As filed with the Securities and Exchange Commission on
November 2, 2009
Registration No. 333-161717
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Amendment No. 2 to
Form S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
Archipelago Learning,
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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8200
(Primary Standard
Industrial
Classification Code Number)
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27-0767387
(I.R.S. Employer
Identification No.)
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Archipelago Learning,
Inc.
3400 Carlisle Street,
Suite 345
Dallas, Texas
75204-1257
(800) 419-3191
(Address, Including Zip Code,
and Telephone Number, Including Area Code, of Registrants
Principal Executive Offices)
Tim McEwen
Chief Executive
Officer
Archipelago Learning,
Inc.
3400 Carlisle Street,
Suite 345
Dallas, Texas 75204
(800) 419-3191
(Name, Address, Including Zip
Code, and Telephone Number, Including Area Code, of Agent For
Service)
Copies to:
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Alexander D. Lynch, Esq.
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
(212) 310-8000 (Phone)
(212) 310-8007 (Fax)
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Valerie Ford Jacob, Esq.
Steven G. Scheinfeld, Esq.
Fried, Frank, Harris, Shriver & Jacobson LLP
One New York Plaza
New York, New York 10004
(212) 859-8000 (Phone)
(212) 859-4000 (Fax)
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, as amended (the
Securities Act), check the following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. 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 the definitions of
accelerated filer, large accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act.
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting company
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
EXPLANATORY
NOTE
Prior to this offering, we conducted our business through
Archipelago Learning Holdings, LLC, formerly known as Study
Island Holdings, LLC, and its subsidiaries. Prior to the
consummation of this offering, and in accordance with and as
contemplated by the limited liability company agreement of
Archipelago Learning Holdings, LLC, Archipelago Learning, Inc.,
a newly formed Delaware corporation, will consummate a corporate
reorganization whereby Archipelago Learning Holdings, LLC will
become a wholly owned subsidiary of Archipelago Learning, Inc.
See Corporate Reorganization in the accompanying
prospectus for a description of the corporate reorganization.
This registration statement, including the prospectus contained
herein, includes the audited consolidated financial statements,
consolidated selected financial and other data and other
financial information of Archipelago Learning Holdings, LLC,
which holds all of our operating subsidiaries and, after the
corporate reorganization and this offering, will be a direct
subsidiary of Archipelago Learning, Inc., as well as the audited
balance sheet of Archipelago Learning, Inc. Prior to the
corporate reorganization and this offering, Archipelago
Learning, Inc. held no material assets and did not engage in any
operations.
The
information in this prospectus is not complete and may be
changed. Neither we nor the selling stockholders may sell these
securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where
the offer or sale is not permitted.
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Subject to Completion
Preliminary Prospectus dated
November 2, 2009
PROSPECTUS
Shares
Archipelago Learning,
Inc.
Common Stock
This is the initial public offering of our common stock. We are
offering shares
of the common stock offered by this prospectus, and the selling
stockholders, which include entities affiliated with members of
our board of directors, are
offering shares
of common stock. We will not receive any proceeds from the sale
of the shares to be offered by the selling stockholders.
We expect the public offering price to be between
$ and
$ per share. Currently, no public
market exists for the shares. After pricing the offering, we
expect that the shares will be listed on The NASDAQ Stock Market
LLC under the symbol ARCL.
Investing in our common stock involves risks that are
described in the Risk Factors section beginning on
page 13 of this prospectus.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to us
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$
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$
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Proceeds, before expenses, to the selling stockholders
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$
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$
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The underwriters may also purchase up to an
additional shares
from the selling stockholders, at the public offering price,
less the underwriting discount, within 30 days from the
date of this prospectus to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The shares will be ready for delivery on or
about ,
2009.
BofA Merrill Lynch
The date of this prospectus
is ,
2009
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus. We have not, the selling stockholders have not and
the underwriters have not authorized any other person to provide
you with different information. If anyone provides you with
different or inconsistent information, you should not rely on
it. We are not, the selling stockholders are not and the
underwriters are not making an offer to sell these securities in
any jurisdiction where the offer or sale is not permitted. You
should assume that the information appearing in this prospectus
is only accurate as of the date on the front cover of this
prospectus. Our business, financial condition, results of
operations and prospects may have changed since that date.
Archipelago Learning, Study Island,
Northstar Learning, TeacherWeb and
their respective logos are our trademarks. Solely for
convenience, we refer to our trademarks in this prospectus
without the
tm and ® symbols,
but such references are not intended to indicate, in any way,
that we will not assert, to the fullest extent under applicable
law, our rights to our trademarks. Other service marks,
trademarks and trade names referred to in this prospectus are
the property of their respective owners. As indicated in this
prospectus, we have included market and industry data obtained
from industry publications and other sources. See Industry
and Market Data.
PROSPECTUS
SUMMARY
This section summarizes key information contained elsewhere
in this prospectus and is qualified in its entirety by the more
detailed information and consolidated financial statements
included elsewhere in this prospectus. You should carefully
review the entire prospectus, including the risk factors, the
consolidated financial statements and the notes thereto, and the
other documents to which this prospectus refers before making an
investment decision. Prior to this offering, we conducted our
business through Archipelago Learning Holdings, LLC, formerly
known as Study Island Holdings, LLC, and its subsidiaries. Prior
to the consummation of this offering, and in accordance with and
as contemplated by the limited liability company agreement of
Archipelago Learning Holdings, LLC, Archipelago Learning, Inc.,
a newly formed Delaware corporation, will consummate a corporate
reorganization whereby Archipelago Learning Holdings, LLC will
become a wholly owned subsidiary of Archipelago Learning, Inc.
Archipelago Learning, Inc. will act as a holding company for our
business after the corporate reorganization, and its shares of
common stock are offered hereby. Unless the context requires
otherwise, references in this prospectus to Archipelago
Learning, we, us, our
company or similar terms refer to Archipelago Learning,
Inc. and its subsidiaries, after giving effect to our corporate
reorganization. Prior to the corporate reorganization and this
offering, Archipelago Learning, Inc., held no material assets
and did not engage in any operations.
Our
Company
Archipelago Learning is a leading subscription-based online
education company. We provide standards-based instruction,
practice, assessments and productivity tools that improve the
performance of educators and students via proprietary web-based
platforms. Study Island, our core product line, helps students
in Kindergarten through 12th grade, or K-12, master grade
level academic standards in a fun and engaging manner. As of
September 30, 2009, Study Island products were utilized by
approximately 8.9 million students in 21,000 schools in
50 states. In the 2008-2009 school year, students answered
over 2.8 billion of our practice questions. We recently
began offering online postsecondary programs through our
Northstar Learning product line.
Study Island combines rigorous content that is highly customized
to specific standards in reading, math, science and social
studies with interactive features and games that engage students
and reinforce and reward learning achievement. Our programs also
enable educators to track student performance in real-time to
address individual student learning gaps, while allowing
administrators to monitor student progress and measure teacher
effectiveness. Through continued product expansion, viral
word-of-mouth marketing and a proven sales organization, Study
Island has the opportunity to grow by increasing sales to
existing school customers as well as adding new school customers.
We capitalize on two significant trends in the education market:
(1) an increased focus on higher academic standards and
educator accountability for student achievement, which has led
to periodic assessment in the classroom to gauge student
learning and inform instruction, and (2) the increased
availability and utilization of web-based technologies to
enhance and supplement teacher instruction, engage todays
technology-savvy learners and improve student outcomes.
Our
Market Opportunity
The U.S. educational system, consisting of K-12 and
postsecondary education, collectively includes approximately
74 million students and approximately $1 trillion in
educational expenditures according to the National Center for
Education Statistics, or NCES. We operate primarily in the
U.S. K-12 education market, which consists of approximately
55 million students in more than 118,000 schools according
to Market Data Retrieval, or MDR. The U.S. K-12 school
system has over 94,000 public schools in over 15,200 school
districts and county and regional centers and more than 24,000
private and Catholic schools, according to MDR.
We believe that we have a growing market opportunity as a result
of an increased emphasis on school and teacher accountability,
legislative developments, including the reauthorization of the
Elementary and
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Secondary Education Act, commonly referred to as No Child Left
Behind, or NCLB, which emphasizes annual student assessment, as
well as increased access to computers and the internet in and
out of the classroom. In addition, schools use a variety of
supplemental materials to augment the core curriculum, provide
remediation and enrichment, and offer additional learning
opportunities in the classroom and at home. An estimated
$11.5 billion was spent on the K-12 instructional materials
market in 2008, according to Outsell, Inc., a research and
advisory firm focused on the publishing, information, and
education industries, or Outsell. In 2009, Outsell projects that
spending on instructional content will grow by about 2-4%, and
spending on assessment, tutoring and test preparation services
will grow by about 4.8-5.2%. Between 2010 and 2012 the overall
market is expected to grow at an annual compounded growth rate
of 5.5%, according to Outsell.
We believe increased accountability, including the need for
school districts and states to meet the requirements of NCLB and
other legislative developments, combined with the increased
availability and utilization of web-based technologies by
teachers, students and administrators has resulted in decreased
spending on traditional print-based and software-based
supplemental materials and increased spending on innovative
online programs that offer functionality and real-time
assessment and reporting not provided by traditional solutions.
Our
Competitive Strengths
We believe the following are our key competitive strengths:
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Customized, Standards-Based Content. Study
Island offers online, standards-based instruction, practice and
assessments for K-12 built from applicable standards in each of
the 50 states, as well as Washington, DC. In addition,
Northstar Learning offers instruction, practice, assessments and
test preparation for the GED and allied health licensure exams,
as well as developmental studies in college readiness
English/language arts and mathematics.
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Real-time Student Tracking, Built-in Remediation and
Enrichment. We provide real-time reporting on
student achievement, allowing educators to quickly identify
learning gaps and provide targeted instruction and practice.
Study Island also provides students with immediate feedback and
explanations and, when required, remediation content designed to
build foundational skills in order to accelerate students to
grade-level proficiency.
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Engaging, Fun and Easy to Use for
Students. Our products utilize a simple,
graphical user interface that is intuitive and easy to use. In
addition, our Study Island products incorporate games and
rewards in order to make learning fun and engaging for students.
By engaging students and providing them with the tools they need
to succeed, we enable them to take control of their own
learning, boost their confidence and keep them interested in
using our products, while creating a culture of academic success.
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Accessible, Dynamic Web-based Platform. Our
products are delivered entirely online so they can be used by
teachers and students on computers wherever internet access is
available. Our programs are compatible with existing school and
school district enterprise systems and require no additional
software, no installation or maintenance and no extensive
implementation or training.
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High Impact, Low Cost Solution. By providing a
single, comprehensive solution for core subjects across a wide
range of grade levels, Study Island eliminates the need for
schools to have multiple vendors or systems, saving them both
time and money. In addition, at an average annual price per
student per subject of $3.00, or $10.00 per student for all
subjects, our products offer customers a compelling value
proposition compared to traditional print, software and online
alternatives provided by large education publishers.
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Management Team with Strong Education Industry
Expertise. Members of our senior management team
have extensive experience in the education industry and in
serving the academic community. Our Chief Executive Officer Tim
McEwen, who has approximately 34 years of experience in the
industry, and our Chief Financial Officer James Walburg, who has
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27 years of public company accounting and finance
experience, both joined us in 2007. Our Chief Technology Officer
Ray Lowrey, who has approximately 14 years of experience in
the education industry, joined us in 2008. Under their
leadership, the number of school customers and registered
student users of our Study Island products have increased from
approximately 7,800 and 3.0 million, respectively, in 2006,
to approximately 21,000 and 8.9 million, respectively, in
September 2009.
Key
Attributes of Our Business Model
We believe the following are the key attributes of our business
model:
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High Revenue Visibility and Strong Cash Flow
Generation. We believe we have an attractive
business model characterized by a visible recurring revenue
stream and high profit margins. In addition, we believe our low
capital expenditure requirements and up-front subscription
payments by customers result in strong cash flow generation and
high returns on invested capital.
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Scalability and Flexibility. We continue to
scale our business by increasing our product offerings, our
sales and the number of students, teachers and schools using our
products without incurring significant incremental expense. Our
content development process, our flexible sales model and our
cost-effective centralized, hosted online delivery platform
allow us to minimize our costs as we expand our product
offerings and our business.
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Powerful, Demand-Driven Sales &
Marketing. Our Study Island products are often
introduced into the classroom by principals or teachers, rather
than mandated by district-level administrators. In addition to
this viral demand for our products and services, we have a 124
member team of specialized sales and marketing professionals. As
a result of this strategy, we set the price points for our K-8
products at levels that fall within a school principals
discretionary budget or that can be funded by individual
teachers or through parent fundraising efforts.
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Our
Growth Strategy
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Expand the Number of Schools Using Our Study Island
Products. As of September 30, 2009, our
Study Island products were used by approximately 21,000 schools
throughout all 50 states and Washington, DC, representing
approximately 17.6% of the over 94,000 public and 24,000 private
and Catholic K-12 schools in the United States. We believe that
there is a significant opportunity to expand the number of
schools that use Study Island, particularly the number of high
schools. Our high school products generally have higher price
points than our K-8 products and accounted for approximately 10%
of our service revenue in 2008.
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Increase Revenue per School. In many schools
that we serve, we have the opportunity to sell additional core
grade level and subject area products, as well as new products,
such as our benchmark assessments and graphic novel reading
intervention, to teachers who already subscribe to one or more
of our products.
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Develop New Products and Enhance our Online
Platform. We continually develop new Study Island
products, as well as new features and functionality for our
online platform, to address student needs and teacher requests.
These new products also provide additional revenue
opportunities. For instance, we intend to introduce new high
school oriented products, including reading and math remediation
products, core subject end of course and exit exam preparation,
advanced placement exam preparation, PSAT, SAT, ACT and other
test preparation, and high school courses for credit and credit
recovery.
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Expand Into New Related Markets. We believe
there is a significant opportunity to grow sales of our products
and services through the introduction of new products for the
postsecondary
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market. We launched our Northstar Learning product line in April
2009 to enter this market, utilizing our content development,
instruction, exam preparation and assessment expertise. In
addition, we believe there are additional market opportunities
outside of the United States and outside of the traditional
school setting. We introduced our Study Island products in
Canada in October 2009. We are exploring the opportunities
to introduce our Study Island products in other international
markets and to sell our products directly to parents as well as
expanding our sales efforts to public libraries, school
libraries and homeschool settings.
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Pursue Acquisitions and Strategic
Relationships. Since 2007, we have sought
acquisitions and strategic relationships that expand our product
and service offerings and provide additional revenue
opportunities. We intend to continue to pursue acquisitions that
have products, services and businesses that are compatible with
our Archipelago Learning brand identity, culture and corporate
mission. In addition, we believe our large student audience of
over 8 million K-12 students provides a significant
opportunity to generate cross-sales of other appropriate,
teacher- and parent-approved products to this valuable
demographic.
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Risks
Associated with Our Business
Our business is subject to numerous risks, as discussed more
fully in the section entitled Risk Factors beginning
on page 13 of this prospectus, which you should read in its
entirety. In particular:
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Most of our customers are public schools, which rely on state,
local and federal funding. If any state, local or federal
funding is materially reduced, our public school customers may
no longer be able to afford to purchase our products and
services;
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If national educational standards and assessments are adopted,
or if existing metrics for applying state standards are revised,
new competitors could more easily enter our markets or the
demands in the markets we currently serve may change;
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If Congress does not reauthorize the Elementary and Secondary
Education Act, commonly referred to as NCLB since the 2001
reauthorization, or other legislation does not continue to
mandate state educational standards and annual assessments,
demand for our products and services could be materially
adversely affected;
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Our recent rapid growth, the recent introduction of a number of
our products and services and our entry into new markets make it
difficult for us to evaluate our current and future business
prospects, and we may be unable to effectively manage our growth
and new initiatives;
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The recent ongoing adoption of online learning in established
education markets makes it difficult for us to evaluate our
current and future business prospects. If web-based education
fails to achieve widespread acceptance by students, parents,
teachers, schools and other institutions, our growth and
profitability may materially suffer;
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Our service revenue is primarily generated by sales of
subscriptions to our Study Island products over the term of the
subscription. Our customer renewal rates are difficult to
predict and declines in our sales of Study Island products or
our customer renewal rates may materially adversely affect our
business and results of operations; and
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Our Study Island products are predominantly purchased by
individual schools, and any decisions at the district or state
level to use the products and services of one of our
competitors, or to limit or reduce the use of web-based
educational products, could materially adversely affect our
ability to attract and retain customers.
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Principal
Stockholders
In January 2007, investment funds affiliated with Providence
Equity Partners, together with Cameron Chalmers and David Muzzo
(our founders and vice presidents) and MHT-SI, LP, acquired 100%
of the voting
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equity interests in Archipelago Learning Holdings, LLC (formerly
known as Study Island Holdings, LLC), the parent of Archipelago
Learning, LLC (formerly known as Study Island, LLC), which
subsequently acquired substantially all of the assets of Study
Island, LP, our predecessor. As a result of these transactions,
affiliates of Providence Equity Partners own approximately 77.2%
of our voting equity interests, Cameron Chalmers and David Muzzo
together own approximately 18.2% of our voting equity interests
divided equally between them, and MHT-SI, LP owns approximately
4.6% of our voting equity interests. For a more detailed
description of the acquisition, see Providence Equity
Transactions.
Corporate
Reorganization
Prior to this offering, Archipelago Learning Holdings, LLC and
its subsidiaries conducted our business. Prior to the
consummation of this offering, and in accordance with and as
contemplated by the limited liability company agreement of
Archipelago Learning Holdings, LLC, the holders of shares of
Archipelago Learning Holdings, LLC, and certain of their
affiliates will enter into transactions with Archipelago
Learning, Inc. pursuant to which direct or indirect holders of
Class A,
Class A-2,
Class B and Class C shares will exchange their shares
for common stock, restricted stock and restricted stock unit
awards. The purpose of this corporate reorganization is to
reorganize our corporate structure so that the top tier entity
in our corporate structure the entity whose common
stock is being offered to the public in this
offering is a corporation rather than a limited
liability company and so that our existing investors will
directly own our common stock. For a more detailed description,
see Corporate Reorganization.
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Our ownership and corporate structure following the Corporate
Reorganization are set forth in the following chart:
Our
Executive Offices
Prior to the Corporate Reorganization, we operated our business
through Archipelago Learning Holdings, LLC, a Delaware limited
liability company, and its subsidiaries. Prior to the
consummation of this offering, we will consummate the Corporate
Reorganization and operate our business through a newly formed
Delaware corporation, Archipelago Learning, Inc. Our principal
executive offices are located at 3400 Carlisle Street,
Suite 345, Dallas, TX 75204, and our telephone number is
(800) 419-3191.
We have a website at www.archipelagolearning.com. The
information that appears on our website is not part of, and is
not incorporated into, this prospectus.
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The
Offering
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Common stock offered by us |
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shares. |
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Common stock offered by the selling stockholders |
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shares. |
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Total offering |
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shares. |
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Common stock to be outstanding after this offering |
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shares. |
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Over-allotment option |
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The underwriters have an option to purchase a maximum
of additional
shares of common stock from the selling stockholders to cover
over-allotments.
The underwriters can exercise this option at any time within
30 days from the date of this prospectus. |
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Use of proceeds |
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We estimate that the net proceeds to us from this offering,
after deducting underwriting discounts and estimated offering
expenses, will be approximately
$ million, assuming the
shares are offered at $ (the
midpoint of the price range set forth on the cover of this
prospectus). We intend to use the net proceeds of this offering
for general corporate purposes. We will not receive any proceeds
from the sale of shares by the selling stockholders. See
Use of Proceeds. |
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Dividend policy |
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We do not anticipate paying any dividends on our common stock in
the foreseeable future. See Dividend Policy. |
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Risk factors |
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Investing in our common stock involves a high degree of risk.
See Risk Factors beginning on page 13 of this
prospectus for a discussion of factors you should carefully
consider before investing in our common stock. |
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Proposed Nasdaq symbol |
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ARCL. |
Unless otherwise indicated, the number of shares of common stock
to be outstanding after this offering:
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excludes shares
of our common stock issuable upon exercise of stock options that
we intend to grant at the time of this offering, at an exercise
price equal to the initial public offering
price; shares
of our common stock, restricted common stock and restricted
stock unit awards reserved for future grants under our 2009
Omnibus Incentive Plan
and
shares of our common stock reserved for future issuance under
our employee stock purchase plan.
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Unless otherwise indicated, the information in this prospectus:
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gives effect to the Corporate Reorganization;
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gives effect to our amended and restated certificate of
incorporation and our amended and restated bylaws, which will be
in effect prior to the consummation of this offering;
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assumes no exercise of the underwriters option to purchase
up
to
additional shares from the selling shareholders; and
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assumes an initial public offering price of
$ per share, the midpoint of the
price range set forth on the cover of this prospectus.
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Summary
Historical Consolidated Financial and Other Data
The following table sets forth the summary historical and
adjusted consolidated financial data for Archipelago Learning
Holdings, LLC for the periods and at the dates indicated. We
derived the summary consolidated financial data presented below
for the years ended December 31, 2008, December 31,
2007 and December 31, 2006 from the audited consolidated
financial statements of Archipelago Learning Holdings, LLC
included elsewhere in this prospectus. We derived the summary
consolidated financial data for the nine months ended
September 30, 2009 and September 30, 2008 and as of
September 30, 2009 from the unaudited consolidated
financial statements of Archipelago Learning Holdings, LLC
included elsewhere in this prospectus. We have prepared the
unaudited consolidated financial information set forth below on
the same basis as the audited consolidated financial statements
and have included all adjustments, consisting of only normal
recurring adjustments, that we consider necessary for a fair
presentation of our financial position and operating results for
such periods. The interim results set forth below are not
necessarily indicative of results for the year ending
December 31, 2009 or for any other period.
In January 2007, Providence Equity Partners, together with
Cameron Chalmers and David Muzzo (our founders and vice
presidents) and MHT-SI, LP, acquired 100% of the voting equity
interests in Archipelago Learning Holdings, LLC, the parent of
Archipelago Learning, LLC, which acquired substantially all of
the assets of Study Island, LP. See Providence Equity
Transactions. All periods ending prior to January 1,
2007 are referred to as Predecessor, and all periods
including and after such date are referred to as
Successor. The consolidated financial statements for
all Successor periods may not be comparable to those of the
Predecessor period.
Contained within the 2007 consolidated financial statements are
nine calendar days of operations and cash flows of the
Predecessor. Such amounts are not material to the overall 2007
consolidated financial statements taken as a whole. Further, the
consolidated financial position of the Predecessor immediately
prior to the January 10, 2007, transaction was not
materially different from that of December 31, 2006.
Accordingly, we have chosen January 1, 2007, as a date of
convenience in presenting successor operating results and the
financial statement information for the period from
January 1, 2007 through January 9, 2007 has not been
presented separately.
In addition, the summary historical consolidated financial and
other data does not include financial statements of Archipelago
Learning, Inc. because it has been formed recently for the
purpose of effecting the offering and until the consummation of
the Corporate Reorganization described more fully in
Corporate Reorganization, it will hold no material
assets and will not engage in any operations. Upon completion of
the Corporate Reorganization, Archipelago Learning, Inc. will
become the parent of Archipelago Learning Holdings, LLC and its
subsidiaries and will have no other assets or operations. See
Corporate Reorganization.
Our historical results are not necessarily indicative of future
operating results. You should read the information set forth
below in conjunction with Selected Historical Consolidated
Financial Data, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
and the consolidated financial statements and the related notes
included elsewhere in this prospectus.
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands)
|
|
|
Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
$
|
10,065
|
|
|
$
|
18,250
|
|
|
$
|
32,068
|
|
|
$
|
22,319
|
|
|
$
|
32,685
|
|
Cost of revenue
|
|
|
343
|
|
|
|
750
|
|
|
|
2,178
|
|
|
|
1,253
|
|
|
|
2,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,722
|
|
|
|
17,500
|
|
|
|
29,890
|
|
|
|
21,066
|
|
|
|
29,962
|
|
Operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
2,793
|
|
|
|
7,669
|
|
|
|
13,193
|
|
|
|
9,516
|
|
|
|
10,630
|
|
Content development
|
|
|
712
|
|
|
|
1,206
|
|
|
|
2,162
|
|
|
|
1,496
|
|
|
|
2,586
|
|
General and administrative
|
|
|
2,581
|
|
|
|
5,010
|
|
|
|
6,644
|
|
|
|
4,632
|
|
|
|
7,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
6,086
|
|
|
|
13,885
|
|
|
|
21,999
|
|
|
|
15,644
|
|
|
|
20,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
3,636
|
|
|
|
3,615
|
|
|
|
7,891
|
|
|
|
5,422
|
|
|
|
9,687
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
(838
|
)
|
|
|
(5,161
|
)
|
|
|
(3,973
|
)
|
|
|
(2,092
|
)
|
Interest income
|
|
|
27
|
|
|
|
343
|
|
|
|
247
|
|
|
|
194
|
|
|
|
44
|
|
Derivative loss
|
|
|
|
|
|
|
(173
|
)
|
|
|
(2,119
|
)
|
|
|
(857
|
)
|
|
|
(415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
27
|
|
|
|
(668
|
)
|
|
|
(7,033
|
)
|
|
|
(4,636
|
)
|
|
|
(2,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
3,663
|
|
|
|
2,947
|
|
|
|
858
|
|
|
|
786
|
|
|
|
7,224
|
|
(Provision) benefit for income taxes
|
|
|
|
|
|
|
(23
|
)
|
|
|
164
|
|
|
|
11
|
|
|
|
(348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,663
|
|
|
$
|
2,924
|
|
|
$
|
1,022
|
|
|
$
|
797
|
|
|
$
|
6,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income(1)
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted earnings per share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted weighted average shares of common stock
outstanding(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(2)
|
|
$
|
3,707
|
|
|
$
|
5,112
|
|
|
$
|
7,955
|
|
|
$
|
6,106
|
|
|
$
|
11,586
|
|
Adjusted EBITDA(2)
|
|
$
|
8,146
|
|
|
$
|
14,119
|
|
|
$
|
21,851
|
|
|
$
|
17,245
|
|
|
$
|
22,820
|
|
Number of schools using Study Island products(3)
|
|
|
7,856
|
|
|
|
13,100
|
|
|
|
17,307
|
|
|
|
16,836
|
|
|
|
20,812
|
|
data and footnotes continued on following page
9
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
As Adjusted(1)
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
36,469
|
|
|
$
|
|
|
Cash and cash equivalents
|
|
$
|
17,111
|
|
|
$
|
|
|
Total assets
|
|
$
|
155,703
|
|
|
$
|
|
|
Long-term debt
|
|
$
|
67,551
|
|
|
$
|
|
|
Total liabilities
|
|
$
|
109,305
|
|
|
$
|
|
|
Total members equity
|
|
$
|
46,398
|
|
|
$
|
|
|
|
|
|
(1) |
|
We present certain amounts pro forma as adjusted, which gives
effect to (i) our Corporate Reorganization as more fully
described in Corporate Reorganization;
(ii) cash distributions of $8.0 million made in
October 2009 and $0.9 million to be made upon the
Corporate Reorganization; (iii) net short-term deferred tax
asset of $ and net long-term
deferred tax liability of $ , as of
September 30, 2009 and (provision) benefit for income taxes
of $ and
$ for the year ended
December 31, 2008 and the nine months ended
September 30, 2009, respectively; (iv) the sale of our
TeacherWeb business, which we expect to complete in
November 2009 (consisting of the purchase price of
$13 million (to be reduced by approximately
$1.5 million of cash remaining on TeacherWebs balance
sheet), the related $6.5 million repayment on our term loan
and an approximately $1.5 million cash distribution to be
made upon the Corporate Reorganization in connection with
certain tax obligations associated with the TeacherWeb sale);
and (v) the sale
of shares
of our common stock in this offering by us at an assumed initial
public offering price of $ per
share (the midpoint of the price range set forth on the cover of
this prospectus) after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, and
the application of the net proceeds from this offering as
described under Use of Proceeds. For additional
information regarding TeacherWeb services and the sale of
TeacherWeb, see Business Our Products and
Services TeacherWeb and
Managements Discussion and Analysis of Financial
Condition and Results of Operations Recent
Developments. |
|
|
|
(2) |
|
We present EBITDA and Adjusted EBITDA in this prospectus to
provide investors with supplemental measures of our operating
performance and, in the case of Adjusted EBITDA, information
utilized in the calculation of the financial covenants under our
credit facility and in the determination of compensation.
EBITDA, as used in this prospectus, is defined as consolidated
net income before net interest expense, consolidated income
taxes and consolidated depreciation and amortization. Adjusted
EBITDA differs from the term EBITDA as it is
commonly used. Adjusted EBITDA, as used in this prospectus,
means Consolidated EBITDA as that term is
defined under our credit facility, which is generally
consolidated net income before consolidated interest expense,
consolidated amortization expense, consolidated depreciation
expense and consolidated tax expense, in each case as defined
more fully in the agreement governing our credit facility. The
other items excluded in this calculation include, but are not
limited to, derivative losses, changes in deferred revenue,
non-cash compensation expense, certain investment and permitted
acquisition expenses, certain permitted payments to Providence
Equity Partners, unusual
non-recurring
charges, agency fees paid to the administrative agent and
adjustments related to the acquisition of TeacherWeb. |
|
|
|
In addition to the financial covenant requirements under our
credit facility, management uses EBITDA and Adjusted EBITDA as a
measure of operating performance for planning purposes,
including the preparation of budgets and projections, as well as
to facilitate analysis of the allocation of resources and to
evaluate the effectiveness of business strategies. Further, we
believe EBITDA and Adjusted EBITDA are frequently used by
securities analysts, investors and other interested parties in
the evaluation of companies in industries similar to ours. |
|
|
|
EBITDA enables investors to isolate the effects on profitability
and operating metrics, such as service revenue, operating
expense and selling, general and administrative expense. In
addition to its use to monitor performance trends, EBITDA
provides a comparative metric to management and investors that
is |
footnotes continued on following page
10
|
|
|
|
|
consistent across companies that have different capital
structures, operate in different tax jurisdictions and have
different capital investments. This enables management and
investors to compare our performance on a consolidated basis and
on a segment basis to that of our peers. Adjusted EBITDA is also
used by management to measure operating performance and by
investors to measures a companys ability to service its
debt and other cash needs. Management believes the inclusion of
the adjustments to EBITDA and Adjusted EBITDA are appropriate to
provide additional information to investors about certain
material non-cash items and about unusual items that we do not
expect to continue at the same level in the future. |
|
|
|
EBITDA and Adjusted EBITDA are not recognized terms under
accounting principles generally accepted in the United States,
or GAAP. Accordingly, they should not be used as indicators of,
or alternatives to, net income as measures of operating
performance. Although we use EBITDA as a measure to assess the
operating performance of our business, EBITDA has significant
limitations as an analytical tool because it excludes certain
material costs. For example, it does not include interest
expense, which has been a necessary element of our costs.
Because we use capital assets, depreciation expense is a
necessary element of our costs and ability to generate service
revenue. In addition, the omission of the substantial
amortization expense associated with our intangible assets
further limits the usefulness of this measure. EBITDA also does
not include the payment of taxes, which is also a necessary
element of our operations. Because EBITDA does not account for
these expenses, its utility as a measure of our operating
performance has material limitations. Because of these
limitations management does not view EBITDA in isolation or as a
primary performance measure and also uses other measures, such
as net income, invoiced sales, average purchase and renewal rate
to measure operating performance. Because the definitions of
EBITDA and Adjusted EBITDA (or similar measures) may vary among
companies and industries, they may not be comparable to other
similarly titled measures used by other companies. |
|
|
|
The following table presents a reconciliation of EBITDA and
Adjusted EBITDA to net income for each of the periods presented: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(In thousands)
|
|
|
Net Income
|
|
$
|
3,663
|
|
|
$
|
2,924
|
|
|
$
|
1,022
|
|
|
$
|
797
|
|
|
$
|
6,876
|
|
Interest expense
|
|
|
|
|
|
|
838
|
|
|
|
5,161
|
|
|
|
3,973
|
|
|
|
2,092
|
|
Interest income, net
|
|
|
(27
|
)
|
|
|
(343
|
)
|
|
|
(247
|
)
|
|
|
(194
|
)
|
|
|
(44
|
)
|
Tax provision (benefit)
|
|
|
|
|
|
|
23
|
|
|
|
(164
|
)
|
|
|
(11
|
)
|
|
|
348
|
|
Depreciation/amortization
|
|
|
71
|
|
|
|
1,670
|
|
|
|
2,183
|
|
|
|
1,541
|
|
|
|
2,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
3,707
|
|
|
$
|
5,112
|
|
|
$
|
7,955
|
|
|
$
|
6,106
|
|
|
$
|
11,586
|
|
Derivative
loss(A)
|
|
|
|
|
|
|
173
|
|
|
|
2,119
|
|
|
|
857
|
|
|
|
415
|
|
Change in deferred
revenue(B)
|
|
|
4,439
|
|
|
|
7,613
|
|
|
|
9,791
|
|
|
|
8,884
|
|
|
|
9,546
|
|
Stock based
compensation(C)
|
|
|
|
|
|
|
631
|
|
|
|
355
|
|
|
|
272
|
|
|
|
298
|
|
Investments and permitted acquisition
expense(D)
|
|
|
|
|
|
|
13
|
|
|
|
263
|
|
|
|
202
|
|
|
|
32
|
|
Sponsor
payments(E)
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
53
|
|
|
|
|
|
Unusual, non-recurring
charges(F)
|
|
|
|
|
|
|
564
|
|
|
|
955
|
|
|
|
561
|
|
|
|
868
|
|
Agency
fees(G)
|
|
|
|
|
|
|
13
|
|
|
|
113
|
|
|
|
75
|
|
|
|
75
|
|
TeacherWeb pro forma
adjustments(H)
|
|
|
|
|
|
|
|
|
|
|
235
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
8,146
|
|
|
$
|
14,119
|
|
|
$
|
21,851
|
|
|
$
|
17,245
|
|
|
$
|
22,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
footnotes continued on following page
11
|
|
|
(A) |
|
Derivative loss includes our interest rate swap that we entered
into as required by our credit facility. |
|
(B) |
|
Change in deferred revenue is the net change in deferred revenue
at the end of such period from the deferred revenue at the end
of the previous period. For a description of how we calculate
deferred revenue, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations Components of Service Revenue and
Expense Service Revenue. |
|
|
|
(C) |
|
Stock-based compensation includes non-cash compensation expense
recorded in respect of shares of Archipelago Learning Holdings,
LLC issued to our employees. See Note 13 to our financial
statements contained elsewhere in this prospectus. |
|
|
|
(D) |
|
Investments and permitted acquisition expense includes cash fees
and expenses in connection with investments or acquisitions
permitted by our credit facility. |
|
(E) |
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Sponsor payments are payments to Providence Equity Partners that
are permitted under our credit facility, and include the
reimbursement of customary fees and reasonable out-of-pocket
expenses to our directors or the managers of Archipelago
Learning Holdings, LLC, such as travel and other expenses. |
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(F) |
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Unusual, non-recurring charges include severance costs,
relocation costs, retention bonuses, and
one-time
contract labor, accounting, legal and bank fees. In 2009, we
also incurred one-time expenses in connection with our initial
public offering. |
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(G) |
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Agency fees are fees paid to the agents under our credit
facility. |
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(H) |
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TeacherWeb pro forma includes adjustments to reflect
TeacherWebs EBITDA from January 2008 until our acquisition
of TeacherWeb in June 2008. We expect to complete the sale of
our TeacherWeb business in November 2009 upon finalizing an
amendment to our credit facility permitting the sale. |
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(3) |
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A school is considered to be using our products if it has an
active subscription for any or all of the Study Island products
available to it. |
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RISK
FACTORS
An investment in our common stock involves a high degree of
risk. You should carefully consider the following risks, as well
as the other information contained in this prospectus, before
making an investment in our company. If any of the following
risks actually occur, our business, results of operations or
financial condition may be materially adversely affected. In
such an event, the trading price of our common stock could
decline and you could lose part or all of your investment.
Additional risks that we currently do not know about or that we
currently believe to be immaterial may also impair our business
operations.
Risks
Related to Our Business and Industry
Most of
our customers are public schools, which rely on state, local and
federal funding. If any state, local or federal funding is
materially reduced, our public school customers may no longer be
able to afford to purchase our products and services, and our
business, financial condition, results of operations and cash
flow could be materially adversely affected.
In 2008 and the first nine months of 2009, approximately 98.0%
and 94.2%, respectively, of our service revenue was generated by
sales of our Study Island products. Approximately 99.0% and
95.1% of our Study Island customers in 2008 and the first nine
months of 2009, respectively, were public schools and school
districts. Although public funding varies by state and
municipality, public schools and districts typically receive
most of their funding from state and local governments, and a
smaller portion from the federal government. Budget
appropriations for education at all levels of government are
determined through the political process and, as a result, the
funding schools receive may fluctuate.
State and federal educational funding is primarily funded
through income taxes, and local educational funding is primarily
funded through property taxes. As a result of the ongoing
recession, income tax revenue for the 2008 tax year has
decreased, which has put pressure on state and federal budgets.
In addition, with the recent decline in real estate values in
almost every state and the resulting reassessments, property tax
revenue is expected to decline over the next few years. For
example, in the fourth quarter of 2008, North Carolina,
Pennsylvania and Ohio, three of the four states accounting for
our highest per-state service revenue, had decreases in their
tax revenue of 3.9%, 3.6% and 5.4%, respectively, resulting in
mid-year 2009 budget gaps of $2.0 billion,
$2.3 billion and $1.2 billion, respectively.
Continuing unfavorable economic conditions may result in
education budget cuts and lead to lower overall spending,
including lower technology spending, by our current and
potential clients, which may materially adversely affect our
service revenue. According to the Center on Budget and Policy
Priorities, at least 25 states made cuts or have proposed
cuts to K-12 and early education funding in their 2010 budgets.
Declines in tax receipts and gaps in states budgets could
result in decreased education spending as well as cuts in
recently enacted federal education spending programs, reduced
school budgets and reduced availability of discretionary funds,
all of which could materially adversely affect our service
revenue and results of operations.
If
national educational standards and assessments are adopted, or
if existing metrics for applying state standards are revised,
new competitors could more easily enter our markets or the
demands in the markets we currently serve may change.
With the reauthorization of the Elementary and Secondary
Education Act, known as No Child Left Behind, or NCLB, in 2001,
Congress conditioned the receipt of federal funding for
education on the establishment of educational standards, annual
assessments and the achievement of adequate yearly progress
milestones. These standards are established at the state level,
and there are currently no national educational standards that
are required to be assessed pursuant to NCLB. As part of NCLB,
each state is required to establish clear performance standards
for each grade level in reading, math and science in grades 3
through 8, and for high school exit or end-of-course exams. Most
of our service revenue from Study Island is concentrated in
grades K-8, which accounted for approximately 87% of our service
revenue in 2008. High school accounted for approximately 10% of
Study Island service revenue for 2008. A shift to national
performance standards or a reduction in the use of
government-imposed standards may result in a material decline in
demand in the markets that we serve.
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In addition, our Study Island products are specifically built
from the varying assessment standards in all 50 states,
which we believe differentiates them from the products offered
by our competitors. If national standards and assessments
replace the current state assessments, it would be easier for
competitors to develop similar products tailored to one national
set of standards rather than multiple state standards. If such
an increase in competition occurred, our ability to compete
effectively could be negatively impacted and our service revenue
and profitability could materially decline.
If
Congress does not reauthorize the Elementary and Secondary
Education Act, commonly referred to as NCLB since the 2001
reauthorization, or other legislation does not continue to
mandate state educational standards and annual assessments,
demand for our products and services could be materially
adversely affected.
NCLB substantially increased the importance of
state-by-state
educational standards and assessments by making such standards
and annual assessments a condition to receipt of federal
educational funding. NCLB initially was scheduled for
reauthorization in October 2008, but was extended in order to
allow the new U.S. presidential administration the
opportunity to impact the direction of any future
reauthorization, which we believe is likely to occur in 2010. If
NCLB is not reauthorized or extended or does not maintain or
increase the importance of
state-by-state
education standards and assessments, or if other federal or
state legislation were to lessen the importance of such
standards and assessments, our products and services could
become significantly less valuable to our customers, and our
service revenue and profitability could materially decline.
Our
recent rapid growth, the recent introduction of a number of our
products and services and our entry into new markets make it
difficult for us to evaluate our current and future business
prospects, and we may be unable to effectively manage our growth
and new initiatives, which may increase the risk of your
investment and could harm our business, financial condition,
results of operations and cash flow.
We were founded in 2000 and began offering our Study Island
products in 2001. Since our founding, we have continually
launched new Study Island products, entered additional states
and experienced rapid growth and increasing market share in the
expanding market for online learning. We began offering our
Study Island products in all 50 states as of the
2008-2009
school year, and we launched our Northstar Learning product line
in April 2009. We began offering TeacherWeb services after
acquiring this business in June 2008. We expect to complete the
sale of TeacherWeb in November 2009 upon finalizing an amendment
to our credit facility permitting the sale. Because many of our
current products and services are relatively new and we have
recently entered new markets, we may be unable to evaluate the
relative success and future prospects, particularly in light of
our goals to continually grow our existing and new customer
base, expand our product and service offerings, acquire and
integrate complementary businesses and enter new markets.
In addition, our growth, recent product introductions and entry
into new markets may place a significant strain on our resources
and increase demands on our executive management, personnel and
systems, and our operational, administrative and financial
resources may be inadequate. We may also not be able to maintain
or accelerate our current growth rate, effectively manage our
expanding operations, or achieve planned growth on a timely or
profitable basis, particularly if the number of students and
educators using our products and services increase or their
demands and needs change as our business expands. Our management
will be required to expand its knowledge of diverse aspects of
the education industry and maintain relationships with key
customers across several sectors of the education market. If we
are unable to manage our growth and expand operations
effectively, we may experience operating inefficiencies, the
quality of our products and services could deteriorate, and our
business and results of operations could be materially adversely
affected.
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The
recent ongoing adoption of online learning in established
education markets makes it difficult for us to evaluate our
current and future business prospects. If web-based education
fails to achieve widespread acceptance by students, parents,
teachers, schools and other institutions, our growth and
profitability may suffer.
The use of online learning technology is a relatively new
approach in the traditional K-12 education testing and
assessment markets. There can be no assurance that online
products and services will achieve
long-term
success in the K-12 or postsecondary education markets. Our
success depends in part upon the continued adoption by teachers
and school districts of technology-based education initiatives.
Some academics and educators oppose online education in
principle and have expressed concerns regarding the perceived
loss of control over the education process that can result from
offering content online. As a necessary corollary to the
acceptance of web-based education in the classroom, our growth
depends in part on parental acceptance of the role of technology
in education and the availability of internet access in the
home. If the acceptance of technology-based education does not
continue to increase, our ability to continue to grow our
business could be materially impaired.
Our
service revenue is primarily generated by sales of subscriptions
to our Study Island products over the term of the subscription.
Our customer renewal rates are difficult to predict and declines
in our sales of Study Island products or our customer renewal
rates may materially adversely affect our business and results
of operations.
Sales of our Study Island products accounted for 96.8% and 93.3%
of our service revenue in 2008 and in the first nine months of
2009, respectively, and we anticipate that revenue from sales of
our Study Island products will continue to account for a
substantial majority of our service revenue for the next few
years. Our Study Island products are sold as subscriptions
through purchase orders. The subscription period for our Study
Island products is typically 12 months and we occasionally
sell multi-year subscriptions. Additionally, promotional
incentives, such as complimentary months of service, are offered
periodically to new Study Island customers, resulting in a
subscription term longer than one year. Our Study Island
customers are not obligated to renew their subscriptions at the
end of the term, nor are they required to pay any penalties if
they fail to renew their subscriptions. Because of constraints
on the use of state, local and federal funding, most of our
Study Island customers are only able to purchase subscriptions
for 12-month periods. As a result, our Study Island customers
have no obligation to renew their subscriptions after the
expiration of their initial subscription period. Our sales team
begins the renewal process approximately six months prior to a
subscription ending and consider this a renewal opportunity;
however, our Study Island customers may choose to renew for
fewer students or fewer products, which would reduce our service
revenue. Sales of our Study Island products or services or our
customer renewal rates may decline or fluctuate as a result of a
number of factors, including decreased demand, adverse
regulatory actions, decreased school funding, pricing pressures,
competitive factors or any other reason. These and other factors
that have affected our Study Island sales or customer renewal
rates in the past are not predictive of the future, and, as a
result, we cannot accurately predict customer renewal rates. If
sales to new Study Island customers decline or our Study Island
customers do not renew their subscriptions at previous levels,
our service revenue may decline, which would negatively impact
our business, financial condition, results of operations and
cash flow.
Our Study
Island products are predominantly purchased by individual
schools, and any decisions at the district or state level to use
the products and services of one of our competitors, or to limit
or reduce the use of web-based educational products, could
materially adversely affect our ability to attract and retain
customers.
The sales model for our Study Island products relies heavily on
word-of-mouth referrals among teachers and school administrators
who purchase our products and services for use by their
students. If policymakers at the district or state level
determine that our products and services are not the best option
for schools in their district or state, or if they decide to
decrease or discontinue the use of web-based educational
products, individual teachers and school administrators may lose
the ability to decide what, if any, online educational products
and services they use. Such action may result in the loss of our
customers and may
15
materially limit our ability to attract new customers. In
addition, our competitors may more successfully market their
products and services at the district or state level, which
could result in a decline in sales of our products and services.
Fluctuations
in sales or renewals may not be immediately reflected in our
results of operations.
We recognize service revenue from our customers monthly over the
term of each of their subscriptions, which is typically
12 months, and we occasionally sell multi-year
subscriptions. Additionally, promotional incentives, such as
complimentary months of service, are offered periodically to new
Study Island customers, resulting in a subscription term longer
than one year. As a result, substantially all of the service
revenue we recognize in any period is deferred revenue from
subscriptions purchased during previous periods. Consequently, a
decline in new sales or subscription renewals in any particular
period will not necessarily be fully reflected in the service
revenue in that period and will negatively affect our revenue in
future periods. In addition, we may be unable to adjust our cost
structure to reflect this reduced service revenue. Accordingly,
the effect of significant downturns in sales, subscription
renewals or market acceptance of our products and services may
not be fully reflected in our results of operations until future
periods. Our subscription model also makes it difficult for us
to rapidly increase our service revenue through additional sales
in any period, as service revenue from new customers would be
recognized ratably over the applicable subscription term.
Our
business is subject to seasonal fluctuations, which may cause
our cash flow to fluctuate from quarter-to-quarter and
materially adversely impact the market price of our common
stock.
Our cash flow may fluctuate as a result of seasonal variations
in our business, principally due to:
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our customers spending patterns, including shifts in the
timing of when individual schools or districts purchase our
products and services;
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the timing of school districts funding sources and
budgeting cycles;
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the timing of the release of federal funds to states, and the
subsequent timing of states release of such funds to
districts and schools;
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the timing of expirations and renewals of subscriptions;
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the timing of special promotions and discounts, including
additional free months of subscriptions; and
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the timing of acquisitions and non-recurring charges incurred in
connection with acquisitions and extraordinary transactions.
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A significant percentage of our new sales and subscription
renewals occur in the third quarter because teachers and school
administrators typically make purchases for the new academic
year at the beginning of their districts fiscal year,
which is usually July 1. The fourth calendar quarter has
historically produced the second highest level of sales and
renewals, followed by the second quarter and finally the first
quarter. Because payment in full for subscriptions is typically
due at the time of subscription or renewal, and our operating
expense, of which labor and sales commissions make up the
largest portion, historically have been fairly consistent
throughout the year, we typically have higher cash flow in the
quarters with stronger sales and renewals. We expect quarterly
fluctuations in our cash flow to continue.
System
disruptions, vulnerability from security risks to our networks,
databases and online applications and an inability to expand and
upgrade our systems in a timely manner to meet unexpected
increases in demand could damage our reputation, impact our
ability to generate service revenue and limit our ability to
attract and retain customers.
The performance and reliability of our technology infrastructure
is critical to our business. Any failure to maintain
satisfactory online product performance, reliability, security
or availability of our web platform infrastructure may
significantly reduce customer satisfaction and damage our
reputation, which would
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negatively impact our ability to attract new customers and
obtain customer renewals. The risks associated with our web
platform include:
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breakdowns or system failures resulting in a prolonged shutdown
of our servers, including failures attributable to power
shutdowns or attempts to gain unauthorized access to our
systems, which may cause loss or corruption of data or
malfunction of software or hardware;
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disruption or failure in our colocation provider, which would
make it difficult or impossible for students and teachers to log
on to our websites;
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damage from fire, flood, tornado, power loss or
telecommunications failures;
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infiltration by hackers or other unauthorized persons; and
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any infection by or spread of computer viruses.
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In addition, increases in the volume of traffic on our websites
could strain the capacity of our existing infrastructure, which
could lead to slower response times or system failures. This
would cause a disruption or suspension of our product and
service offerings.
Any web platform interruption or inadequacy that causes
performance issues or interruptions in the availability of our
websites could reduce customer satisfaction and result in a
reduction in the number of customers using our products and
services. If sustained or repeated, these performance issues
could reduce the attractiveness of our websites and products and
services.
We may need to incur additional costs to upgrade our computer
systems in order to accommodate system disruptions, security
risks and increased demand if we anticipate that our systems
cannot handle higher volumes of traffic in the future. However,
the costs and complexities involved in expanding and upgrading
our systems may prevent us from doing so in a timely manner and
may prevent us from adequately meeting the demand placed on our
systems.
Any
significant interruption in the operations of our data centers
could cause a loss of data and disrupt our ability to manage our
network hardware and software and technological infrastructure,
and any significant interruption in the operations of our call
center could disrupt our ability to respond to requests for help
or service and process orders in a timely manner.
All of our web platform servers and routers, including backup
servers, are currently located in colocation facilities in
Dallas, Texas. As part of our disaster recovery arrangements, we
intend to replicate all of our customers data in a
separate backup facility near Chicago, Illinois. If we are not
successful in implementing this plan, we will face additional
risks relating to the central location of our servers. Any
disruption of operations of or damage to these servers could
materially harm our ability to operate our business. We also may
need to make additional investments to improve the performance
of our platform and prevent disruption of our services. Any
disruption or significant interruption in the operations of our
data centers may result in a loss of customer satisfaction and
limit our ability to retain and attract customers.
We rely in part on our call center to generate sales leads and
maintain a high level of customer service. Any significant
interruption in the operation of our call center, including an
interruption caused by our failure to expand or upgrade our
systems or to manage these expansions or upgrades, could reduce
our ability to receive and respond to requests for help or
service, process orders and provide products and services, which
could result in lost or cancelled sales and damage to our
reputation.
We are
subject to laws and regulations as a result of our collection
and use of personal information, particularly from our K-12
student users, and any violations of such laws or regulations,
or any breach, theft or loss of such information, could
materially adversely affect our reputation and operations and
expose us to costly litigation.
Our products and services require the disclosure of student
information by educational institutions and credit card
information by some customers. The vast majority of our Study
Island users are minors. The Child
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Online Protection Act and the Childrens Online Privacy
Protection Act restrict the distribution of materials considered
harmful to children and impose additional restrictions on the
ability of online services to collect information from minors.
Many states have also passed laws requiring notification to
users when there is a security breach of personal data.
Additionally, the Family Educational Rights and Privacy Act, or
FERPA, protects the privacy and restricts the disclosure of
student information, and we must remain FERPA-compliant through
security policies, processes, systems and controls, including
using software that detects hackers and other unauthorized or
illegal activities. We cannot predict whether new technological
developments could circumvent these security measures. If the
security measures that we use to protect personal or student
information or credit card information are ineffective, we may
be subject to liability, including claims for invasion of
privacy, impersonation, unauthorized purchases with credit card
information or other similar claims. In addition, the Federal
Trade Commission and several states have investigated the use of
personal information by certain internet companies. We could
incur significant expense and our business could be materially
adversely affected if new regulations regarding use of personal
information are introduced, if our security measures are
ineffective or if our privacy practices are investigated.
Domestic
and foreign government regulation relating to the internet or
our products and services could cause us to incur significant
expense, and failure to comply with applicable regulations could
make our business less efficient or even impossible to continue
to operate.
As web-based commerce continues to evolve, increasing regulation
by federal, state or foreign agencies becomes more likely. In
addition, taxation of services provided over the internet or
other charges imposed by government agencies or by private
organizations for accessing the internet may also be imposed.
Any regulation imposing greater fees for internet use or
restricting information exchange over the internet could result
in a decline in the use of the internet and the viability of
internet-based services, which could materially harm our
business.
We may
not be able to develop new products and services or expand our
existing product lines in a timely and cost effective
manner.
Each of our Study Island products is built from specific state
standards for a particular grade level and subject in the K-12
market. With these standards continually changing and our
release of new Study Island products, as well as the launch of
our new Northstar Learning product line, our product and content
development teams may not be able to respond to changing market
requirements on a timely basis. We intend to launch upgraded
versions of our Study Island products in January 2010, but we
may be unable to do so in a timely and cost effective manner
that appropriately meets market demand. In addition, we are
entering new markets, such as the postsecondary and
international markets, which will place new demands on our
product and content development teams. These are new, unproven
markets for us, and if we are not able to generate sufficient
new revenue to exceed the incremental costs associated with
developing and delivering new products and entering new markets,
our results of operations may be materially and adversely
affected. Furthermore, we may be unable to develop and offer
additional products and services on commercially reasonable
terms and in a timely manner, if at all, or maintain the quality
and consistency necessary to keep pace with changes in market
requirements and respond to competitive pressures. A failure to
do any of these things may result in a material decline in our
service revenue and may prevent us from maintaining
profitability.
If we
acquire or invest in any companies, services or technologies in
the future, they could prove difficult to integrate, disrupt our
business, dilute stockholder value and materially adversely
affect our results of operations.
As part of our growth strategy, we may acquire or invest in
complementary companies, services and technologies. We cannot
assure you that we will be able to consummate any such
acquisitions or investments on favorable terms or at all. If we
fail to properly evaluate and execute our acquisitions or
investments, our business and prospects may be seriously harmed.
Such acquisitions and investments involve numerous risks,
including:
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difficulties in integrating operations, technologies, services
and personnel;
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diversion of financial and managerial resources from existing
operations;
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risk of entering new markets;
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potential write-offs of acquired assets;
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significant one-time costs, including banking, legal and
accounting fees and payment of severance packages;
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potential loss of key employees;
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inability to generate sufficient service revenue to offset
acquisition or investment costs; and
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delays in customer purchases due to uncertainty.
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In connection with our acquisitions or investments, we may also
incur additional debt and related interest expense, as well as
unforeseen liabilities, which could have a material adverse
effect on our business, financial condition and results of
operations. Furthermore, we may issue additional equity in
connection with these transactions, which would result in
dilution to our existing shareholders.
If we are
unable to maintain and enhance our brand identity, our business
and results of operations may suffer.
The continued development of our brand identity is important to
our business, and expanding brand awareness is critical to
attracting and retaining our customers. Although our Study
Island brand has existed since 2000, our Northstar Learning and
Archipelago Learning brands are relatively new, having launched
in April 2009 and August 2009, respectively. Our existing and
potential customers may not be aware of the relationship of our
brands with one and another, particularly Archipelago Learning
serving as an umbrella for each of our products and Northstar
Learning serving as a postsecondary education product line. Our
newer brands are unproven and may not be successfully received
by our customers. In addition, we have launched our Study Island
products in a number of new states over the last two years and
intend to launch Study Island products in international markets
in the future. As we continue to increase subscriptions and
extend our geographic reach, maintaining quality and consistency
across all of our products and services may become more
difficult to achieve, and any significant and well-publicized
failure to maintain this quality and consistency will have a
detrimental effect on our brand. We cannot provide assurances
that our sales and marketing efforts will be successful in
further promoting our brand in a competitive and cost-effective
manner. If we are unable to maintain and enhance our brand
recognition and increase awareness of our products and services,
or if we incur excessive sales and marketing expense, our
business and results of operations could be materially adversely
affected.
Our
future growth and profitability will depend in large part upon
the effectiveness and efficiency of our marketing expenditures
in recruiting new customers.
Our future growth and profitability will depend in large part
upon the effectiveness and efficiency of our marketing
expenditures, including our ability to:
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create greater awareness of our brands;
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select the right market, media and specific media vehicles in
which to advertise;
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identify the most effective and efficient level of spending in
each market, media and specific media vehicle;
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determine the appropriate creative message and media mix for
advertising, marketing and promotional expenditures;
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effectively manage marketing costs, including creative and media
expense, in order to maintain acceptable customer acquisition
costs;
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generate leads for sales, including obtaining educator lists in
a cost-effective manner;
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drive traffic to our website; and
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convert customer inquiries into actual orders.
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Our planned marketing expenditures may not result in increased
service revenue or generate sufficient levels of product and
brand awareness, and we may not be able to increase our net
sales at the same rate as we increase our advertising
expenditures.
We
operate in a highly competitive market subject to rapid
technological changes, and increasing competition could lead to
pricing pressures, reduced operating margins, loss of market
share and increased capital expenditures.
The markets for our products and services are highly
competitive, and we expect increased competition in the future
that could adversely affect our service revenue and market
share. Our current competitors include but are not limited to:
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providers of online and offline supplemental instructional
materials for the core subject areas of reading, mathematics,
science and social studies for K-12 institutions;
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companies that provide K-12-oriented software and web-based
educational assessment and remediation products and services to
students, educators, parents and educational institutions;
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the assessment divisions of established education publishers,
including Pearson Education, Inc., The McGraw-Hill Companies and
Houghton Mifflin Harcourt Company;
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providers of online and offline test preparation materials;
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traditional print textbook and workbook companies that publish
K-12 core subject educational materials, standardized test
preparation materials or paper and pencil assessment tools;
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summative assessment companies, which traditionally assess
student learning at the end of a class period, that have
expanded their line to include products that provide periodic
assessment in the classroom to gauge student learning and inform
instruction, also known as formative assessment; and
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non-profit and membership educational organizations and
government agencies that offer online and offline products and
services, including in some cases at no cost, to assist
individuals in standards mastery and test preparation.
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Some of our competitors may have more resources than we do, and
several of the largest K-12 educational publishers may have more
experience, larger customer bases and greater brand recognition
in the markets we serve. Further, larger established companies
with high brand recognition and extensive experience providing
various educational products to the K-12 market may develop
online products and services that are competitive with our core
products and services. These competitors may be able to devote
greater resources than us to the development, promotion and sale
of their services and respond more quickly than we can to new
technologies or changes in customer requirements or preferences.
We may not be able to compete effectively with current or future
competitors, especially those with significantly greater
resources or more established customer bases, which may
materially adversely affect our sales and our business.
If our
products or services contain errors, new product releases could
be delayed or our services could be disrupted. As a result, our
customers may choose not to renew their subscriptions and our
business could be materially adversely affected.
If our products or services contain defects, errors or security
vulnerabilities, our reputation could be harmed, which could
result in significant costs to us and impair our ability to sell
our products and services in the future. Because our products
and services are complex and because we do not
pre-launch any of our products or upgrades to any
third parties prior to the official launch, they may contain
undetected errors or defects, known as bugs. Bugs can be
detected at any point in time, but are more common when a new
product or service is introduced or when new versions are
released. We expect that, despite our testing, errors will be
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found in the future. If an error occurs, our product and service
offerings may be disrupted, causing delays or interruptions.
Significant errors, delays or disruptions could lead to:
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decreases in customer satisfaction with and loyalty toward our
products and services;
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delays in or loss of market acceptance of our products and
services;
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diversion of our resources;
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a lower rate of subscription renewals or upgrades;
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injury to our reputation; or
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increased service expense or payment of damages.
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If we are
unable to adapt our products and services to technological
changes, to the emergence of new computing devices and to more
sophisticated online services, we may lose market share and
service revenue, and our business could suffer.
We need to anticipate, develop and introduce new products,
services and applications on a timely and cost effective basis
that keeps pace with technological developments and changing
customer needs. For example, the number of individuals who
access the internet through devices other than a personal
computer, such as personal digital assistants, mobile
telephones, televisions and set-top box devices, has increased
dramatically, and this trend is likely to continue. Our products
and services were designed for internet use on desktop and
laptop computers. The lower resolution, functionality and memory
associated with alternative devices currently available may make
the use of our products and services through such devices
difficult. We have no experience to date in operating versions
of our products and services developed or optimized for users of
alternative devices. Accordingly, it is difficult to predict the
problems we may encounter in developing versions of our products
and services for use on these alternative devices, and we may
need to devote significant resources to the creation, support
and maintenance of such versions. If we fail to develop or sell
products and services cost effectively that respond to these or
other technological developments and changing customer needs, we
may lose market share and service revenue and our business could
materially suffer.
Protection
of our intellectual property is limited, and any misuse of our
intellectual property by others, including software piracy,
could harm our business, reputation and competitive
position.
Our trademarks, copyrights, trade secrets, trade dress and
designs are valuable and integral to our success and competitive
position. However, we cannot assure you that we will be able to
adequately protect our proprietary rights through reliance on a
combination of copyrights, trademarks, trade secrets,
confidentiality procedures, contractual provisions and technical
measures. Protection of trade secrets and other intellectual
property rights in the markets in which we operate and compete
is highly uncertain and may involve complex legal questions. We
cannot completely prevent the unauthorized use or infringement
of our intellectual property rights, as such prevention is
inherently difficult. Despite enforcement efforts against
software piracy, we lose significant service revenue due to
illegal use of our software. If piracy activities increase, they
may further harm our business.
We also expect that the more successful we are, the more likely
that competitors will try to illegally use our proprietary
information and develop products that are similar to ours, which
may infringe on our proprietary rights. In addition, we could
potentially lose future trade secret protection for our source
code if any unauthorized disclosure of such code occurs. The
loss of future trade secret protection could make it easier for
third parties to compete with our products by copying
functionality. Any changes in, or unexpected interpretations of,
the trade secret and other intellectual property laws in any
country in which we operate may compromise our ability to
enforce our trade secret and intellectual property rights.
Costly and time-consuming litigation could be necessary to
enforce and determine the scope of our confidential information
and trade secret protection. If we are unable to protect our
proprietary rights or if third parties independently develop or
gain access to our or similar technologies, our business,
service revenue, reputation and competitive position could be
materially adversely affected.
21
We may be
sued for infringing the intellectual property rights of others
and such actions would be costly to defend, could require us to
pay damages or enter into royalty or license agreements with
third parties and could limit our ability or increase our costs
to use certain content or technologies in the future.
We may be sued for infringing the intellectual property rights
of others or be subject to litigation based on allegations of
infringement or other violations of intellectual property
rights. Regardless of merits, intellectual property claims are
often time-consuming and expensive to litigate and settle. In
addition, to the extent claims against us are successful, we may
have to pay substantive monetary damages or discontinue any of
our products, services or practices that are found to be in
violation of another partys rights. We also may have to
seek a license and make royalty payments to continue offering
our products and services or following such practices, which may
significantly increase our operating expense.
Our
customers can input their own content to our websites. We have
limited control over this content, which could expose us to
liability from third parties.
As part of a subscription to our websites, our customers are
able to input their own content onto our websites, which may be
accessible by other users who share the same subscription as the
creator of the content. For example, educators and students may
post articles or other materials on class discussion boards,
which may give rise to claims from third parties for the
unauthorized duplication or distribution of this material. We
may be exposed to liability, including fines and costly
litigation, if the content violates the intellectual property
rights of a third party, or otherwise violates any law or
regulation, including FERPA, the Child Online Protection Act and
the Childrens Online Privacy Protection Act.
The
confidentiality, non-disclosure and other agreements we use to
protect our products, trade secrets and proprietary information
may prove unenforceable or inadequate.
We protect our products, trade secrets and proprietary
information, in part, by requiring all of our employees to enter
into agreements providing for the maintenance of confidentiality
and the assignment of rights to inventions made by them while
employed by us. We also enter into non-disclosure agreements
with our technical consultants, customers, vendors and resellers
to protect our confidential and proprietary information. We
cannot assure you that our confidentiality agreements with our
employees, consultants and other third parties will not be
breached, that we will be able to effectively enforce these
agreements, that we will have adequate remedies for any breach,
or that our trade secrets and other proprietary information will
not be disclosed or will otherwise be protected.
We also rely on contractual and license agreements with third
parties in connection with their use of our products and
technology. There is no guarantee that such parties will abide
by the terms of such agreements or that we will be able to
adequately enforce our rights, in part because we rely, in many
instances, on click-wrap licenses, which are
licenses that can only be read and accepted online and are not
negotiated or signed by individual licensees. Accordingly, some
provisions of our licenses, including provisions protecting
against unauthorized use, copying, transfer, resale and
disclosure of the licensed software program, may be
unenforceable under the laws of several jurisdictions.
We have
not registered copyrights for all of our products, which may
limit our ability to enforce them.
We have not registered our copyrights in all of our software,
written materials, website information, designs or other
copyrightable works. The United States Copyright Act
automatically protects all of our copyrightable works, but
without registration we cannot enforce those copyrights against
infringers or seek certain statutory remedies for any such
infringement. Preventing others from copying our products,
written materials and other copyrightable works is important to
our overall success in the marketplace. In the event we decide
to enforce any of our copyrights against infringers, we will
first be required to register the relevant copyrights, and we
cannot be sure that all of the material for which we seek
copyright registration would be registrable in whole or in part,
or that once registered, we would be successful in bringing a
copyright claim against any such infringers.
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We must
monitor and protect our internet domain names to preserve their
value. We may be unable to prevent third parties from acquiring
domain names that are similar to, infringe on or otherwise
decrease the value of our trademarks.
We own several domain names that include the terms Study Island,
Archipelago Learning and Northstar Learning, among others. Third
parties may acquire substantially similar domain names that
decrease the value of our domain names and trademarks and other
proprietary rights which may hurt our business. Moreover, the
regulation of domain names in the United States and foreign
countries is subject to change. Governing bodies could appoint
additional domain name registrars or modify the requirements for
holding domain names. Governing bodies could also establish
additional top-level domains, which are the portion
of the web address that appears to the right of the
dot, such as com, net,
gov or org. As a result, we may not
maintain exclusive rights to all potentially relevant domain
names in the United States or in other countries in which we
conduct business, which could harm our business and reputation.
We do not
own all of the software, content and other technologies used in
our products and services.
Some of our products and services include intellectual property
owned by third parties, including licensed content for reading
passages and other educational content. From time to time we may
be required to renegotiate with these third parties or negotiate
with new third parties to include or continue using their
technology or content in our existing products, in new versions
of our existing products or in wholly new products. We may not
be able to negotiate or renegotiate licenses on commercially
reasonable terms, or at all, and the third-party software we use
may not be appropriately supported, maintained or enhanced by
the licensors. If we are unable to obtain the rights necessary
to use or continue to use third-party technology or content in
our products and services, or if those third parties are unable
to support, maintain and enhance their software, we could
experience increased costs or delays or reductions in product
releases and functionality until equivalent software or content
can be developed, identified, licensed and integrated.
Our
future success depends on our ability to retain our key
employees.
We are dependent on the services of Tim McEwen, our Chief
Executive Officer, James Walburg, our Chief Financial Officer,
Ray Lowrey, our Chief Technology Officer, Julie Huston, our Vice
President of Sales, our other vice presidents and senior
editors, and other members of our senior management team. Other
than non-compete provisions of limited duration included in
employment agreements that we have with certain executives, we
do not generally seek non-compete agreements with key personnel,
and they may leave and subsequently compete against us. The loss
of service of any of our senior management team, particularly
those who are not party to employment agreements with us, or our
failure to attract and retain other qualified and experienced
personnel on acceptable terms, could have a material adverse
effect on our business.
We may be
unable to attract and retain the skilled employees needed to
sustain and grow our business.
Our success to date has largely depended on, and will continue
to depend on, the skills, efforts and motivations of our
executive team and employees, who generally have significant
experience with our company and within the education industry.
Our success also depends largely on our ability to attract and
retain highly qualified IT engineers and programmers, content
writers and editors, sales and marketing managers and corporate
management personnel. We may experience difficulties in locating
and hiring qualified personnel and in retaining such personnel
once hired, which may materially and adversely affect our
business.
We may
have exposure to greater than anticipated tax
liabilities.
We are and have been subject to income taxes and other taxes in
a variety of jurisdictions and are subject to review by both
various state and federal taxation authorities. The
determination of our provision for income taxes and other tax
liabilities requires significant judgment and the ultimate tax
outcome may differ from the amounts recorded in our consolidated
financial statements, which may materially affect our financial
results in the period or periods for which such determination is
made.
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Although
we do not currently transact a material amount of business in
foreign countries, we intend to expand into international
markets, which will subject us to additional economic,
operational and political risks that could increase our costs
and make it difficult for us to continue to operate
profitably.
We recently launched Study Island products in Canada and intend
to expand into other international markets. The addition of
international operations may require significant expenditure of
financial and management resources and result in increased
administrative and compliance costs. As a result of such
expansion, we will be increasingly subject to the risks inherent
in conducting business internationally, including:
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foreign currency fluctuations, which could result in reduced
service revenue and increased operating expense;
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potentially longer payment and sales cycles;
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increased difficulty in collecting accounts receivable;
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the effect of applicable foreign tax structures, including tax
rates that may be higher than tax rates in the United States or
taxes that may be duplicative of those imposed in the United
States;
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tariffs and trade barriers;
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general economic and political conditions in each country;
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inadequate intellectual property protection in foreign countries;
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uncertainty regarding liability for information retrieved and
replicated in foreign countries;
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the difficulties and increased expense in complying with a
variety of domestic and foreign laws, regulations and trade
standards, including the Foreign Corrupt Practices Act; and
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unexpected changes in regulatory requirements.
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The
current global financial crisis and adverse worldwide economic
conditions may have significant effects on our business,
financial condition and results of operations.
The current global financial crisis - which has included,
among other things, significant reductions in available capital
and liquidity, substantial reductions
and/or
fluctuations in equity and currency values and a worldwide
recession, the extent of which is likely to be significant and
prolonged - may materially adversely affect our business.
We have already begun to experience some weakening in demand for
our products and services, and we cannot predict whether it will
continue or increase. In an economic downturn like the current
one, which is characterized by higher unemployment, lower family
income, lower corporate earnings, lower business investment and
lower consumer spending, the demand for our products and
services may be materially adversely affected. See
Most of our customers are public schools,
which rely on state, local and federal funding. If any state,
local or federal funding is materially reduced, our public
school customers may no longer be able to afford to purchase our
products and services, and our business, financial condition,
results of operations and cash flow could be materially
adversely affected.
The credit markets have been experiencing extreme volatility and
disruption since August 2007. The current global financial
crisis affecting the banking system and the possibility that
financial institutions may consolidate or fail has resulted in a
tightening of the credit markets, which could impair our ability
to refinance our existing debt, to draw upon our revolving
credit facility or incur additional debt, to seek other funding
sources to meet our liquidity needs or to fund planned
expansion. Furthermore, the tightening of the credit markets may
delay or prevent our customers from securing funding adequate to
operate their businesses and purchase our products and services,
leading to an increase in our bad debt levels.
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We may
need additional capital in the future, but there is no assurance
that funds will be available on acceptable terms, or at
all.
We may need to raise additional funds in order to achieve growth
or fund other business initiatives. This financing may not be
available in sufficient amounts or on terms acceptable to us and
may be dilutive to existing shareholders if raised through
additional equity offerings. Additionally, any securities issued
to raise funds may have rights, preferences or privileges senior
to those of existing shareholders. If adequate funds are not
available or are not available on acceptable terms, our ability
to expand, develop or enhance services or products, or respond
to competitive pressures may be materially limited.
Our
existing indebtedness could adversely affect our financial
condition and we may not be able to fulfill our debt
obligations.
As of September 30, 2009, Archipelago Learning, LLC had an
outstanding term loan in an aggregate principal amount equal to
$68.3 million and no revolving credit loans outstanding
under its revolving credit facility which expires in November
2013. We expect to repay $6.5 million of the term loan in
November 2009 in connection with the sale of TeacherWeb upon
finalizing an amendment to our credit facility permitting the
sale. The agreements governing this credit facility contain
various covenants that limit our ability to, among other things:
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incur or guarantee additional indebtedness;
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pay dividends or make other distributions to our shareholders;
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make restricted payments;
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incur liens;
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engage in transactions with affiliates; and
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enter into business combinations.
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These restrictions could limit our ability to withstand general
economic downturns that could affect our business, obtain future
financing, make acquisitions or capital expenditures, conduct
operations or otherwise capitalize on business opportunities
that may arise. Additionally, we will use a significant portion
of our cash flow to pay interest on our outstanding debt,
limiting the amount available for working capital, capital
expenditures and other general corporate purposes.
We may be more vulnerable to adverse economic conditions than
less leveraged competitors and thus less able to withstand
competitive pressures. If our cash flow is inadequate to make
interest and principal payments on our debt, we might have to
refinance our indebtedness or issue additional equity or other
securities and may not be successful in those efforts or may not
obtain terms favorable to us. Additionally, our ability to
finance working capital needs and general corporate purposes for
the public and private markets, as well as the associated cost
of funding, is dependent, in part, on our credit ratings, which
may be adversely affected if we experience declining service
revenue. Any of these events could reduce our ability to
generate cash available for investment or debt repayment or to
make improvements or respond to events that would enhance
profitability. We may incur significantly more debt in the
future, which will increase each of the foregoing risks related
to our indebtedness. In addition, upon the sale of TeacherWeb,
the obligations under our credit facility will be guaranteed
only by AL Midco, LLC, or AL Midco, as TeacherWebs
guarantee will be released, and will be secured by liens on
substantially all of the assets owned by Archipelago Learning,
LLC and AL Midco. For a more detailed description of our credit
facility, see Managements Discussion and Analysis of
Financial Condition and Results of Operations Credit
Facility and Description of Material
Indebtedness.
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Risks
Related to Our Common Stock and this Offering
We expect
that our stock price will fluctuate significantly, and you may
not be able to resell your shares at or above the initial public
offering price.
The trading price of our common stock is likely to be volatile
and subject to wide price fluctuations in response to various
factors, including:
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market conditions in the broader stock market;
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actual or anticipated fluctuations in our quarterly financial
and results of operations;
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introduction of new products or services by us or our
competitors;
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issuance of new or changed securities analysts reports or
recommendations;
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investor perceptions of us and the educational industry;
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sales, or anticipated sales, of large blocks of our stock;
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additions or departures of key personnel;
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regulatory or political developments;
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litigation and governmental investigations; and
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changing economic conditions.
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These and other factors may cause the market price and demand
for our common stock to fluctuate substantially, which may limit
or prevent investors from readily selling their shares of common
stock and may otherwise negatively affect the liquidity of our
common stock. In addition, in the past, when the market price of
a stock has been volatile, holders of that stock have sometimes
instituted securities class action litigation against the
company that issued the stock. If any of our stockholders were
to bring a lawsuit against us, we could incur substantial costs
defending the lawsuit. Such a lawsuit could also divert the time
and attention of our management from our business.
There is
no existing market for our common stock, and we do not know if
one will develop to provide you with adequate
liquidity.
Prior to this offering, there has been no public market for
shares of our common stock. We cannot predict the extent to
which investor interest in our company will lead to the
development of a trading market on The NASDAQ Stock Market LLC,
also called Nasdaq, or how liquid that market may become. If an
active trading market does not develop or is not sustained, you
may have difficulty selling any of our common stock that you
purchase at an attractive price or at all. The initial public
offering price of shares of our common stock will be determined
by negotiation between us and the underwriters and may not be
indicative of prices that will prevail following the completion
of this offering. The market price of shares of our common stock
may decline below the initial public offering price, and you may
not be able to resell your shares of our common stock at or
above the initial offering price.
If
securities or industry analysts do not publish research or
reports about our business, if they adversely change their
recommendations regarding our stock or if our results of
operations do not meet their expectations, our stock price and
trading volume could decline.
The trading market for our common stock will be influenced by
the research and reports that industry or securities analysts
publish about us or our business. If one or more of these
analysts cease coverage of our company or fail to publish
reports on us regularly, we could lose visibility in the
financial markets, which in turn could cause our stock price or
trading volume to decline. Moreover, if one or more of the
analysts who cover us downgrade recommendations regarding our
stock, or if our results of operations do not meet their
expectations, our stock price could decline and such decline
could be material.
26
Sales of
substantial amounts of our common stock in the public markets,
or the perception that such sales might occur, could reduce the
price of our common stock and may dilute your voting power and
your ownership interest in us.
If our existing shareholders sell substantial amounts of our
common stock in the public market following this offering, the
market price of our common stock could decrease significantly.
The perception in the public market that our existing
shareholders might sell shares of common stock could also
depress our market price. Upon the consummation of this
offering, we will
have shares
of common stock outstanding. Our directors, executive officers,
the selling stockholders and substantially all of our other
stockholders will be subject to the
lock-up
agreements described in Underwriting and are subject
to the Rule 144 holding period requirements described in
Shares Eligible for Future Sale. After these
lock-up
agreements have expired and holding periods have elapsed and the
lock-up
periods set forth in our stockholders agreement to be
entered into in connection with this offering have
expired, additional
shares will be eligible for sale in the public market. The
market price of shares of our common stock may drop
significantly when the restrictions on resale by our existing
shareholders lapse. A decline in the price of shares of our
common stock might impede our ability to raise capital through
the issuance of additional shares of our common stock or other
equity securities.
You will
experience immediate and substantial book value dilution after
this offering.
The initial public offering price of our common stock will be
substantially higher than the pro forma net tangible book value
per share of the outstanding common stock immediately after the
offering. Based on an assumed initial public offering price of
$ per share (the midpoint of the
price range set forth on the cover of this prospectus) and our
net tangible book value on a pro forma basis as of
September 30, 2009, if you purchase our common stock in
this offering, you will suffer immediate dilution in net
tangible book value per share of approximately
$ per share. See
Dilution.
Insiders
will continue to have substantial control over us after this
offering and could limit your ability to influence the outcome
of key transactions, including a change of control.
Our principal stockholders, directors and executive officers and
entities affiliated with them will own
approximately % of the outstanding
shares of our common stock after this offering. As a result,
these stockholders, if acting together, would be able to
influence or control matters requiring approval by our
stockholders, including the election of directors and the
approval of mergers or other extraordinary transactions. They
may also have interests that differ from yours and may vote in a
way with which you disagree and which may be adverse to your
interests. The concentration of ownership may have the effect of
delaying, preventing or deterring a change of control of our
company, could deprive our stockholders of an opportunity to
receive a premium for their common stock as part of a sale of
our company may materially adversely affect the market price of
our common stock.
We are a
controlled company within the meaning of Nasdaq
rules and will qualify for, and intend to rely on, exemptions
from certain corporate governance requirements. As a result, you
will not have the same protections afforded to shareholders of
companies that are subject to such requirements.
After completion of this offering, Providence Equity Partners
will continue to control a majority of the voting power of our
outstanding common stock. As a result, we are a controlled
company within the meaning of Nasdaq corporate governance
standards. Under these rules, a controlled company
may elect not to comply with certain corporate governance
requirements, including:
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the requirement that a majority of the board of directors
consist of independent directors;
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the requirement that we have a nominating/corporate governance
committee that is composed entirely of independent directors
with a written charter addressing the committees purpose
and responsibilities;
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the requirement that we have a compensation committee that is
composed entirely of independent directors with a written
charter addressing the committees purpose and
responsibilities; and
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the requirement for an annual performance evaluation of the
nominating and corporate governance and compensation committees.
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Following this offering, we intend to utilize these exemptions.
As a result, we will not have a majority of independent
directors, our nominating and corporate governance committee,
and compensation committee will not consist entirely of
independent directors and such committees will not be subject to
annual performance evaluations. Accordingly, you will not have
the same protections afforded to shareholders of companies that
are subject to all of the corporate governance requirements of
Nasdaq.
We will
have broad discretion in applying the net proceeds of this
offering and we may not use those proceeds in ways that will
enhance the market value of our common stock.
Our management will retain broad discretion to allocate the net
proceeds of this offering. The net proceeds may be applied in
ways with which you and other investors in the offering may not
agree or which do not increase the value of your investment. We
intend to use our net proceeds from this offering for general
corporate purposes, which may include the acquisition of other
businesses, products or technologies. We have not allocated
these net proceeds for any specific purposes. Our management may
not be able to yield a significant return, if any, on any
investment of these net proceeds. We will not receive any of the
proceeds from the sale of the shares of our common stock by the
selling stockholders.
As a
result of becoming a public company, we will be obligated to
develop and maintain proper and effective internal control over
financial reporting and will be subject to other requirements
that will be burdensome and costly. We may not timely complete
our analysis of our internal control over financial reporting,
or these internal controls may not be determined to be
effective, which could adversely affect investor confidence in
our company and, as a result, the value of our common
stock.
We have historically operated our business as a private company.
After this offering, we will be required to file with the
Securities and Exchange Commission, or SEC, annual and quarterly
information and other reports that are specified in
Section 13 of the Securities Exchange Act of 1934, as
amended, or the Exchange Act. We will also be required to ensure
that we have the ability to prepare financial statements that
are fully compliant with all SEC reporting requirements on a
timely basis. In addition, we will become subject to other
reporting and corporate governance requirements, including the
requirements of Nasdaq, and certain provisions of the
Sarbanes-Oxley Act of 2002 and the regulations promulgated
thereunder, which will impose significant compliance obligations
upon us. As a public company, we will be required to:
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prepare and distribute periodic public reports and other
stockholder communications in compliance with our obligations
under the federal securities laws and Nasdaq rules;
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create or expand the roles and duties of our board of directors
and committees of the board;
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institute more comprehensive financial reporting and disclosure
compliance functions;
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supplement our internal accounting and auditing function,
including hiring additional staff with expertise in accounting
and financial reporting for a public company;
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enhance and formalize closing procedures at the end of our
accounting periods;
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establish an internal audit function;
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enhance our investor relations function;
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establish new internal policies, including those relating to
disclosure controls and procedures; and
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involve and retain to a greater degree outside counsel and
accountants in the activities listed above.
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These changes will require a significant commitment of
additional resources. We may not be successful in implementing
these requirements and implementing them could adversely affect
our business or results of operations. In addition, if we fail
to implement the requirements with respect to our internal
accounting and audit functions, our ability to report our
results of operations on a timely and accurate basis could be
impaired.
Our
internal control over financial reporting does not currently
comply with Section 404 of the Sarbanes-Oxley Act,
including the requirement for a public accounting firm
attestation report, and failure to achieve and maintain
effective internal control over financial reporting, including
the requirement for a public accounting firm attestation report,
in accordance with Section 404 of the Sarbanes-Oxley Act
could have a material adverse effect on us.
Our internal control over financial reporting does not currently
comply with Section 404 of the Sarbanes-Oxley Act,
including the requirement for a public accounting firm
attestation report. We will be required to comply with the
requirements of Section 404 in the course of preparing our
2010 financial statements. We do not currently have
comprehensive documentation of our internal controls, nor do we
document or test our compliance with these controls on a
periodic basis in accordance with Section 404. Furthermore,
we have not tested our internal controls in accordance with
Section 404 and, due to our lack of documentation, such a
test would not be possible to perform at this time.
We are in the early stages of addressing our internal control
procedures to comply with Section 404, which requires an
annual management assessment of the effectiveness of our
internal control over financial reporting. We will incur
additional costs in order to improve our internal control over
financial reporting and comply with Section 404, including
increased auditing and legal fees and costs associated with
hiring additional accounting and administrative staff. If, as a
public company, we are not able to implement the requirements of
Section 404 in a timely manner or with adequate compliance,
our independent registered public accounting firm may not be
able to attest to the effectiveness of our internal control over
financial reporting. If we are unable to maintain adequate
internal control over financial reporting, we may be unable to
report our financial information on a timely basis, may suffer
adverse regulatory consequences or violations of applicable
stock exchange listing rules and may breach the covenants under
our credit facility. There could also be a negative reaction in
the financial markets due to a loss of investor confidence in us
and the reliability of our financial statements.
Provisions
in our certificate of incorporation and bylaws and Delaware law
may discourage, delay or prevent a change of control of our
company or changes in our management and, therefore, may depress
the trading price of our stock.
Our certificate of incorporation and bylaws include certain
provisions that could have the effect of discovering, delaying
or preventing a change of control of our company or changes in
our management, including, among other things:
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restrictions on the ability of our stockholders to fill a
vacancy on the board of directors;
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our ability to issue preferred stock with terms that the board
of directors may determine, without stockholder approval, which
could be used to significantly dilute the ownership of a hostile
acquirer;
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the absence of cumulative voting in the election of directors
which may limit the ability of minority stockholders to elect
directors; and
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advance notice requirements for stockholder proposals and
nominations, which may discourage or deter a potential acquirer
from soliciting proxies to elect a particular state of directors
or otherwise attempting to obtain control of us.
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These provisions in our certificate of incorporation and bylaws
may discourage, delay or prevent a transaction involving a
change in control of our company that is in the best interest of
our minority stockholders. Even in the absence of a takeover
attempt, the existence of these provisions may adversely affect
the prevailing market price of our common stock if they are
viewed as discouraging future takeover attempts.
We do not
expect to pay dividends, and any return on your investment will
likely be limited to the appreciation of our common
stock.
We currently intend to retain our future earnings, if any, for
the foreseeable future, to repay indebtedness and to fund the
development and growth of our business. We do not intend to pay
any dividends to holders of our common stock and the agreements
governing our credit facility significantly restrict our ability
to pay dividends. As a result, capital appreciation in the price
of our common stock, if any, will be your only source of gain or
income on an investment in our common stock.
30
FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking statements that are
subject to risks and uncertainties. All statements other than
statements of historical fact included in this prospectus are
forward-looking statements. Forward-looking statements give our
current expectations and projections relating to our financial
condition, results of operations, plans, objectives, future
performance and business. You can identify forward-looking
statements by the fact that they do not relate strictly to
historical or current facts. These statements may include words
such as anticipate, estimate,
expect, project, forecast,
plan, intend, believe,
may, should, can have,
likely, future and other words and terms
of similar meaning in connection with any discussion of the
timing or nature of future operating or financial performance or
other events.
The forward-looking statements contained in this prospectus are
based on assumptions that we have made in light of our industry
experience and on our perceptions of historical trends, current
conditions, expected future developments and other factors we
believe are appropriate under the circumstances. As you read and
consider this prospectus, you should understand that these
statements are not guarantees of performance or results. They
involve risks, uncertainties (some of which are beyond our
control) and assumptions. Although we believe that these
forward-looking statements are based on reasonable assumptions,
you should be aware that many factors could affect our actual
financial results and cause them to differ materially from those
anticipated in the forward-looking statements. We believe these
factors include the following risks, among others:
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Most of our customers are public schools, which rely on state,
local and federal funding. If any state, local or federal
funding is materially reduced, our public school customers may
no longer be able to afford to purchase our products and
services;
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If national educational standards and assessments are adopted,
or if existing metrics for applying state standards are revised,
new competitors could more easily enter our markets or the
demands in the markets we currently serve may change;
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If Congress does not reauthorize the Elementary and Secondary
Education Act, commonly referred to as NCLB since the 2001
reauthorization, or other legislation does not continue to
mandate state educational standards and annual assessments,
demand for our products and services could be materially
adversely affected;
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Our recent rapid growth, the recent introduction of a number of
our products and services and our entry into new markets make it
difficult for us to evaluate our current and future business
prospects, and we may be unable to effectively manage our growth
and new initiatives;
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The recent ongoing adoption of online learning in established
education markets makes it difficult for us to evaluate our
current and future business prospects. If web-based education
fails to achieve widespread acceptance by students, parents,
teachers, schools and other institutions, our growth and
profitability may materially suffer;
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Our service revenue is primarily generated by sales of
subscriptions to our Study Island products over the term of the
subscription. Our customer renewal rates are difficult to
predict and declines in our sales of Study Island products or
our customer renewal rates may materially adversely affect our
business and results of operations; and
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Our Study Island products are predominantly purchased by
individual schools, and any decisions at the district or state
level to use the products and services of one of our
competitors, or to limit or reduce the use of web-based
educational products, could materially adversely affect our
ability to attract and retain customers.
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Should one or more of these risks or uncertainties materialize,
or should any of these assumptions prove incorrect, our actual
results may vary in material respects from those projected in
these forward-looking statements.
31
Any forward-looking statement made by us in this prospectus
speaks only as of the date on which we make it. Factors or
events that could cause our actual results to differ may emerge
from time to time, and it is not possible for us to predict all
of them. We undertake no obligation to update any
forward-looking statement, whether as a result of new
information, future developments or otherwise, except as may be
required by law.
This prospectus also contains market data related to our
business and industry. See Industry and Market Data.
This market data includes projections that are based on a number
of assumptions. If these assumptions turn out to be incorrect,
actual results may differ from the projections based on these
assumptions. As a result, our markets may not grow at the rates
projected by these data, or at all. The failure of these markets
to grow at these projected rates may have a material adverse
effect on our business, financial condition, results of
operations and the market price of our common stock.
32
PROVIDENCE
EQUITY TRANSACTIONS
In January 2007, Providence Equity Partners V, LP and
affiliated investment funds, or Providence Equity Partners,
together with Cameron Chalmers and David Muzzo (our founders and
vice presidents) and MHT-SI, LP, acquired 100% of the voting
equity interests in Archipelago Learning Holdings, LLC (formerly
known as Study Island Holdings, LLC), the parent of Archipelago
Learning, LLC (formerly known as Study Island, LLC), for an
initial investment of $109.5 million, and Archipelago
Learning, LLC subsequently acquired substantially all of the
assets of Study Island, LP, for $104.8 million, including
transaction costs and working capital adjustments. In connection
with the acquisition:
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Providence Equity Partners contributed approximately
$84.5 million in cash for approximately 77.2% of the voting
equity interests in Archipelago Learning Holdings, LLC;
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Cameron Chalmers and David Muzzo each contributed
$10.0 million, for a total of $20.0 million, for
approximately 9.1% each, or a total of approximately 18.2%, of
the voting equity interests in Archipelago Learning Holdings,
LLC;
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MHT-SI, LP contributed approximately $5.0 million in cash
for approximately 4.6% of the voting equity interests in
Archipelago Learning Holdings, LLC;
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With the cash contributed by Providence Equity Partners, Cameron
Chalmers, David Muzzo and MHT-SI, LP, (i) Archipelago
Learning, LLC purchased substantially all the assets of Study
Island, LP for $100.0 million, (ii) Archipelago
Learning, LLC paid $4.6 million in transaction costs
related to the acquisition of the assets of Study Island, LP and
(iii) $5.0 million was retained by Archipelago
Learning, LLC for general corporate purposes;
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In November 2007, Archipelago Learning, LLC as borrower, and the
other persons designated as credit parties from time to time,
entered into a credit facility providing for a
$70.0 million term loan and a $10.0 million revolving
credit facility with General Electric Capital Corporation, as a
lender and as agent for all lenders, NewStar Financial, Inc., as
syndication agent, the other parties thereto as lenders and GE
Capital Markets, Inc. and NewStar Financial, Inc., as joint lead
arrangers and joint bookrunners; and
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With the borrowings under our term loan and cash on hand,
(i) Archipelago Learning, LLC paid $1.7 million in
financing fees related to our credit facility,
(ii) Archipelago Learning, LLC distributed
$74.8 million of its proceeds under its term loan and cash
on hand to Archipelago Learning Holdings, LLC, and
(iii) Archipelago Learning Holdings, LLC made distributions
of $74.8 million to the holders of its voting equity
interests.
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We refer to the foregoing transactions collectively as the
Providence Equity Transactions.
From January 2007 through September 30, 2009, Archipelago
Learning Holdings, LLC paid aggregate distributions to its
equity holders of approximately $76 million, consisting of
$74.8 million in the year ended December 31, 2007 and
$1.3 million in the nine months ended September 30,
2009. In October 2009, Archipelago Learning Holdings, LLC made
an $8.0 million special distribution to its equity holders
representing a return on such holders investment, which
was paid in accordance with the Archipelago Learning Holdings,
LLC Agreement. In addition, prior to the closing of this
offering, Archipelago Learning Holdings, LLC intends to make
additional distributions of approximately $1.5 million to
its equity holders to enable them to meet certain tax
obligations associated with the sale of TeacherWeb and
approximately $0.9 million to its equity holders to enable
them to meet their other estimated tax obligations for the
period from January 1, 2009 to the date of the Corporate
Reorganization, which will be based on Archipelago Learning
Holdings, LLCs estimated net taxable income from
January 1, 2009 to the date of the Corporate
Reorganization. Investors in this offering will not receive
these distributions. See Dividend Policy.
33
CORPORATE
REORGANIZATION
Prior to this offering, Archipelago Learning Holdings, LLC and
its subsidiaries conducted our business. Prior to the
consummation of this offering, and in accordance with and as
contemplated by the limited liability company agreement of
Archipelago Learning Holdings, LLC, the holders of shares of
Archipelago Learning Holdings, LLC, and certain of their
affiliates will enter into the following transactions with
Archipelago Learning, Inc., a newly formed Delaware corporation
that will act as a holding company for our business:
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The direct or indirect holders of Class A and
Class A-2 shares
of Archipelago Learning Holdings, LLC (other than Providence
Equity Partners
V-A Study
Island L.L.C. and its subsidiaries) will, directly or
indirectly, contribute all such Class A and
Class A-2 shares
of Archipelago Learning Holdings, LLC held by such parties to
Archipelago Learning, Inc. in exchange for an aggregate
of shares of common stock;
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Providence Equity Partners V-A Study Island L.L.C., which will
not have any assets other than its Class A shares of
Archipelago Learning Holdings, LLC, will merge with and into
Archipelago Learning, Inc. and as a result of such merger, the
members of Providence Equity Partners
V-A Study
Island L.L.C. will receive an aggregate
of shares of our common stock;
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Our officers, directors and employees who hold vested
Class B shares of Archipelago Learning Holdings, LLC will
contribute their vested Class B shares of Archipelago
Learning Holdings, LLC to Archipelago Learning, Inc. in exchange
for an aggregate of shares of
common stock;
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Our officers, directors and employees who hold unvested
Class B shares of Archipelago Learning Holdings, LLC will
contribute their unvested Class B shares of Archipelago
Learning Holdings, LLC to Archipelago Learning, Inc. in exchange
for an aggregate of shares of
restricted common stock subject to time-based vesting;
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Our officers, directors and employees (other than our chief
executive officer, chief financial officer, chief technology
officer and co-founders) who hold Class C shares of
Archipelago Learning Holdings, LLC will contribute such
Class C shares to Archipelago Learning, Inc. in exchange
for an aggregate
of shares
of common stock and an aggregate
of
restricted stock unit awards subject to vesting based on, among
other things, the trading price of our common stock; and
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Our chief executive officer, chief financial officer, chief
technology officer and co-founders will contribute their
Class C shares of Archipelago Learning Holdings, LLC to
Archipelago Learning, Inc. in exchange for an aggregate
of shares
of restricted common stock subject to vesting based on, among
other things, the cash returns to Providence Equity Partners in
respect of shares of common stock held by Providence Equity
Partners and an aggregate
of
restricted stock unit awards subject to vesting based on, among
other things, the cash returns to Providence Equity Partners in
respect of shares of common stock held by Providence Equity
Partners.
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We refer to the transactions listed above as the Corporate
Reorganization.
For a more detailed discussion of the Class B and
Class C shares, the restricted stock and the restricted
stock unit awards see Compensation Discussion and
Analysis Elements of Executive
Compensation Equity Compensation Plan.
As a result of the Corporate Reorganization, Archipelago
Learning, Inc. will own all of the outstanding member interests
of Archipelago Learning Holdings, LLC, and Archipelago Learning,
Inc. will become the parent of Archipelago Learning Holdings,
LLC and its subsidiaries, and will have no other assets or
operations. Archipelago Learning, Inc. will be a Delaware
C corporation, and as such will be subject to
federal and state income taxes. Archipelago Learning Holdings,
LLC was a limited liability company not
34
subject to state or federal income taxes, and as such, the
historical financial data included in this prospectus does not
reflect what our financial position and results of operations
would have been had we been a taxable corporation. We expect to
record a net deferred tax liability and a corresponding expense
to our provision for income taxes of approximately
$ million upon becoming a
C corporation before the effectiveness of the
registration statement of which this prospectus is a part. This
deferred tax liability primarily results from the excess of the
book basis over the tax basis of certain of our intangible
assets. We expect to realize future reductions in our current
tax expense as these intangibles are amortized and deducted from
taxable income on our tax returns. Prior to the closing of this
offering, Archipelago Learning Holdings, LLC intends to make
additional cash distributions of approximately $1.5 million
to its equity holders to enable them to meet certain tax
obligations associated with the sale of TeacherWeb and
approximately $0.9 million to the members of Archipelago
Learning Holdings, LLC to enable them to meet their other
estimated income tax obligations for the period from
January 1, 2009 to the date of the Corporate
Reorganization, which will be based on Archipelago Learning
Holdings, LLCs estimated net taxable income from
January 1, 2009 to the date of the Corporate
Reorganization. Purchasers of shares in this offering will not
receive these distributions. In addition, in October 2009,
Archipelago Learning Holdings, LLC made an $8.0 million
distribution to its members representing a return on such
members investment, which was paid in accordance with the
Archipelago Learning Holdings, LLC Agreement.
The Corporate Reorganization will not affect our operations,
which we will continue to conduct through our operating
subsidiaries.
The purpose of the Corporate Reorganization is to reorganize our
corporate structure so that the
top-tier
entity in our corporate structure the entity whose
common stock is being offered to the public in this
offering is a corporation rather than a limited
liability company and so that our existing investors will own
our common stock directly. References in this prospectus to our
capitalization and other matters pertaining to our equity and
participation shares prior to the consummation of the Corporate
Reorganization relate to the capitalization and equity and
participation shares of Archipelago Learning Holdings, LLC. This
prospectus includes consolidated financial statements and
consolidated financial data of Archipelago Learning Holdings,
LLC. In addition, this prospectus includes an audited balance
sheet of Archipelago Learning, Inc.
35
USE OF
PROCEEDS
We estimate that the net proceeds to us from our sale
of shares
of common stock in this offering will be
$ ,
after deducting underwriting discounts and commissions and
estimated expenses payable by us in connection with this
offering. This assumes a public offering price of
$ per share, which is the midpoint
of the price range set forth on the cover of this prospectus. We
intend to use net proceeds from shares that we sell for general
corporate purposes.
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would increase (decrease) the net proceeds to us from this
offering by $ million,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting underwriting discounts and commissions and estimated
expenses payable by us.
We will not receive any proceeds from the sale of shares by the
selling stockholders, which include entities affiliated with
members of our board of directors.
DIVIDEND
POLICY
From January 2007 through September 30, 2009, Archipelago
Learning Holdings, LLC paid aggregate distributions to its
equity holders of approximately $76 million, consisting of
$74.8 million in the year ended December 31, 2007 and
$1.3 million in the nine months ended September 30,
2009. These distributions were made in connection with the
Providence Equity Transactions and to enable equity holders to
meet their estimated tax obligations. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations. In October 2009,
Archipelago Learning Holdings, LLC made an $8.0 million
special distribution to its equity holders representing a return
on such holders investment, which was paid in accordance
with the Archipelago Learning Holdings, LLC Agreement. In
addition, prior to the closing of this offering, Archipelago
Learning Holdings, LLC intends to make additional distributions
of approximately $1.5 million to its equity holders to
enable them to meet certain tax obligations associated with the
sale of TeacherWeb and approximately $0.9 million to
its equity holders to enable them to meet their other estimated
tax obligations for the period from January 1, 2009 to the
date of the Corporate Reorganization, which will be based on
Archipelago Learning Holdings, LLCs estimated net taxable
income from January 1, 2009 to the date of the Corporate
Reorganization. Investors in this offering will not receive
these distributions.
After this offering, we intend to retain all available funds and
any future earnings to reduce debt and fund the development and
growth of our business and we do not anticipate paying any
dividends on our capital stock for the foreseeable future. Our
ability to pay dividends on our common stock is restricted by
the terms of our credit facility and may be further restricted
by any future indebtedness we incur. Our business is conducted
through our subsidiaries. Dividends from, and cash generated by
our subsidiaries will be our principal sources of cash to repay
indebtedness, fund operations and pay dividends. Accordingly,
our ability to pay dividends to our stockholders is dependent on
the earnings and distributions of funds from our subsidiaries.
Any future determination to pay dividends will be at the
discretion of our board of directors and will take into account:
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restrictions in our credit facility;
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general economic and business conditions;
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the financial condition and results of operations of us and our
subsidiaries;
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our capital requirements and the capital requirements of our
subsidiaries;
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the ability of our operating subsidiaries to pay dividends and
make distributions to us; and
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such other factors as our board of directors may deem relevant.
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36
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
our capitalization as of September 30, 2009:
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on an actual basis reflecting the capitalization of Archipelago
Learning Holdings, LLC; and
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on a pro forma as adjusted basis to give effect to:
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our Corporate Reorganization as more fully described in
Corporate Reorganization;
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cash distributions of $8.0 million made in October 2009 and
$0.9 million to be made upon the corporate reorganization;
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net short-term deferred tax asset of
$ and net long-term
deferred tax liability of
$ , as of
September 30, 2009 and (provision) benefit for income taxes
of $ and
$ for the year ended
December 31, 2008 and the nine months ended
September 30, 2009, respectively;
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the sale of our TeacherWeb business, which is expected to occur
in November 2009 (consisting of the purchase price of
$13 million (to be reduced by approximately
$1.5 million of cash remaining on TeacherWebs balance
sheet), the related $6.5 million repayment on our term loan
and an approximately $1.5 million cash distribution to be
made upon the Corporate Reorganization in connection with
certain tax obligations associated with the TeacherWeb sale); and
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the sale
of shares
of our common stock in this offering by us at an assumed initial
public offering price of $ per
share (the midpoint of the price range set forth on the cover of
this prospectus) after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, and
the application of the net proceeds from this offering as
described in Use of Proceeds.
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This table should be read in conjunction with Use of
Proceeds, Selected Historical Consolidated Financial
Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
consolidated financial statements and the related notes thereto
included elsewhere in this prospectus.
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As of September 30, 2009
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Pro Forma
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Actual
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As Adjusted(1)
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(In thousands, except
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share data)
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Cash and cash equivalents
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$
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17,111
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$
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Debt:
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Current portion of long-term debt
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700
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Long-term debt, less current portion(2)
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67,551
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Total debt
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68,251
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Members equity:
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Class A shares, 109,545,064 shares authorized and
outstanding
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34,792
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Class A-2 shares,
286,882 shares authorized and outstanding
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750
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Class B shares, 6,578,727 shares authorized and
6,028,727 shares outstanding
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941
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Class C shares, 7,126,451 shares authorized and
6,576,451 shares outstanding
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343
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Retained Earnings
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9,572
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Total members equity
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46,398
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Stockholders equity:
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Preferred stock, $0.001 par
value, shares authorized; no
shares issued and outstanding, on a pro forma as adjusted basis
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Common stock, $0.001 par
value, shares
authorized; shares issued and
outstanding, on a pro forma as adjusted basis
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Additional paid-in capital
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Retained earnings
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Total stockholders equity
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Total capitalization
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$
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114,649
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$
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(1) |
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We present certain amounts pro forma as adjusted, which gives
effect to (i) our Corporate Reorganization as more fully
described in Corporate Reorganization;
(ii) cash distributions of $8.0 million made in October
2009 and $0.9 million to be made upon the Corporate
Reorganization; (iii) net deferred tax liabilities of
$ ;
(iv) the sale of our TeacherWeb business, which we expect
to complete in November 2009 (consisting of the purchase price
of $13 million (to be reduced by approximately
$1.5 million of cash remaining on TeacherWebs balance
sheet), the related $6.5 million repayment on our term loan
and an approximately $1.5 million cash distribution to be
made upon the Corporate Reorganization in connection with
certain tax obligations associated with the TeacherWeb sale);
and (v) the sale of shares of our common stock in this offering
by us at an assumed initial public offering price of
$
per share (the midpoint of the price range set forth on the
cover of this prospectus) after deducting underwriting discounts
and commissions and estimated offering expenses payable by us,
and the application of the net proceeds from this offering as
described under Use of Proceeds. For additional
information regarding the sale of Teacher Web See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Recent
Developments. Assuming the number of shares sold by us in
this offering remains the same as set forth on the cover page, a
$1.00 increase or decrease in the assumed initial public
offering price would increase or decrease, as applicable, our
total capitalization by approximately
$ million. |
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(2) |
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Does not include $10.0 million of our revolving credit
facility, of which $0 was outstanding at September 30, 2009. |
38
DILUTION
If you invest in our common stock in this offering, your
ownership interest will be diluted to the extent of the
difference between the initial public offering price per share
and the pro forma as adjusted net tangible book value per share
of common stock upon the completion of this offering.
As of September 30, 2009, our net tangible book value was
approximately $ million, or
$ per share. Our net tangible book
value represents our total tangible assets less total
liabilities, divided by the total number of shares of common
stock outstanding. Dilution in net tangible book value per share
represents the difference between the amount per share paid by
purchasers of common stock in this offering and the pro forma
net tangible book value per share of common stock immediately
after the consummation of this offering.
After giving effect to (i) the issuance
of shares
of our common stock
and shares
of our restricted common stock in exchange for outstanding
Class A, Class A-2, Class B and Class C
shares of Archipelago Learning Holdings, LLC in connection with
the Corporate Reorganization and (ii) the sale of our
common stock at an assumed initial public offering price of
$ per share (the midpoint of the
price range set forth on the cover of this prospectus), and
after deducting underwriting discounts and commissions and
estimated offering expenses payable by us, our pro forma as
adjusted net tangible book value as of September 30, 2009
would have been approximately $ ,
or $ per share.
This represents an immediate increase in pro forma net tangible
book value of $ per share to our
existing shareholders and an immediate dilution of
$ per share to new investors
purchasing shares of common stock in this offering at the
initial public offering price.
The following table illustrates the dilution to new investors on
a per share basis:
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
|
|
$
|
|
|
Pro forma net tangible book value per share as of
September 30, 2009
|
|
$
|
|
|
|
|
|
|
Increase in pro forma net tangible book value per share
attributable to the sale of shares in this offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in pro forma net tangible book value per share
attributable to the issuance of restricted common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible book value per share after
this offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share (the
midpoint of the price range set forth on the cover of this
prospectus) would increase (decrease) our pro forma net tangible
book value after this offering by
$ million and increase
(decrease) the dilution to new investors by
$ per share, assuming the number
of shares offered by us, as set forth on the cover page of this
prospectus remains the same and after deducting the estimated
underwriting discounts and commissions and estimated offering
expenses payable by us.
39
The following table summarizes, as of September 30, 2009,
the total number of shares of our common stock we issued and
sold, the total consideration we received and the average price
per share paid to us by our existing shareholders and to be paid
by new investors purchasing shares of our common stock in this
offering. The table assumes an initial public offering price of
$ per share (the midpoint of the
price range set forth on the cover of this prospectus) and
deducts underwriting discounts and commissions and estimated
offering expenses payable by us:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Per Share
|
|
|
Existing shareholders
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
New investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share (the
midpoint of the price range set forth on the cover of this
prospectus) would increase (decrease) the total consideration
paid by new investors by $ and the
total consideration paid by all stockholders by
$ .
In addition, we may choose to raise additional capital due to
market conditions or strategic considerations even if we believe
we have sufficient funds for our current or future operating
plans. To the extent that additional capital is raised through
the sale of equity or convertible debt securities, the issuance
of such securities could result in further dilution to our
stockholders.
40
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth the selected historical
consolidated financial data for Archipelago Learning Holdings,
LLC for the periods and at the dates indicated. The selected
historical consolidated financial data as of December 31,
2008 and December 31, 2007 and the statement of operations
and other data for each of the years ended December 31,
2008, 2007 and 2006 are derived from the audited consolidated
financial statements included elsewhere in this prospectus. The
selected historical consolidated financial data as of
September 30, 2009 and for the nine months ended
September 30, 2008 and September 30, 2009 have been
derived from the unaudited consolidated financial statements
included elsewhere in this prospectus. The interim results set
forth below are not necessarily indicative of results for the
year ending December 31, 2009 or for any other period.
In January 2007, Providence Equity Partners, together with
Cameron Chalmers and David Muzzo (our founders and vice
presidents) and MHT-SI, LP, acquired 100% of the voting equity
interests in Archipelago Learning Holdings, LLC, the parent of
Archipelago Learning, LLC, which acquired substantially all of
the assets of Study Island, LP. See Providence Equity
Transactions. All periods ending prior to January 1,
2007 are referred to as Predecessor, and all periods
including and after such date are referred to as
Successor. The consolidated financial statements for
all Successor periods may not be comparable to those of the
Predecessor period.
Contained within the 2007 consolidated financial statements are
nine calendar days of operations and cash flows of the
Predecessor. Such amounts are not material to the overall 2007
consolidated financial statements taken as a whole. Further, the
consolidated financial position of the Predecessor immediately
prior to the January 10, 2007, transaction was not
materially different from that of December 31, 2006.
Accordingly, we have chosen January 1, 2007, as a date of
convenience in presenting successor operating results and the
financial statement information for the period from
January 1, 2007 through January 9, 2007 has not been
presented separately.
The selected historical consolidated financial data as of
December 31, 2004 and December 31, 2005 and for the
years ended December 31, 2004 and December 31, 2005
has been omitted. The omitted data is not available and the
inclusion of such data would require the conversion of cash
basis financials to financial statements prepared in accordance
with GAAP. This conversion would require substantial management
time and cannot be completed without the expenditure of
unreasonable effort and expense. In addition, as a result of our
recent growth and the impact of the Providence Equity
Transactions, the omitted financial data is not comparable to
the financial data set forth below and, accordingly, we believe
the omission of this financial data does not have a material
impact on the understanding of our results of operations,
financial performance and related trends. The selected
historical consolidated financial data also does not include
financial statements of Archipelago Learning, Inc. because it
has been formed recently for the purpose of effecting the
offering and until the consummation of the Corporate
Reorganization described more fully in Corporate
Reorganization, it will hold no material assets and will
not engage in any operations. Upon completion of the Corporate
Reorganization, Archipelago Learning, Inc. will become the
parent of Archipelago Learning Holdings, LLC and its
subsidiaries and will have no other assets or operations. See
Corporate Reorganization.
41
The results indicated below and elsewhere in this prospectus are
not necessarily indicative of our future performance. You should
read this information together with Capitalization,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and related notes included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
$
|
10,065
|
|
|
$
|
18,250
|
|
|
$
|
32,068
|
|
|
$
|
22,319
|
|
|
$
|
32,685
|
|
|
|
|
|
Cost of revenue
|
|
|
343
|
|
|
|
750
|
|
|
|
2,178
|
|
|
|
1,253
|
|
|
|
2,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,722
|
|
|
|
17,500
|
|
|
|
29,890
|
|
|
|
21,066
|
|
|
|
29,962
|
|
|
|
|
|
Operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
2,793
|
|
|
|
7,669
|
|
|
|
13,193
|
|
|
|
9,516
|
|
|
|
10,630
|
|
|
|
|
|
Content development
|
|
|
712
|
|
|
|
1,206
|
|
|
|
2,162
|
|
|
|
1,496
|
|
|
|
2,586
|
|
|
|
|
|
General and administrative
|
|
|
2,581
|
|
|
|
5,010
|
|
|
|
6,644
|
|
|
|
4,632
|
|
|
|
7,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
6,086
|
|
|
|
13,885
|
|
|
|
21,999
|
|
|
|
15,644
|
|
|
|
20,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
3,636
|
|
|
|
3,615
|
|
|
|
7,891
|
|
|
|
5,422
|
|
|
|
9,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
(838
|
)
|
|
|
(5,161
|
)
|
|
|
(3,973
|
)
|
|
|
(2,092
|
)
|
|
|
|
|
Interest income
|
|
|
27
|
|
|
|
343
|
|
|
|
247
|
|
|
|
194
|
|
|
|
44
|
|
|
|
|
|
Derivative loss
|
|
|
|
|
|
|
(173
|
)
|
|
|
(2,119
|
)
|
|
|
(857
|
)
|
|
|
(415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
27
|
|
|
|
(668
|
)
|
|
|
(7,033
|
)
|
|
|
(4,636
|
)
|
|
|
(2,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
3,663
|
|
|
|
2,947
|
|
|
|
858
|
|
|
|
786
|
|
|
|
7,224
|
|
|
|
|
|
(Provision) benefit for income taxes
|
|
|
|
|
|
|
(23
|
)
|
|
|
164
|
|
|
|
11
|
|
|
|
(348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,663
|
|
|
$
|
2,924
|
|
|
$
|
1,022
|
|
|
$
|
797
|
|
|
$
|
6,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per equity share attributable to members equity
(Basic and diluted)
|
|
$
|
1,832
|
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Predecessor per equity share attributable to
members equity (Basic and diluted)
|
|
$
|
3,177
|
|
|
$
|
589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Successor per equity share attributable to
members equity (Basic and diluted)
|
|
|
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
9,318
|
|
|
$
|
16,931
|
|
|
$
|
26,922
|
|
|
$
|
26,015
|
|
|
$
|
36,469
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
1,387
|
|
|
|
11,060
|
|
|
|
13,144
|
|
|
|
18,865
|
|
|
|
17,111
|
|
|
|
|
|
Total assets
|
|
|
4,227
|
|
|
|
127,591
|
|
|
|
142,025
|
|
|
|
149,335
|
|
|
|
155,703
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
69,300
|
|
|
|
68,600
|
|
|
|
68,775
|
|
|
|
67,551
|
|
|
|
|
|
Total liabilities
|
|
|
9,762
|
|
|
|
89,244
|
|
|
|
101,551
|
|
|
|
109,170
|
|
|
|
109,305
|
|
|
|
|
|
Total members equity (deficit)
|
|
|
(5,535
|
)
|
|
|
38,347
|
|
|
|
40,474
|
|
|
|
40,165
|
|
|
|
46,398
|
|
|
|
|
|
43
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial
condition and results of operations should be read together with
Selected Historical Consolidated Financial Data and
the consolidated financial statements and the related notes
included elsewhere in this prospectus. The historical
consolidated financial information discussed below reflects the
historical results of operations of Archipelago Learning
Holdings, LLC, which will be our wholly owned subsidiary after
our corporate reorganization, and, except as indicated, the
discussion below does not give effect to our corporate
reorganization. See Corporate Reorganization for a
description of our corporate reorganization. This discussion
contains
forward-looking
statements, based on current expectations and related to future
events and our future financial performance, that involve risks
and uncertainties. Our actual results may differ materially from
those anticipated in these forward-looking statements as a
result of many factors, including those set forth under
Risk Factors, Forward-Looking Statements
and elsewhere in this prospectus.
Overview
Archipelago Learning is a leading subscription-based online
education company. We provide standards-based instruction,
practice, assessments and productivity tools that improve the
performance of educators and students via proprietary web-based
platforms. Study Island, our core product line, helps students
in Kindergarten through 12th grade, or K-12, master grade
level academic standards in a fun and engaging manner. As of
September 30, 2009, Study Island products were utilized by
approximately 8.9 million students in 21,000 schools
in 50 states. In the 2008-2009 school year, students
answered over 2.8 billion of our practice questions. We
recently began offering online postsecondary programs through
our Northstar Learning product line.
We were founded in 2000. In 2001, we launched our first Study
Island products in two states. By 2009, we developed Study
Island products for all 50 states, expanded our content to
include the subject areas of reading, writing, mathematics,
social studies and science and grew from serving 57 schools in
2001 to approximately 21,000 schools. We entered the
postsecondary educational market with the launch of Northstar
Learning in April 2009, which uses the same web-based platform
as our Study Island products to provide various instruction,
assessment and exam preparation content.
We further expanded our product offerings with our June 2008
acquisition of TeacherWeb, a website portal and teacher
productivity tool that provides educators with simple,
easy-to-use templates to create district, school or classroom
websites. In August 2009, we made a minority investment in
Edline, a private educational technology company offering
products and services similar to TeacherWeb, and we expect to
complete our sale of TeacherWeb to Edline in November 2009 upon
finalizing an amendment to our credit facility permitting the
sale.
We capitalize on two significant trends in the education market:
(1) an increased focus on higher academic standards and
educator accountability for student achievement, which has led
to periodic assessment in the classroom to gauge student
learning and inform instruction, also known as formative
assessment, and (2) the increased availability and
utilization of web-based technologies to enhance and supplement
teacher instruction, engage todays technology-savvy
learners and improve student outcomes.
The increased focus on higher academic standards and educator
accountability is largely reflected in legislative efforts such
as No Child Left Behind, NCLB, the common name for the 2001
reauthorization of the Elementary and Secondary Education Act.
NCLB led states to establish high academic standards for K-12
students. We believe NCLB will be considered for reauthorization
in 2010, but if it is not reauthorized or extended or does not
maintain or increase the importance of
state-by-state
education standards and assessments, our highly customized
Study Island products may become less competitive, which
could result in lower service revenue and profitability.
Similarly, new legislation could lessen the importance of
state-by-state
education standards and assessments or Congress may adopt
national educational standards, which would reduce the
importance of our product customization and allow competitors to
compete more easily with our products.
44
In addition, most of our customers are public schools and school
districts that have to comply with state educational standards.
As a result, our sales depend on the availability of public
funds, which may become more limited as many states or districts
face budget cuts. If schools lack funding or if budget cuts
continue and become more severe, we may not be able to maintain
our sales to public schools or may have to adjust our pricing,
which may result in lower service revenue, lower margins and
lower liquidity.
Seasonal trends associated with school budget years and state
testing calendars also affect the timing of our sales of
subscriptions to new and existing customers. As a result, most
new subscriptions and renewals occur in the third quarter
because teachers and school administrators typically make
purchases for the new academic year at the beginning of their
districts fiscal year, which is usually July 1.
Subscriptions to our products generate substantially all of our
service revenue, and customers enter into subscriptions
typically for a
12-month
term. We rely significantly on our ability to secure renewals
for subscriptions to our products as well as sales to new
customers. We generally contact schools several months in
advance of the expiration of their subscription, to attempt to
secure renewal subscriptions. If a school does not renew its
subscription within six months after its expiration, we
categorize it as a lost school, and if a school subsequently
purchases a subscription after this renewal period, we consider
it to be a new subscription.
Our recent expansion outside of the U.S. K-12 market,
including our Northstar Learning line for the postsecondary
market and our plans to create and sell Study Island products
for students outside of the United States, may impact our
financial performance. We have incurred and expect to continue
to incur certain preliminary costs associated with creating new
products and entering new markets, such as increased personnel
costs from hiring new employees, product and development costs
and initial marketing initiatives.
In January 2007, investment funds affiliated with Providence
Equity Partners, together with Cameron Chalmers and David Muzzo
(our founders and vice presidents) and MHT-SI, LP, acquired 100%
of the voting equity interests in Archipelago Learning Holdings,
LLC, the parent of Archipelago Learning, LLC, which subsequently
acquired substantially all of the assets of Study Island, LP,
our predecessor. In connection with the acquisition:
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Providence Equity Partners contributed approximately
$84.5 million in cash for approximately 77.2% of the voting
equity interests in Archipelago Learning Holdings, LLC;
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Cameron Chalmers and David Muzzo each contributed
$10.0 million, for a total of $20.0 million, for
approximately 9.1% each, or a total of approximately 18.2%, of
the voting equity interests in Archipelago Learning Holdings,
LLC;
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MHT-SI, LP contributed approximately $5.0 million in cash
for approximately 4.6% of the voting equity interests in
Archipelago Learning Holdings, LLC;
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With the cash contributed by Providence Equity Partners, Cameron
Chalmers, David Muzzo and MHT-SI, LP, (i) Archipelago
Learning, LLC purchased substantially all the assets of Study
Island, LP for $100.0 million, (ii) Archipelago
Learning, LLC paid $4.6 million in transaction costs
related to the acquisition of the assets of Study Island, LP and
(iii) $5.0 million was retained by Archipelago
Learning, LLC for general corporate purposes;
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In November 2007, Archipelago Learning, LLC as borrower, and the
other persons designated as credit parties from time to time,
entered into a credit facility providing for a
$70.0 million term loan and a $10.0 million revolving
credit facility with General Electric Capital Corporation, as a
lender and as agent for all lenders, NewStar Financial, Inc., as
syndication agent, the other parties thereto as lenders and GE
Capital Markets, Inc. and NewStar Financial, Inc., as joint lead
arrangers and joint bookrunners; and
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With the borrowings under our term loan and cash on hand,
(i) Archipelago Learning, LLC paid $1.7 million in
financing fees related to our credit facility,
(ii) Archipelago Learning, LLC distributed
$74.8 million of its proceeds under its term loan and cash
on hand to Archipelago Learning Holdings, LLC, and
(iii) Archipelago Learning Holdings, LLC made distributions
of $74.8 million to the holders of its voting equity
interests.
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45
We refer to the foregoing transactions collectively as the
Providence Equity Transactions.
Prior to this offering, Archipelago Learning Holdings, LLC and
its subsidiaries conducted our business. Prior to the
consummation of this offering, and in accordance with and as
contemplated by the limited liability company agreement of
Archipelago Learning Holdings, LLC, the holders of shares of
Archipelago Learning Holdings, LLC, and certain of their
affiliates will enter into the following transactions with
Archipelago Learning, Inc., a newly formed Delaware corporation
that will act as a holding company for our business:
The direct or indirect
holders of Class A and
Class A-2 shares
of Archipelago Learning Holdings, LLC (other than Providence
Equity Partners
V-A Study
Island L.L.C. and its subsidiaries) will, directly or
indirectly, contribute all such Class A and
Class A-2 shares
of Archipelago Learning Holdings, LLC held by such parties to
Archipelago Learning, Inc. in exchange for an aggregate
of shares of common stock;
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Providence Equity Partners V-A Study Island L.L.C., which will
not have any assets other than its Class A shares of
Archipelago Learning Holdings, LLC, will merge with and into
Archipelago Learning, Inc. and as a result of such merger, the
members of Providence Equity Partners
V-A Study
Island L.L.C. will receive an aggregate
of shares of our common stock;
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Our officers, directors and employees who hold vested
Class B shares of Archipelago Learning Holdings, LLC will
contribute their vested Class B shares of Archipelago
Learning Holdings, LLC to Archipelago Learning, Inc. in exchange
for an aggregate of shares of
common stock;
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Our officers, directors and employees who hold unvested
Class B shares of Archipelago Learning Holdings, LLC will
contribute their unvested Class B shares of Archipelago
Learning Holdings, LLC to Archipelago Learning, Inc. in exchange
for an aggregate of shares of
restricted common stock subject to time-based vesting;
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Our officers, directors and employees (other than our chief
executive officer, chief financial officer, chief technology
officer and co-founders) who hold Class C shares of
Archipelago Learning Holdings, LLC will contribute such
Class C shares to Archipelago Learning, Inc. in exchange
for an aggregate
of shares
of common stock and an aggregate
of restricted
stock unit awards subject to vesting based on, among other
things, the trading price of our common stock; and
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Our chief executive officer, chief financial officer, chief
technology officer and co-founders will contribute their
Class C shares of Archipelago Learning Holdings, LLC to
Archipelago Learning, Inc. in exchange for an aggregate
of shares
of restricted common stock subject to vesting based on, among
other things, the cash returns to Providence Equity Partners in
respect of shares of common stock held by Providence Equity
Partners and an aggregate
of
restricted stock unit awards subject to vesting based on, among
other things, the cash returns to Providence Equity Partners in
respect of shares of common stock held by Providence Equity
Partners.
|
We refer to the transactions listed above as the Corporate
Reorganization.
For a more detailed discussion of the Class B and
Class C shares, the restricted stock and the restricted
unit awards see Compensation Discussion and
Analysis Elements of Executive
Compensation Equity Compensation Plan.
As a result of the Corporate Reorganization, Archipelago
Learning, Inc. will own all of the outstanding member interests
of Archipelago Learning Holdings, LLC, will become the parent of
Archipelago Learning Holdings, LLC and its subsidiaries and will
have no other assets or operations. Archipelago Learning, Inc.
will be a Delaware C corporation, and as such will
be subject to federal and state income taxes. Archipelago
Learning Holdings, LLC was a limited liability company not
subject to state or federal income taxes, and as such, the
historical financial data included in this prospectus does not
reflect what our financial position and results of operations
would have been had we been a taxable corporation. We expect to
46
record a net deferred tax liability and a corresponding expense
to our provision for income taxes of approximately
$ million upon becoming a
C corporation before the effectiveness of the
registration statement of which this prospectus is a part. This
deferred tax liability primarily results from the excess of the
book basis over the tax basis of certain of our intangible
assets. We expect to realize future reductions in our current
tax expense as these intangibles are amortized and deducted from
taxable income on our tax returns. Prior to the closing of this
offering, Archipelago Learning Holdings, LLC intends to make
additional cash distributions of approximately $1.5 million
to its equity holders to enable them to meet certain tax
obligations associated with the sale of TeacherWeb and
approximately $0.9 million to the members of Archipelago
Learning Holdings, LLC to enable them to meet their other
estimated income tax obligations for the period from
January 1, 2009 to the date of the Corporate
Reorganization, which will be based on Archipelago Learning
Holdings, LLCs estimated net taxable income from
January 1, 2009 to the date of the Corporate
Reorganization. Purchasers of shares in this offering will not
receive these distributions. In addition, in October 2009,
Archipelago Learning Holdings, LLC made an $8.0 million
distribution to its members representing a return on such
members investment, which was paid in accordance with the
Holding LLC Agreement.
For more information on the Providence Equity Transactions and
the Corporate Reorganization, see Corporate
Reorganization and Certain Relationships and Related
Person Transactions.
Recent
Developments
In August 2009, in conjunction with Providence Equity
Partners acquisition of Edline Holdings, Inc., or Edline,
a private Chicago-based educational technology company, we made
a strategic minority investment in Edline. We purchased 285,601
Series A shares of Edline for $2.7 million,
representing 6.9% of Edlines outstanding Series A
shares. In addition, Edline borrowed $2.1 million from us
pursuant to a five-year promissory note, which bears interest at
9.5% per annum and requires semi-annual interest-only payments.
In connection with these transactions, we received transaction
fees of $0.2 million. Edline provides online Learning
Community Management Systems, or LCMS, solutions that help
schools improve student performance by harnessing the power of
parental involvement, supporting teachers and engaging the
learning community. Services include web hosting, content
management, information portals, tools for classroom management,
gradebook, notification, student data analytics, virtual storage
and related technologies.
We believe that we can benefit from strategic opportunities with
Edline, as Edline is capitalizing on the same trends in the K-12
education market as Study Island: (1) an increased focus on
higher academic achievement and (2) increased availability
and utilization of web-based technologies to enhance and
supplement instruction and improve school to home
communications. Accordingly, there are attractive strategic
partnership opportunities between us and Edline, including:
linking Study Islands content to Edlines school and
district LCMS solutions and co-marketing arrangements to
capitalize on each companys customer base and sales force.
In October 2009, we were approached by Edline to consider
selling the operations of TeacherWeb. We believe the sale of
TeacherWeb, coupled with our earlier investment in Edline, will
enable us to focus on growing our core business of providing
online
standards-based
instruction, practice, assessment and reporting programs through
our Study Island and Northstar Learning products, while
partnering with Edline to integrate Study Islands content
with Edlines community management solutions. We expect to
complete the sale of TeacherWeb in November 2009 for an
aggregate purchase price of $13 million, consisting of $6.5
million in cash (to be reduced by approximately
$1.5 million of cash remaining on TeacherWebs balance
sheet), Series A shares of Edline valued at $3.7 million
and $2.8 million of five-year debt securities that bear
interest at 9.5% per annum and require semi-annual interest-only
payments. The sale will be completed upon our finalizing an
amendment to our credit facility permitting the sale. In
addition, we will prepay $6.5 million on our term loan in
connection with the sale. As a result of the sale,
TeacherWebs guarantee of our credit facility will be
released. We do not expect the sale to have a material negative
impact on our net income in the future. Upon the completion of
the sale, we will hold 11.2% of Edlines outstanding Series
A shares and $4.9 million of Edlines senior debt.
47
Components
of Service Revenue and Expense
Service
Revenue
Substantially all of our service revenue is generated from
subscriptions for our products and services. For 2006, 2007,
2008 and the first nine months of 2009, subscription revenue
accounted for 97.3%, 98.0%, 98.4% and 98.8% of our service
revenue, respectively. Our subscription revenue results from
subscriptions sold to new and existing customers. We also
generate service revenue from individual buys, which are
individual purchases for access to a product, and from training
fees, which are fees from customers for onsite or online
training sessions that are primarily provided to new Study
Island customers.
A significant portion of our service revenue has been and is
expected to be generated by sales of our Study Island products
to public schools and school districts, which rely on state,
federal and local funding. State, federal and local educational
funding is primarily funded through income or property taxes,
and such tax revenue may increase or decrease as a result of
general economic conditions and tax policies. The NCLB
legislation passed in 2001 conditioned the receipt of federal
funding for education on the establishment of educational
standards, annual assessments and the achievement of adequate
yearly progress milestones. In addition, budget appropriations
for education at all levels of government are determined through
the political process, and as a result, the funding that schools
receive may fluctuate, which may impact our sales to schools in
future periods.
Subscription revenue from our Study Island products accounted
for 97.7%, 97.8%, 96.8% and 93.3% of our service revenue in
2006, 2007, 2008 and the first nine months of 2009,
respectively, and we anticipate that service revenue from sales
of our Study Island products will account for a substantial
majority of our service revenue for the next few years. We also
generated subscription revenue from our TeacherWeb service,
which accounted for 2.0% and 5.5% of our service revenue in 2008
and the first nine months of 2009, respectively. As a result of
the anticipated sale of TeacherWeb in November 2009, we will no
longer generate subscription revenue related to TeacherWeb.
TeacherWeb revenue represented 2.0% and 5.8% of our service
revenue for 2008 and the nine months ended September 30,
2009, respectively. We have not yet generated significant
subscription revenue from our Northstar Learning product line,
which was launched in April 2009.
Pricing for Study Island subscriptions is based on a variety of
factors. Subscriptions are priced on a fixed price per class or
a variable price per school based on the number of students per
grade using the products. In addition, subscriptions are priced
on a per subject matter basis with discounts given if all of the
subjects for a given grade are purchased. Subscription prices
also vary by state based on the number, complexity and
comprehensiveness of the applicable standards. Our Study Island
products are specifically built from the varying assessment
standards in all 50 states, which we believe differentiates us
from our competitors. If national standards and assessments
replace current state assessments, we may face increased
competition as well. The average annual price per student per
subject is $3.00, or $10.00 per student for all subjects.
Our subscription fees are typically billed prior to the
commencement of the subscription term; however, we recognize
subscription revenue ratably over the subscription term
beginning on the commencement date of each subscription. The
traditional subscription term is 12 months for our Study
Island products and six months for our Northstar Learning
product line. We occasionally sell multi-year subscriptions.
Additionally, promotional incentives, such as complimentary
months of service, are offered periodically to new Study Island
customers, resulting in a subscription term longer than one
year. All of our subscriptions are sold on a
non-cancelable
basis. From time to time, we may enhance or upgrade our
products. Because we provide our products on a single web-based
platform, all of our customers generally benefit from new
features and functionality released during the subscription term
at no additional cost.
We increased our standard pricing in August 2007 and August
2008. We do not believe, however, that these pricing increases
are meaningful to changes in our service revenue. Our pricing
structure is complex, using a set of standard prices, but
offering discretionary discounts of different amounts for a wide
range of circumstances with our clients. Additionally,
considering that we recognize our service revenue ratably over
the subscription terms of our clients (which are typically
12 months, but vary under many circumstances), price
increases have a delayed impact on revenue within a single
period presented in our financial statements.
48
Factors affecting our service revenue include: (i) the
number of schools, classes or students purchasing our products;
(ii) the term of the subscriptions; (iii) subscription
renewals; (iv) the number of states or geographies in which
we offer products; (v) the number of products we offer in a
state or in a geographic region; (vi) the complexity and
comprehensiveness of applicable standards, which impacts
pricing; (vii) the effectiveness of our regional
field-based and inside sales teams; (viii) recognition of
service revenue in any period from deferred revenue from
subscriptions purchased or renewed during the current and prior
periods; (ix) federal, state and local educational funding
levels; and (x) discretionary purchasing funds available to
our customers.
The timing of sales to new and existing Study Island customers
is affected by seasonal trends associated with school budget
years and state testing calendars. As a result, most new
subscriptions and renewals occur in the third quarter because
teachers and school administrators typically make purchases for
the new academic year at the beginning of their districts
fiscal year, which is usually July 1. The fourth calendar
quarter has historically produced the second highest level of
new subscriptions and renewals, followed by the second quarter
and the first quarter. We anticipate that sales of our Northstar
Learning products will be highest at the beginning of customary
academic semesters in September and January. Because our service
revenue is deferred over the course of the subscription period
and our customers pay for their subscriptions at the beginning
of the subscription period, this seasonality does not cause our
service revenue to fluctuate significantly but does impact our
cash flow.
As of September 30, 2009, approximately 21,000 schools
used Study Island products. A school is considered to be using
our products if it has an active subscription for any or all of
the Study Island products available to it. The number of schools
using our products will increase as schools without active
subscriptions purchase subscriptions for our products. The
number of schools using our products will decrease if the
schools do not renew their subscriptions. We generally contact
schools several months in advance of the expiration of their
subscription to attempt to secure renewal subscriptions. If a
school does not renew its subscription within six months after
its expiration, we categorize it as a lost school and our count
of the number of schools using our products decreases. If the
school subsequently purchases a subscription to our products
after this renewal period, we consider it to be a new
subscription. In 2008, we had a renewal rate of 77.1%, which
reflects the percentage of schools that subscribed for our
products in one period and then subscribed for our products
again in the next period, within six months of their
subscription end date.
Our subscription purchases are generally evidenced by a purchase
order. We recognize an invoiced sale in the period in which the
purchase order is received and the invoice is issued, which may
be at a different time than the commencement of the
subscription. Service revenue for invoiced sales is deferred and
recognized ratably over the subscription term beginning on the
commencement date of the applicable subscription.
The following table sets forth information regarding our
invoiced sales as well as other metrics that impact our service
revenue for the periods presented:
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Predecessor
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Successor
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Year Ended
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Year Ended
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Twelve Months Ended
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December 31,
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December 31,
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September 30,
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2006
|
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2007
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2008
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2008
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2009
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(Dollars in thousands)
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Invoiced sales to new customers(1)(2)
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$
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7,021
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$
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11,222
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|
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$
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14,099
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|
|
$
|
14,100
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|
|
$
|
14,666
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Invoiced sales to existing customers(1)(3)
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6,981
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13,847
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|
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24,709
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|
|
22,248
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|
|
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33,889
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Invoiced other sales(1)(4)
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502
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|
794
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|
1,053
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|
|
865
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|
1,048
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Invoiced TeacherWeb sales(5)
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1,998
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1,578
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3,285
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|
|
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|
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Invoiced sales(1)
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14,504
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25,863
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41,859
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|
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38,791
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52,888
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Change in deferred revenue(6)
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(4,439
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)
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(7,613
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)
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(9,791
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)
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(10,966
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)
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(10,454
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)
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Service revenue
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$
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10,065
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|
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$
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18,250
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|
|
$
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32,068
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|
|
$
|
27,825
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|
|
$
|
42,434
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49
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Predecessor
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Successor
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At
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December 31,
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At December 31,
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At September 30,
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2006
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2007
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2008
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2008
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2009
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Other metrics:
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Number of schools using Study Island products(7)
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7,856
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13,100
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|
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17,307
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|
|
|
16,836
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|
|
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20,812
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Number of students using Study Island products(8)
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3,000,000
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|
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5,000,000
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8,311,501
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8,047,608
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8,884,559
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Number of products available(9)
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429
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650
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950
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|
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751
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|
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1,190
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Number of states(10)
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23
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35
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|
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50
|
|
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50
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50
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(1) |
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We present invoiced sales data to provide a supplemental measure
of our operating performance. We believe the various invoiced
sales metrics enable investors to evaluate our sales performance
in isolation and on a consistent basis without the affects of
service revenue deferral and service revenue recognition from
sales in prior periods. In addition, invoiced sales to new
customers and existing customers and invoiced other sales
provide investors with important information regarding the
source of orders for our products and services and our sales
performance in a particular period. Invoiced sales are not
recognized under accounting principles generally accepted in the
United States, or GAAP, and should not be used an as indicator
of, or an alternative to, service revenue and deferred revenue.
Invoiced sales metrics have significant limitations as
analytical tools because they do not take into account the
requirement to provide the applicable product or service over
the subscription period and they do not match the recognition of
services revenue with the associated cost of revenue. |
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(2) |
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Invoiced sales to new customers are recognized in the period in
which the school or district purchase order is received and the
invoice is issued. A new customer is any customer that is not
considered to be an existing customer. |
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(3) |
|
Invoiced sales to existing customers are recognized in the
period in which the school or district purchase order is
received and the invoice is issued. An existing customer is
defined as any customer with an existing subscription to Study
Island products. We generally contact schools several months in
advance of the expiration of their subscription to attempt to
secure renewal subscriptions. If a school does not renew its
subscription within six months after its expiration, we
categorize it as a lost school and our count of the number of
schools using our products decreases. If the school subsequently
purchases a subscription to our products after this renewal
period, we consider it to be a new subscription. |
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(4) |
|
Invoiced other sales include invoices from individual buys,
which are individual purchases for access to a product, and from
training fees, which are fees from customers for onsite or
online training sessions that are primarily provided to new
Study Island customers. |
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(5) |
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Invoiced TeacherWeb sales are recognized at the point of sale
and are not evaluated in the same manner as Study Island sales.
We expect to complete the sale of our TeacherWeb business in
November 2009 upon finalizing an amendment to our credit
facility permitting the sale. |
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(6) |
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Our subscription fees are typically billed prior to the
commencement of the subscription term. Revenue for invoiced
sales is deferred and recognized ratably over the subscription
term beginning on the commencement date of the applicable
subscription. The traditional subscription term is
12 months for our Study Island products and TeacherWeb
service and six months for our Northstar Learning product line. |
|
(7) |
|
A school is considered to be using our products if it has an
active subscription for any or all of the Study Island products
available to it. |
|
(8) |
|
The numbers of students using Study Island products is the
number of registered user names. In 2006 and 2007, we did not
track the number of registered user names and have provided
calculated management estimates based on the best available data
for those years. |
|
|
|
|
50
footnotes continued on following page
|
|
|
|
|
(9) A Study Island product is any one subject for one grade
level in a single state. A Northstar Learning product is any one
subject. |
|
(10) |
|
The number of states is the number of states in which Study
Island offers products, which are built from the standards of
such states. |
Cost
of Revenue
Cost of revenue consists of the direct and indirect costs to
host and make available our products and services to our
customers. A significant portion of the cost of revenue includes
salaries, bonuses, stock-based compensation, employee benefits
costs and taxes related to engineering personnel who maintain
our servers and technical equipment and who work on our
web-based hosted platform. The employee benefits costs and taxes
are allocated based upon a percentage of total compensation
expense. Other direct and indirect costs include recruiting and
relocation fees associated with engineering and product
development employees, contracted labor, facility costs for our
web platform servers and routers, including backup servers that
are maintained in colocation facilities in Dallas, Texas,
depreciation expense on those servers and routers, network
monitoring costs and amortization of Study Islands
technical development intangible asset as a result of the
Providence Equity Transactions. We expect cost of revenue to
decrease following our sale of TeacherWeb, which we expect to
complete in November 2009, due to decreased personnel and
operational costs related to TeacherWeb.
Operating
Expense
We classify our operating expense into three categories: sales
and marketing, content development, and general and
administrative. All of the categories include personnel costs.
Personnel costs for each category of operating expense include
salaries, bonuses, stock-based compensation, employee benefits
costs and taxes. Personnel costs for sales and marketing expense
also include sales commissions. Salary increases are generally
given in January of each year. Bonuses are expensed monthly as
they accrue based on managements estimate of the expected
bonus amounts, and are actually paid to most employees and sales
management personnel in July and January. These bonuses are
based on a combination of business and individual performance
for the first six months and the last six months of the year.
Senior management bonuses are generally paid in the first
quarter of the year, after the results for the prior year are
known. Sales commissions are generally paid as a percentage of
sales to new and existing customers, and are paid in the month
the customers purchase order is received.
Sales and Marketing Expense. Our sales and
marketing expense consists primarily of personnel expense,
direct marketing costs, travel and entertainment expense, and
the amortization of customer relationships as an intangible
asset. Personnel expense has increased significantly since 2006
as we increased our sales and marketing headcount to
124 employees at September 30, 2009 from
31 employees at December 31, 2006 as a result of the
growth in our Study Island product line, the TeacherWeb
acquisition and the launch of our Northstar Learning product
line. In addition, our sales commissions increased during this
period primarily as a result of an increased number of sales
representatives and higher Study Island sales volume. Our
employees have also received market-driven merit increases in
their base salaries during this period. Marketing expense
consists of direct mail costs, email prospecting expense,
pay per click advertising costs, search engine
optimization costs, printed material costs, marketing research
expense, and trade show expense. Marketing expense generally
increases as our sales efforts increase, both in new and
existing markets. Our marketing efforts are related to the
launch of new product offerings, the introduction of our
products and services in new states and geographic regions, and
opportunities within a selected market associated with specific
events such as timing for the standardized testing in a
particular state and upcoming trade shows. Sales and marketing
expense also includes the amortization of customer relationship
costs as a result of the Providence Equity Transactions and the
acquisition of TeacherWeb in June 2008. We expect to complete
the sale of TeacherWeb in November 2009, after which we will not
incur any sales and marketing expense related to TeacherWeb.
Content Development Expense. Our content
development expense primarily consists of personnel costs for
our content development employees, who are responsible for
writing the questions for our Study Island and Northstar
Learning products, and program content amortization expense. Our
content development personnel costs have increased significantly
since 2006 as we increased headcount to 58 at September 30,
51
2009 from 12 at December 31, 2006 to support the
development of new Study Island products for each state and the
expanded number of subjects and grades covered by our Study
Island products, as well as the launch of Northstar Learning and
product enhancements.
General and Administrative Expense. Our
general and administrative expense includes personnel costs for
general and administrative employees, accounting and legal
professional services fees, rent, insurance, travel and
entertainment expense, and other corporate expense. General and
administrative expense increased as a result of the expansion of
our Dallas office space in 2007 and 2008 and the implementation
of a new financial system and new accounting system in 2008 and
2009. We expect other operating expense to increase in future
periods as we expect to incur additional expense associated with
being a public company, including increased personnel costs,
legal costs, accounting costs, board compensation expense,
investor relations costs, higher insurance premiums, and costs
associated with our compliance with Section 404 of the
Sarbanes-Oxley Act of 2002, other applicable SEC regulations and
the requirements of Nasdaq.
Other
Income (Expense)
Our other income (expense) includes the interest expense on our
$70.0 million term loan and $10.0 million revolving
credit facility entered into in November 2007 and amortization
of debt financing costs. We borrowed $10.0 million under
our revolving credit facility in September 2008 and we repaid
the full amount in November 2008. No amounts were outstanding
under the revolving credit facility at September 30, 2009.
The amounts borrowed under our term loan bear interest at rates
based upon either a base rate or LIBOR, plus an applicable
margin. We also earn interest income on our cash and cash
equivalents investments which is included in other income. We
utilize an interest rate swap, required by the terms of our
credit facility, as part of our overall risk management
strategy. We entered into the swap arrangement in December 2007
with an initial notional amount of $45.5 million. In June
2009, the notional amount of the interest rate swap decreased to
$40.5 million and will decrease in periodic amounts to a
notional amount of $30.5 million at the December 31,
2010 termination date. We swapped a floating rate payment based
on the three-month LIBOR for a fixed rate of 4.035% in order to
minimize the variability in expected future cash flow due to
interest rate movements on our LIBOR-base variable rate debt. We
have not designated our interest rate swap as a cash flow hedge.
The unrealized changes in the derivative fair value and the
realized interest income
and/or
expense associated with the swap are recorded as a derivative
gain (loss) in other income (expense).
Income
Tax Expense
Income tax expense is comprised of federal, state, local and
foreign taxes based on our income in the appropriate
jurisdictions. Prior to the Corporate Reorganization,
Archipelago Learning Holdings, LLC was treated as a partnership
and was not a taxpaying entity for federal income tax purposes
and generally is not a taxpaying entity for state income tax
purposes. As a result, Archipelago Learning Holdings, LLCs
income was taxed to its members in their individual federal
income tax returns. TeacherWeb was treated as a taxable
corporation for federal income tax purposes. In 2008, we
recorded a $0.2 million federal and state income tax
benefit for TeacherWeb. We are also subject to certain franchise
taxes and we record these expenses in our income tax expense.
Other
Considerations
Equity Compensation Expense. As members of a
private limited liability company, our members interests
consisted of Class A,
Class A-2,
Class B and Class C shares. Management and other
employees were granted Class B and Class C shares
under our 2007 Equity Compensation Plan. For the years ended
December 31, 2007 and 2008 and for the first nine months of
2009, we recognized approximately $0.6 million,
$0.4 million and $0.3 million, respectively, as
stock-based compensation expense. Upon completion of this
offering, Class A and
Class A-2
shares will be converted into shares of common stock of
Archipelago Learning, Inc. Class B shares will be converted
into shares of common stock and restricted common stock, and
Class C shares will be converted into shares of common
stock and restricted stock unit awards. See Corporate
Reorganization and Overview.
Managements participation shares will convert into common
stock, restricted common stock and restricted stock unit awards.
In addition, in connection with
52
this offering, we intend to implement the 2009 Omnibus Incentive
Plan. We expect to grant additional stock options, restricted
stock, restricted stock unit awards and other forms of
equity-based compensation under that plan after the offering,
which will result in the incurrence of equity compensation
expense.
Providence Equity Transactions. As a result of
the Providence Equity Transactions in 2007, our interest expense
and our depreciation and amortization expense have increased.
Accordingly, our consolidated financial statements prior to
January 2007 are not comparable to subsequent periods, primarily
as a result of significantly increased interest expense and
depreciation and amortization expense.
Corporate Reorganization. Prior to the
consummation of this offering, we will reorganize our corporate
structure so that the top-tier entity in our corporate
structure the entity whose common stock is being
offered to the public in this offering is a
corporation rather than a limited liability company. See
Corporate Reorganization and
Overview.
Critical
Accounting Policies
Our discussion and analysis of our consolidated financial
condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with GAAP. The preparation of these financial
statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue and
expense, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates
including those related to long-lived intangible and tangible
assets, goodwill and stock-based compensation. We base our
estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates
under different assumptions or conditions. All intercompany
balances and transactions have been eliminated in consolidation.
The accounting policies we believe to be most critical to
understanding our results of operations and financial condition
and that require complex and subjective management judgments are
discussed below.
Revenue Recognition. We generate service
revenue from subscription revenue, training fees and individual
buys, which are individual purchases for access to our products.
For the nine months ended September 30, 2008 and 2009,
subscription revenue accounted for 98.9% and 98.8% of our
service revenue, respectively.
Service revenue is recognized when all of the following
conditions are satisfied: there is persuasive evidence of an
arrangement, the service has been provided to the customer, the
collection of the fees is reasonably assured, and the amount of
the fees to be paid by the customer is fixed or determinable.
Our arrangements do not contain general rights of return.
Our subscription fees are typically billed prior to the
commencement of the subscription term. We defer the total amount
of the sale of subscriptions, training, and support as unearned
revenue when the customer is invoiced and recognize the revenue
on a straight-line basis over the subscription period, beginning
on the commencement date of each subscription. The traditional
subscription term is 12 months for our Study Island
products and TeacherWeb services and six months for our
Northstar Learning products. We occasionally sell multi-year
subscriptions. Additionally, promotional incentives, such as
complimentary months of service, are offered periodically to new
Study Island customers, resulting in a subscription term longer
than one year. All of our subscriptions are sold on a
non-cancelable basis. As a result, substantially all of the
service revenue that we recognize in any period represents
deferred revenue from subscriptions purchased or renewed during
current and previous periods. As a result of the anticipated
sale of TeacherWeb in November 2009, we will no longer
generate subscription revenue related to TeacherWeb. TeacherWeb
revenue represented 2.0% and 5.8% of our service revenue for
2008 and the nine months ended September 30, 2009,
respectively. From time to time, we may enhance or upgrade our
products. Because we provide our products on a single web-based
platform, all of our customers generally benefit from new
features and functionality released during the subscription term
at no additional cost.
Training sessions are offered to our customers in conjunction
with the subscriptions to train the customers on implementing,
using, and administering the Study Island programs. Training
revenue is
53
recognized ratably over the subscription term for the related
subscription. Customer support is provided to customers
following the sale at no additional charge and at a minimal
personnel cost per call.
Goodwill, Intangible Assets and Long-Lived
Assets. Goodwill represents the excess of the
cost of an acquisition over the fair value of net assets
acquired. Goodwill is assessed for impairment at the reporting
unit level at least annually and any time an event occurs or
circumstances change that would more likely than not reduce the
fair value of the goodwill below its carrying value. As of
December 31, 2008 and September 30, 2009, goodwill was
valued at $103.3 million and represented 72.7% and 66.3% of
our total assets of $142.0 million and $155.7 million,
respectively. Of that $103.3 million of goodwill,
$94.4 million, or 91.4%, is attributable to the operations
of our Study Island reporting unit and the remaining
$8.9 million is attributable to TeacherWeb. We do not
expect to recognize an impairment on goodwill in connection with
our sale of TeacherWeb, which we expect to complete in
November 2009 upon finalizing an amendment to our credit
facility permitting the sale.
The goodwill impairment test involves a two-step test. The first
step is a comparison of each reporting units fair value to
its carrying value. We currently have two reporting units, which
are one level below our operating segment. If the carrying value
of a reporting unit exceeds its fair value, goodwill is
considered potentially impaired and we must complete the second
step of the impairment test. The amount of impairment is
determined by comparing the implied fair value of reporting unit
goodwill to the carrying value of the goodwill in the same
manner as if the reporting unit was being acquired in a business
combination. Specifically, we would allocate the fair value to
all of the assets and liabilities of the reporting unit,
including internally developed intangible assets with a zero
carrying value, in a hypothetical analysis that would calculate
the implied fair value of goodwill. If the implied fair value of
goodwill is less than the recorded goodwill, we would recognize
an impairment charge for the difference. We perform our
impairment tests in the fourth quarter of each year.
Our judgment is a significant factor in determining whether an
indicator of impairment has occurred. We rely on estimates in
determining the fair value of each reporting unit for step one,
which include the following factors:
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|
|
Data from actual open marketplace
transactions. We may utilize such information, if
available, where those transactions may involve assets or
equity, to assist management in evaluating goodwill impairment.
|
|
|
|
Anticipated future cash flows and terminal value for each
reporting unit. The income approach to
determining the fair value relies on the timing and estimates of
future cash flows, including an estimate of terminal value. The
projections use managements estimates of economic and
market conditions over the projected period including growth
rates in service revenue, customer attrition and estimates of
any expected changes in operating margins. We have utilized an
income growth rate for our estimates, which we believe to be
reasonable based on historical growth and market and industry
conditions. Our projections of future cash flows are subject to
change as actual results are achieved that differ from those
anticipated. Because management frequently updates its
projections, we would expect to identify on a timely basis any
significant differences between actual results and recent
estimates. We are not expecting actual results to vary
significantly from estimates.
|
|
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|
Selection of an appropriate discount rate. The
income approach requires the selection of an appropriate
discount rate, which is based on a weighted-average cost of
capital analysis. The discount rate is affected by changes in
short-term interest rates and long-term yield as well as
variances in the typical capital structure of marketplace
participants. For our impairment testing in the fourth quarter
of 2008, we utilized a weighted-average cost of capital which
was developed using a combination of a risk free rate, an equity
premium, and a risk factor. For the risk free rate, we utilized
the 20-year
U.S. government bond rate. The equity premium was developed
based on a study of historical security market returns, adjusted
for the size of our reporting entities. The risk factor was
based on our product lines, potential changes in market demand,
current market
|
54
|
|
|
|
|
conditions and other potentially relevant factors. Given the
current volatile general economic conditions, it is possible
that the discount rate will fluctuate in the near term.
|
In the impairment test performed in the fourth quarter of 2007,
the fair value of our Study Island reporting unit significantly
exceeded the carrying value by a margin in excess of 20%. For
the test performed in 2008, the fair value of the Study Island
unit exceeded the carrying value by an even greater margin. In
the 2008 testing for TeacherWeb, due to the proximity of the
testing to the acquisition date and because there had been no
significant changes in operations of the reporting unit, the
fair value and carrying value remained consistent with the
values upon acquisition. Based upon our results of impairment
testing and events that have occurred subsequently, we do not
believe either of our reporting units to be at risk of failing
step one of impairment testing for the foreseeable future.
Intangible assets and other long-lived assets are reviewed for
impairment when events or changes in circumstances indicate the
carrying amount may not be recoverable. If impairment indicators
exist, an assessment of undiscounted future cash flows to be
generated by such assets is made. If the results of the analysis
indicate impairment, the assets are adjusted to fair market
value. Intangible assets with finite lives are amortized using
the straight-line method over their estimated useful lives. No
impairment loss was identified for intangible or long-lived
assets in 2007 and 2008.
Stock-Based Compensation Expense. We have
issued Class B and Class C shares to employees as part
of their compensation. The Class B shares vest ratably over
five years, subject to the employees continued
employment by or service to Archipelago Learning, LLC. The
Class C shares are subject to performance hurdles, and
holders of Class C shares are only entitled to
distributions if he or she is employed by or provides service to
Archipelago Learning, LLC at the time that distributions are
made. We recognize compensation expense, based on the grant-date
fair value of the awards, over the required service or
performance periods of the awards.
The following share-based award activity occurred during the
years ended December 31, 2006, 2007 and 2008 and the nine
months ended September 30, 2008 and 2009:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
Successor
|
|
|
Year Ended
|
|
Years Ended
|
|
Nine Months Ended
|
|
|
December 31,
|
|
December 31,
|
|
September 30,
|
|
|
2006
|
|
2007
|
|
2008
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(In millions, except share data)
|
|
Class B Shares granted
|
|
|
|
|
|
|
5,720,692
|
|
|
|
456,336
|
|
|
|
456,336
|
|
|
|
673,287
|
|
Class B grant date fair value
|
|
|
|
|
|
$
|
1.8
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
Class C Shares granted
|
|
|
|
|
|
|
5,720,692
|
|
|
|
456,336
|
|
|
|
456,336
|
|
|
|
673,287
|
|
Class C grant date fair value
|
|
|
|
|
|
$
|
0.3
|
|
|
$
|
0.0
|
|
|
$
|
0.0
|
|
|
$
|
0.1
|
|
Stock-based compensation expense recognized
|
|
|
|
|
|
$
|
0.6
|
|
|
$
|
0.4
|
|
|
$
|
0.2
|
|
|
$
|
0.3
|
|
The grant-date fair value of the Class B and Class C
shares was recognized as stock-based compensation over the
required service period, which is typically five years for
Class B shares subject to a participants continued
employment by or service to us. The Class C shares are
subject to performance hurdles and holders of Class C
shares are entitled to distributions after holders of
Class A and
Class A-2 shares
receive certain threshold multiples of cash-based returns on
their respective Class A and
Class A-2 shares,
subject to such Class C share holders continued
employment by or service to us.
We determined the estimated fair values of the shares awarded
using a market approach to develop an overall enterprise value.
The market approach we utilized included the use of pricing
multiples derived from transactions of companies within our
industry and our past transactions, including the acquisition of
the assets of Study Island, LP and the acquisition of
TeacherWeb. The companies selected for comparison are all
engaged in a technology-based education-related business. The
multiples we selected were applied to an estimate of our future
earnings to arrive at an estimated enterprise value for our
equity. We then allocated this equity value to the different
classes of stock using discounted cash flows, based on the
respective rights of the
55
classes to distributions from future earnings. This approach
resulted in a share value for the Class B Shares of $0.31,
$0.29 and $0.26 for the grants in 2007, 2008 and 2009,
respectively, and a share value for the Class C Shares of
$0.05, $0.07 and $0.06 for the grants in 2007, 2008 and 2009,
respectively.
Accounts Receivable. Accounts receivable
represents amounts billed to customers for service revenue. We
carry our accounts receivable at cost, less an allowance for
doubtful accounts, which is based on managements
assessment of the collectability of accounts receivable. We
extend unsecured credit to our customers in the ordinary course
of business, but mitigate the associated credit risk by
performing ongoing credit evaluations of our customers. The vast
majority of our customers are public schools, which receive
their funding from the local, state and federal government. We
evaluate the adequacy of the allowance for doubtful accounts
based on a specific customer review of the outstanding accounts
receivable.
Results
of Operations
The following table sets forth our consolidated statement of
income for the periods indicated:
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Year Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
$
|
10,065
|
|
|
$
|
18,250
|
|
|
$
|
32,068
|
|
|
$
|
22,319
|
|
|
$
|
32,685
|
|
Cost of revenue
|
|
|
343
|
|
|
|
750
|
|
|
|
2,178
|
|
|
|
1,253
|
|
|
|
2,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
9,722
|
|
|
|
17,500
|
|
|
|
29,890
|
|
|
|
21,066
|
|
|
|
29,962
|
|
Operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
2,793
|
|
|
|
7,669
|
|
|
|
13,193
|
|
|
|
9,516
|
|
|
|
10,630
|
|
Content development
|
|
|
712
|
|
|
|
1,206
|
|
|
|
2,162
|
|
|
|
1,496
|
|
|
|
2,586
|
|
General and administrative
|
|
|
2,581
|
|
|
|
5,010
|
|
|
|
6,644
|
|
|
|
4,632
|
|
|
|
7,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
6,086
|
|
|
|
13,885
|
|
|
|
21,999
|
|
|
|
15,644
|
|
|
|
20,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
3,636
|
|
|
|
3,615
|
|
|
|
7,891
|
|
|
|
5,422
|
|
|
|
9,687
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
(838
|
)
|
|
|
(5,161
|
)
|
|
|
(3,973
|
)
|
|
|
(2,092
|
)
|
Interest income
|
|
|
27
|
|
|
|
343
|
|
|
|
247
|
|
|
|
194
|
|
|
|
44
|
|
Derivative loss
|
|
|
|
|
|
|
(173
|
)
|
|
|
(2,119
|
)
|
|
|
(857
|
)
|
|
|
(415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
27
|
|
|
|
(668
|
)
|
|
|
(7,033
|
)
|
|
|
(4,636
|
)
|
|
|
(2,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
3,663
|
|
|
|
2,947
|
|
|
|
858
|
|
|
|
786
|
|
|
|
7,224
|
|
(Provision) benefit for income taxes
|
|
|
|
|
|
|
(23
|
)
|
|
|
164
|
|
|
|
11
|
|
|
|
(348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,663
|
|
|
$
|
2,924
|
|
|
$
|
1,022
|
|
|
$
|
797
|
|
|
$
|
6,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Nine Months Ended September 30, 2009 to Nine Months
Ended September 30, 2008
Service Revenue. Our service revenue for the
nine months ended September 30, 2009 was
$32.7 million, representing an increase of
$10.4 million, or 46.4%, as compared to service revenue of
$22.3 million for the nine months ended September 30,
2008. Subscription and training revenue is recognized over the
term of the subscription, which is generally 12 months.
Consequently, our revenue in any month is impacted by invoiced
sales over at least the previous 12 months. In order to
evaluate our revenue fluctuations, we utilize metrics, including
invoiced sales over the last 12 months. See
Components of Service Revenue and
Expense Service Revenue. The increase in
service revenue for the nine months ended September 30,
2009 is comprised of the revenue impact of invoiced sales to new
56
customers over at least the 12 months preceding each month
within the nine months ended September 30, 2009, along with
the retention of the majority of the revenue stream resulting
from customers existing at the beginning of the period, a price
increase to our standard price list (before discounts applied)
in August 2008, and the acquisition of TeacherWeb in June 2008,
which contributed an additional $1.7 million of service
revenue during the nine months ended September 30, 2009.
Cost of Revenue. Cost of revenue for the nine
months ended September 30, 2009 increased by
$1.5 million, or 117.3%, to $2.7 million from
$1.3 million for the nine months ended September 30,
2008. This increase in cost of revenue was primarily
attributable to a $1.2 million increase in engineering
personnel costs resulting from increased headcount focusing on
enhancing resources and management, along with annual salary
increases and bonus payments.
Sales and Marketing Expense. Sales and
marketing expense for the nine months ended September 30,
2009 increased by $1.1 million, or 11.7%, to
$10.6 million from $9.5 million for the nine months
ended September 30, 2008. This increase was primarily
attributable to a $0.6 million increase in personnel costs
resulting from increased headcount, annual salary increases,
bonus payments and increased commissions due to increased sales
and $0.2 million in amortization expense related to
TeacherWebs customer relationship amortization.
Content Development Expense. Content
development expense for the nine months ended September 30,
2009 increased by $1.1 million, or 72.9%, to
$2.6 million from $1.5 million for the nine months
ended September 30, 2008. This increase was primarily
attributable to a $0.9 million increase in personnel costs
related to increased headcount for the continued development of
Study Island products, the launch of products in Canada and the
development of content for our Northstar Learning product line,
along with annual salary increases and bonus payments. Headcount
for content development increased to 58 employees at
September 30, 2009 from 47 employees at
September 30, 2008.
General and Administrative Expense. General
and administrative expense for the nine months ended
September 30, 2009 increased by $2.4 million, or
52.4%, to $7.1 million from $4.6 million for the nine
months ended September 30, 2008. This increase was
primarily attributable to a $1.9 million increase in
personnel costs, $0.2 million related to increased
accounting fees associated with our audit of 2008, 2007 and 2006
in preparation for this offering and increased depreciation
expense of $0.3 million associated with our capital
expenditures.
Other Income (Expense). Other income (expense)
totaled $2.5 million of net expense for the nine months
ended September 30, 2009, which was a reduction of expense
of $2.2 million, or 46.9%, compared to net expense of
$4.6 million for the nine months ended September 30,
2008. The decrease was primarily due to reduced interest expense
of $1.9 million during the period on our term loan, due to
a combination of reduced outstanding debt, lower LIBOR rates and
reduced applicable margin as a result of our reduced leverage
ratio during the period. Additionally, we had reduced loss on
our interest rate swap of $0.4 million during the period
due to increases in the fair value of the interest rate swap in
2009 compared to decreases in 2008.
Net Income. Net income for the nine months
ended September 30, 2009 increased by $6.1 million, or
762.7%, to $6.9 million from $0.8 million for the nine
months ended September 30, 2008. This increase in net
income was due to the $10.4 million increase in service
revenue and the $2.2 million reduction in other expense,
net as noted above. This increase was partially offset by the
$1.5 million increase in cost of revenue and
$4.6 million increase in operating expenses as noted above.
Comparison
of Years Ended December 31, 2008 and December 31,
2007
Service Revenue. Service revenue for the year
ended December 31, 2008 increased by $13.8 million, or
75.7%, to $32.1 million from $18.3 million for the
year ended December 31, 2007. Subscription and training
revenue is recognized over the term of the subscription, which
is generally 12 months. Consequently, our revenue in any
month is impacted by invoiced sales over at least the previous
12 months. In order to evaluate our revenue fluctuations,
we utilize metrics, including invoiced sales over the last
12 months. See Components of Service
Revenue and Expense Service Revenue. The
increase in service revenue for
57
the year ended December 31, 2008 is comprised of the
revenue impact of invoiced sales to new customers over at least
the 12 months preceding each month within the year ended
December 31, 2008, along with the retention of the majority
of the revenue stream resulting from customers existing at the
beginning of the year, a price increase to our standard price
list (before discounts applied) in August 2008, and the
acquisition of TeacherWeb in June 2008, which contributed an
additional $0.7 million of service revenue during the year
ended December 31, 2008.
Cost of Revenue. Cost of revenue for the year
ended December 31, 2008 increased by $1.4 million, or
190.4%, to $2.2 million from $0.8 million for the year
ended December 31, 2007. This increase in cost of revenue
was primarily attributable to a $0.9 million increase in
personnel costs resulting from an increase in engineering
headcount from 9 at December 31, 2007 to 23 at
December 31, 2008. In addition, we incurred
$0.3 million of expense attributable to the acquisition of
TeacherWeb and $0.3 million of expense related to
facilities, network security, recruiting and depreciation.
Sales and Marketing Expense. Sales and
marketing expense for the year ended December 31, 2008
increased by $5.5 million, or 72.0%, to $13.2 million
from $7.7 million for the year ended December 31,
2007. This increase was primarily attributable to
$4.4 million in increased personnel costs related to the
expansion of the Study Island sales team, $0.4 million of
marketing expense related to new product releases,
$0.3 million for additional contract labor and a
$0.2 million increase in customer relationship amortization
resulting from our acquisition of TeacherWeb in June 2008.
Headcount for sales and marketing increased to
114 employees at December 31, 2008 from
88 employees at December 31, 2007.
Content Development Expense. Content
development expense for the year ended December 31, 2008
increased by $1.0 million, or 79.3%, to $2.2 million
from $1.2 million for the year ended December 31,
2007. This increase was primarily attributable to a
$0.9 million increase in personnel costs. Headcount for
content development increased to 44 employees at
December 31, 2008 from 20 at December 31, 2007.
General and Administrative Expense. General
and administrative expense for the year ended December 31,
2008 increased by $1.6 million, or 32.6%, to
$6.6 million from $5.0 million for the year ended
December 31, 2007. This increase was primarily attributable
to accounting expense and subscription fees to an online service
associated with the implementation of a new financial system in
January 2008, increased bank fees associated with our term loan
and revolving credit facility, increased expense associated with
mergers and acquisition activities, and increased rent expense
due to our leasing additional office space in Dallas to support
additional Dallas-based employees. Depreciation expense
increased by $0.2 million from the year ended
December 31, 2007 as compared to the year ended
December 31, 2008.
Other Income (Expense). Interest income for
the year ended December 31, 2008 decreased by
$0.1 million, or 28.0%, to $0.2 million from
$0.3 million for the year ended December 31, 2007.
This decrease was due to higher average cash balances during
2008 offset by lower prevailing interest rates during 2008.
Interest expense for the year ended December 31, 2008 was
$5.2 million, representing an increase of $4.3 million
as compared to interest expense of $0.8 million for the
year ended December 31, 2007. This higher interest expense
was due to the full year effect of borrowings under the term
loan that we entered into in November 2007. Other expense also
increased for the year ended December 31, 2008 as compared
to the year ended December 31, 2007, due to the derivative
loss of $2.1 million in the year ended December 31,
2008, which reflects an increase of $1.9 million over as
compared to a $0.2 million loss for the prior year. This
loss was due to the fair value changes for our interest rate
swap recorded in our statements of income.
Net Income. Net income decreased by
$1.9 million, or 65.0%, to $1.0 million from
$2.9 million for the year ended December 31, 2007.
This decrease in net income was due to a $1.4 million
increase in cost of revenue and an $8.1 million increase in
operating expense as discussed above, an $4.3 million
increase in interest expense associated with the full year
effect of borrowings under the term loan we entered into in
November 2007 and an increase in derivative losses of
$1.9 million due to the fair value changes for our interest
rate swap, which were offset in part by the $13.8 million
increase in service revenue for the year ended December 31,
2008.
58
Comparison
of Years Ended December 31, 2007 and December 31,
2006
Service Revenue. Service revenue for the year
ended December 31, 2007 increased by $8.2 million, or
81.3%, to $18.3 million from $10.1 million for the
year ended December 31, 2006. Subscription and training
revenue is recognized over the term of the subscription, which
is generally 12 months. Consequently, our revenue in any
month is impacted by invoiced sales over at least the previous
12 months. In order to evaluate our revenue fluctuations,
we utilize metrics, including invoiced sales over the last
12 months. See Components of Service
Revenue and Expense Service Revenue. The
increase in service revenue for the year ended December 31,
2007 is comprised of the revenue impact of invoiced sales to new
customers over at least the 12 months preceding each month
within the year ended December 31, 2007, along with the
retention of the majority of the revenue stream resulting from
customers existing at the beginning of the year and a price
increase to our standard price list (before discounts applied)
in August 2007.
Cost of Revenue. Cost of revenue for the year
ended December 31, 2007 increased by $0.4 million, or
118.7%, to $0.8 million from $0.3 million for the year
ended December 31, 2006. This increase in cost of revenue
was primarily attributable to an increase in engineering
personnel costs.
Sales and Marketing Expense. Sales and
marketing expense for the year ended December 31, 2007
increased by $4.9 million, or 174.6%, to $7.7 million
from $2.8 million for the year ended December 31,
2006. This increase was primarily attributable to a
$2.7 million increase in personnel expense related to
expanding the Study Island sales team, a $0.5 million
increase in marketing expense related to increased product
releases and a $0.3 million increase in expense related to
contract labor. Headcount for sales and marketing increased to
88 employees at December 31, 2007 from
31 employees at December 31, 2006. Amortization cost
specifically related to customer relationships increased by
$1.3 million in connection with the Providence Equity
Transactions.
Content Development Expense. Content
development expense for the year ended December 31, 2007
increased by $0.5 million, or 69.4%, to $1.2 million
from $0.7 million for the year ended December 31,
2007. This increase is primarily attributable to a
$0.4 million increase in personnel expense. In addition,
$0.2 million is attributable to increased amortization of
our content intangible asset related to the purchase of Study
Island, LP in January 2007 in connection with the Providence
Equity Transactions.
General and Administrative Expense. General
and administrative expense for the year ended December 31,
2007 increased by $2.4 million, or 94.1%, to
$5.0 million from $2.6 million for the year ended
December 31, 2006. This increase was primarily attributable
to a $1.3 million increase in personnel expense related to
headcount which included hiring of our chief executive officer
and chief financial officer and costs associated with bonus
payments made to such personnel in connection with the
Providence Equity Transactions, $0.2 million increase in
rent expense due to the expansion of our Dallas office and
additional increases related to increased telephone and internet
expense to support additional employees, increased accounting
expense in connection with entry into our term loan and
revolving credit facility, and the implementation of a new
financial system.
Other Income (Expense). Interest income for
the year ended December 31, 2007 increased by
$0.3 million, or 1170.4%, to $0.3 million from $27,000
for the year ended December 31, 2006. This increase was due
to maintaining higher average cash balances in 2007 as compared
to 2006. Interest expense for the year ended December 31,
2007 was $0.8 million. We did not incur interest expense in
2006. This higher interest expense was due to borrowings under
our term loan that we entered into in November 2007. We incurred
$0.2 million of derivative losses in 2007 due to the fair
value changes for the interest rate swap that we entered into in
November 2007.
Net Income. Net income for the year ended
December 31, 2007 decreased by $0.7 million, or 20.2%,
to $2.9 million from $3.7 million for the year ended
December 31, 2006. This decrease in net income was due to a
$0.4 million increase in cost of revenue, a
$7.8 million increase in operating expense as noted above,
a $0.8 million increase in interest expense associated with
the borrowings under our term loan, $0.2 million in
derivative losses, which were offset in part by the
$8.2 million increase in service revenue and interest
income of $0.3 million for the year ended December 31,
2007.
59
Quarterly
Information
The following tables set forth selected unaudited quarterly
consolidated statements of income data for the seven most recent
quarters. The information for each of these quarters has been
prepared on the same basis as the audited consolidated financial
statements included in this prospectus and, in the opinion of
management, includes all adjustments necessary for the fair
presentation of the results of operations for such periods. This
data should be read in conjunction with the audited consolidated
financial statements and the related notes included in this
prospectus. These quarterly operating results are not
necessarily indicative of our operating results for any future
period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
(In thousands, except share data)
|
|
|
Service revenue
|
|
$
|
6,844
|
|
|
$
|
7,156
|
|
|
$
|
8,319
|
|
|
$
|
9,749
|
|
|
$
|
10,539
|
|
|
$
|
10,888
|
|
|
$
|
11,258
|
|
Cost of revenue
|
|
|
312
|
|
|
|
391
|
|
|
|
550
|
|
|
|
925
|
|
|
|
919
|
|
|
|
863
|
|
|
|
941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
6,532
|
|
|
|
6,765
|
|
|
|
7,769
|
|
|
|
8,824
|
|
|
|
9,620
|
|
|
|
10,025
|
|
|
|
10,317
|
|
Operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
3,356
|
|
|
|
2,839
|
|
|
|
3,321
|
|
|
|
3,677
|
|
|
|
3,304
|
|
|
|
3,668
|
|
|
|
3,658
|
|
Content development
|
|
|
425
|
|
|
|
501
|
|
|
|
570
|
|
|
|
666
|
|
|
|
836
|
|
|
|
752
|
|
|
|
998
|
|
General and administrative
|
|
|
896
|
|
|
|
1,414
|
|
|
|
2,322
|
|
|
|
2,012
|
|
|
|
2,094
|
|
|
|
2,323
|
|
|
|
2,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
4,677
|
|
|
|
4,754
|
|
|
|
6,213
|
|
|
|
6,355
|
|
|
|
6,234
|
|
|
|
6,743
|
|
|
|
7,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,855
|
|
|
|
2,011
|
|
|
|
1,556
|
|
|
|
2,469
|
|
|
|
3,386
|
|
|
|
3,282
|
|
|
|
3,019
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,556
|
)
|
|
|
(1,189
|
)
|
|
|
(1,228
|
)
|
|
|
(1,188
|
)
|
|
|
(740
|
)
|
|
|
(637
|
)
|
|
|
(715
|
)
|
Interest income
|
|
|
90
|
|
|
|
70
|
|
|
|
34
|
|
|
|
53
|
|
|
|
8
|
|
|
|
6
|
|
|
|
30
|
|
Derivative gain (loss)
|
|
|
(1,305
|
)
|
|
|
996
|
|
|
|
(548
|
)
|
|
|
(1,262
|
)
|
|
|
(60
|
)
|
|
|
(81
|
)
|
|
|
(274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(2,771
|
)
|
|
|
(123
|
)
|
|
|
(1,742
|
)
|
|
|
(2,397
|
)
|
|
|
(792
|
)
|
|
|
(712
|
)
|
|
|
(959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(916
|
)
|
|
|
1,888
|
|
|
|
(186
|
)
|
|
|
72
|
|
|
|
2,594
|
|
|
|
2,570
|
|
|
|
2,060
|
|
(Provision) Benefit for income taxes
|
|
|
(21
|
)
|
|
|
(21
|
)
|
|
|
53
|
|
|
|
153
|
|
|
|
(58
|
)
|
|
|
(75
|
)
|
|
|
(215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(937
|
)
|
|
$
|
1,867
|
|
|
$
|
(133
|
)
|
|
$
|
225
|
|
|
$
|
2,536
|
|
|
$
|
2,495
|
|
|
$
|
1,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per equity share attributable to members
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
0.02
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
Weighted average equity shares and equivalents outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
109,545
|
|
|
|
109,545
|
|
|
|
109,545
|
|
|
|
109,545
|
|
|
|
109,545
|
|
|
|
109,545
|
|
|
|
109,545
|
|
Liquidity
and Capital Resources
Our primary cash requirements include the payment of our
operating expense, interest and principal payments on our debt,
and capital expenditures. We also have used cash to make
dividend payments and
tax-related
distributions to our equity holders. We may also incur
unexpected costs and operating expenses related to any
unforeseen disruptions to our servers, the loss of key personnel
or changes in the credit markets and interest rates, which could
increase our immediate cash requirements or otherwise impact our
liquidity. We finance our operations primarily through cash flow
from operations, which is typically the highest in the third and
fourth quarters when our sales are highest and invoices are
paid. Our cash flow from operations is typically flat in the
first and second quarters. Several factors outside of our
control may impact our cash flow. For example, we believe NCLB
is likely to be reauthorized in 2010, and the terms of its
extension, reauthorization or new legislation that would replace
it may materially impact the demand for our products. If new
legislation lessens the importance of
state-by-state
testing and assessments, demand for our products may
60
materially decrease, or if competitors can more easily enter our
markets because of the establishment of national education
standards, we may experience lower cash flows, both of which
would affect our liquidity. In addition, if state and local
budget cuts in education continue, our public school and school
district customers may lack funding to buy our products which
may result in fewer sales or require us to lower prices for our
Study Island products, either of which would have a negative
impact on our cash flow. See Long-term
Liquidity.
In November 2007, we entered into a six-year $70.0 million
term loan and into a $10.0 million revolving credit
facility. We used the proceeds of the term loan and cash on hand
to make a make a dividend payment to the equity holders of
Archipelago Learning Holdings, LLC in November 2007. We repaid
$1.0 million in principal on our term loan during the nine
months ended September 30, 2009. We repaid
$0.7 million in principal on our term loan during the year
ended December 31, 2008. We did not repay any principal on
our term loan in 2007. See Overview
above and Credit Facility below.
Our primary sources of liquidity are our cash and cash
equivalent balances as well as availability under our revolving
credit facility. At December 31, 2008, we had cash and cash
equivalents of $13.1 million and $10.0 million of
availability under our revolving credit facility. Our total
indebtedness was $69.3 million at December 31, 2008.
At September 30, 2009, our principal sources of liquidity
were cash and cash equivalents of $17.1 million and
$10.0 million of availability under our revolving credit
facility. Our total indebtedness was $68.3 million at
September 30, 2009. We believe that our consistent cash
flow and our $10.0 million availability combined with our
low capital expenditure costs will provide us with sufficient
capital to continue to grow our business, but we will use a
significant portion of our cash flow to pay interest on our
outstanding debt, limiting the amount available for working
capital, capital expenditures and other general corporate
purposes. As we continue to expand our business, we may in the
future require additional working capital for increased costs.
Long-term
Liquidity
At December 31, 2008, we had cash and cash equivalents of
$13.1 million and $10.0 million of availability under
our revolving credit facility, and at September 30, 2009,
we had cash and cash equivalents of $17.1 million and
$10.0 million of availability under our revolving credit
facility. We anticipate that the funds generated by our
operations, the funds available under our revolving credit
facility and the net proceeds that we receive from this
offering, will be sufficient to meet working capital
requirements and to finance capital expenditures over the next
several years. There can be no assurance, however, that cash
resources will be available to us in an amount sufficient to
enable us to service our indebtedness or to fund our other
liquidity needs. Our ability to meet our debt service
obligations and other capital requirements, including capital
expenditures and acquisitions, will depend upon our future
results of operations and our ability to obtain additional debt
or equity capital and our ability to stay in compliance with our
financial covenants, which, in turn, will be subject to general
economic, financial, business, competitive, legislative,
regulatory and other conditions, many of which are beyond our
control. We may also need to obtain additional funds to finance
acquisitions, which may be in the form of additional debt or
equity. Although we believe we have sufficient liquidity under
our revolving credit facility, as discussed above, under extreme
market conditions there can be no assurance that such funds
would be available or sufficient, and in such a case, we may not
be able to successfully obtain additional financing on favorable
terms, or at all.
Cash
Flow
Cash Flow
from Operating Activities
Net cash provided by operating activities was $13.4 million
during the nine months ended September 30, 2009 compared to
$8.5 million during the nine months ended
September 30, 2008. This $4.8 million increase was
primarily due to an increase in net income of $6.1 million
offset by a decrease in cash flows from working capital of
$1.1 million. The decrease in cash flows from working
capital was primarily the result of changes in deferred
revenues, accounts receivable and other assets.
61
Net cash provided by operating activities was $13.6 million
for 2008 compared to $12.7 million in 2007. The
$0.9 million increase was primarily due to changes in
non-cash adjustments totaling $1.7 million and working
capital improvements of $1.0 million partially offset by a
decrease in net income of $1.9 million, The working capital
improvements were primarily the result of a $2.2 million
increase in deferred revenue, offset by a $1.3 million
decrease in accrued liabilities.
Net cash provided by operating activities was $12.7 million
for 2007 compared with $7.5 million in 2006. The
$5.2 million increase was primarily due to changes in
non-cash adjustments totaling $2.5 million and working
capital improvements of $3.5 million partially offset by a
decrease in net income of $0.7 million. The increase in
working capital was primarily due to an increase in deferred
revenue of $3.2 million, an increase in accrued liabilities
of $1.1 million, offset by a decrease in accounts
receivable of $0.4 million and a decrease in prepaid
expenses and other expenses of $0.5 million.
Cash Flow
from Investing Activities
Net cash used for investing activities for the nine months ended
September 30, 2009 was $5.9 million, including
$1.0 million used for the purchase of property and
equipment and an investment in and note issued to Edline, for an
aggregate of $4.9 million.
Net cash used for investing activities for the year ended
December 31, 2008 was $11.0 million and included
$9.7 million in net cash used for the purchase of
TeacherWeb and $1.3 million used for the purchase of
property and equipment.
Net cash used for investing activities in 2007 was
$85.3 million and included $84.8 million net cash used
for the purchase of Study Island, LP in connection with the
Providence Equity Transactions and $0.5 million used for
the purchase of property and equipment.
Net cash used for investing activities in 2006 was
$0.2 million and included the purchase of property and
equipment.
Cash Flow
from Financing Activities
Net cash used for financing activities in the nine months ended
September 30, 2009 was $3.5 million due to
$1.0 million in principal payments on our term loan,
$1.3 million in tax distributions paid to our members and
$1.2 million paid for costs related to this offering.
Net cash used for financing activities was $0.5 million for
2008 and was primarily due to $10.0 million of payments on
our revolving credit facility and $0.7 million of payments
on our term loan, offset in part by the receipt of
$10.0 million in proceeds from our revolving credit
facility and $0.2 million in refunds for debt financing
costs incurred in the year ended December 31, 2007 in
connection with the Providence Equity Transactions.
Net cash provided by financing activities for 2007 was
$82.2 million and was primarily due to the receipt of
$89.5 million in proceeds from the issuance of equity and
the receipt of $70.0 million in proceeds from the
incurrence of debt under our term loan in connection with the
Providence Equity Transactions. These proceeds were offset in
part by $74.8 million in distributions to our
equityholders, $1.7 million in debt financing costs and
$0.8 million in cash distributions to the predecessor
owners.
Net cash used for financing activities was $6.4 million for
2006 due to the $6.4 million of cash distributions made to
the predecessor owners.
In October 2009, Archipelago Learning Holdings, LLC made a
special distribution of $8.0 million to its equity holders
representing a return on such holders investment, which
was paid in accordance with the Archipelago Learning Holdings,
LLC Agreement. In addition, Archipelago Learning Holdings, LLC
intends to make additional distributions of approximately
$1.5 million to its equity holders to enable them to meet
certain tax obligations associated with the sale of TeacherWeb
and approximately $0.9 million to its equity holders to
enable them to meet their other estimated tax obligations for
the period from January 1, 2009 to the date of the
Corporate Reorganization, which will be based on Archipelago
Learning Holdings, LLCs
62
estimated net taxable income from January 1, 2009 to the
date of the Corporate Reorganization. Investors in this offering
will not receive these distributions.
Credit
Facility
In November 2007, as part of the Providence Equity Transactions,
we entered into an $80.0 million credit facility with
General Electric Capital Corporation, as agent, composed of a
$70.0 million term loan and a $10.0 million revolving
credit facility, which expires in November 2013. The proceeds of
the term loan and $4.9 million in cash were used to pay a
distribution of $73.2 million to holders of Class A
shares of Archipelago Learning Holdings, LLC and debt financing
costs of $1.7 million. The term loan bears interest at
rates based upon either a base rate or LIBOR rate plus an
applicable margin (3.25% as of September 30, 2009 and
December 31, 2008 and 4.00% as of December 31, 2007,
in each case for a
LIBOR-based
term loan) determined based on our leverage ratio. Amounts under
the revolving credit facility can be borrowed and repaid, from
time to time, at our option, subject to the pro forma compliance
with certain financial covenants. In 2008, we received a refund
of a portion of our debt financing costs in the amount of
$0.2 million.
In May 2009 the credit agreement governing the term loan and the
revolving credit facility was amended to permit the creation of
AL Midco, LLC, or AL Midco, a new wholly owned subsidiary of
Archipelago Learning Holdings, LLC, which assumed all of
Archipelago Learning Holdings, LLCs interests in
Archipelago Learning, LLC. AL Midco, became a guarantor under
the credit agreement and Archipelago Learning Holdings, LLC was
released as a guarantor. We expect to amend the credit agreement
in November 2009 to permit the sale of TeacherWeb. This
amendment further modifies certain terms of the credit
agreement, including adding a LIBOR floor of 1.25% to the
calculation of our interest rates and reducing the letter of
credit sublimit available to us under the credit agreement from
$2.0 million to $1.0 million. In addition, we will
prepay an aggregate amount of $6.5 million upon the
consummation of the sale of TeacherWeb, which we expect to
complete in November 2009 upon finalizing the amendment. As a
result of the sale, TeacherWeb, Inc. will be released as a
guarantor.
Upon the sale of TeacherWeb the obligations under the credit
facility will be guaranteed only by AL Midco, as
TeacherWebs guarantee will be released. The credit
facility is secured on a first-priority basis by security
interests (subject to permitted liens) in substantially all
tangible and intangible assets, subject to certain exceptions,
owned by Archipelago Learning, LLC and AL Midco, including
pledges of the voting stock of the subsidiaries of Archipelago
Learning, LLC and AL Midco. In addition, any future
domestic subsidiaries of Archipelago Learning, LLC and
AL Midco will be required (subject to certain exceptions)
to guarantee the credit facility and grant liens on
substantially all of its assets to secure such guarantee.
Our credit facility requires us to maintain certain financial
ratios, including a leverage ratio (based on the ratio of
consolidated indebtedness, net of cash and cash equivalents
subject to control agreements, to consolidated EBITDA, defined
in the credit facility as earnings before interest, taxes,
depreciation, derivative losses, changes in deferred revenue,
stock based compensation, certain investments and permitted
acquisition expenses, certain permitted payments to Providence
Equity Partners, unusual non-recurring charges, certain agency
fees to the administrative agent and adjustments related to the
acquisition of TeacherWeb, or Adjusted EBITDA), an interest
coverage ratio (based on the ratio of Adjusted EBITDA to
consolidated interest expense, as defined in the credit
facility) and a fixed charge coverage ratio (based on the ratio
of Adjusted EBITDA to fixed charges, as defined in the credit
facility). Based on the formulations set forth in the credit
facility, as of September 30, 2009, we were required to
maintain a maximum leverage ratio of 4.50 to 1.00, a minimum
interest coverage ratio of 2.10 to 1.00 and a minimum fixed
charge coverage ratio of 1.40 to 1.00. As of September 30,
2009, our leverage ratio was 2.15 to 1.00, our interest coverage
ratio was 7.69 to 1.00 and our fixed charge coverage ratio was
4.73 to 1.00. The financial ratios we are required to maintain
become more restrictive over time.
Our credit facility also contains certain affirmative and
restrictive covenants that, among other things, provide
limitations on the incurrence of additional indebtedness, liens
on property, sale and leaseback transactions, investments, loans
and advances, merger or consolidation, asset sales,
acquisitions, dividends, transactions with affiliates,
prepayments of any other indebtedness, modifications of our
organizational
63
documents and restrictions on our subsidiaries. The credit
facility contains events of default that are customary for
similar facilities and transactions, including a cross-default
provision with respect to any other indebtedness and an event of
default that would be triggered by a change of control, as
defined in the credit facility, and which is not expected to be
triggered by this offering. As of September 30, 2009,
December 31, 2008 and 2007, we were in compliance with all
covenants.
We have the right to optionally prepay our borrowings under the
term loan or the revolving credit facility, subject to the
procedures set forth in the credit facility. We may be required
to make prepayments on our borrowings under the term loan or the
revolving credit facility if we receive proceeds as a result of
certain asset sales, debt issuances, events of loss or if we
have excess cash flow (as defined in the credit facility).
As of September 30, 2009, $68.3 million of borrowings
were outstanding under the term loan and $0 was outstanding
under the revolving credit facility. As of December 31,
2008, $69.3 million of borrowings were outstanding under
the term loan and $0 was outstanding under the revolving credit
facility. For the nine months ended September 30, 2009 and
for year ended December 31, 2008, the weighted average
interest rate under the term loan was 3.71% and 7.03%,
respectively, before giving effect to the interest rate swap.
The rate on our interest rate swap is the difference between our
fixed rate of 4.035% and the floating rate of three-month LIBOR.
Contractual
Obligations
As of December 31, 2008, our contractual obligations and
other commitments were as follows:
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Payments due by period
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|
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|
Total
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|
Less than 1 year
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|
|
1-3 years
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|
3-5 years
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|
|
More than 5 years
|
|
|
|
(In thousands)
|
|
|
Long-term debt obligations(1)
|
|
$
|
69,300
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|
|
$
|
700
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|
|
$
|
2,100
|
|
|
$
|
66,500
|
|
|
|
|
|
Operating lease obligations
|
|
$
|
1,467
|
|
|
$
|
462
|
|
|
$
|
1,005
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest payments based on variable interest rates on our
long-term debt obligations are excluded from our contractual
obligations. |
Off-Balance
Sheet Arrangements
We do not have any off-balance sheet arrangements.
Qualitative
and Quantitative Disclosures about Market Risk
Interest
Rate Risk
We are exposed to interest rate risk in connection with our term
loan and any borrowings under our revolving credit facility.
Amounts borrowed under our term loan and our revolving credit
facility bear interest at rates based upon a base rate or LIBOR,
plus an applicable margin. To manage our interest rate exposure,
and as a requirement under our term loan, we entered into an
interest rate swap agreement with a notional amount totaling
$45.5 million, of which $40.5 million remained in
effect as of September 30, 2009. The notional amount of the
interest rate swap will decrease in periodic amounts to a
notional amount of $30.5 million at the December 2010
termination date. We swapped a floating rate payment based on
three month LIBOR for a fixed rate of 4.035% in order to
minimize the variability in expected future cash flow due to
interest rate movements on our LIBOR-based variable rate debt.
Based on the amount outstanding under our term loan at
September 30, 2009, we believe that a 1% increase in the
applicable interest rate, before giving effect to the interest
rate swap, would cause an increase in our interest expense of
approximately $0.7 million on an annual basis. Because the
short-term LIBOR, which we use to determine our term loan
interest rate, is less than 1%, it cannot decrease by 1%, and
any decrease would result in a decrease in our interest expense.
For further information on our interest rate swap agreement, see
Components of Service
64
Revenue and Expense Other Income (Expense)
above and note 2 to our audited consolidated financial
statements included elsewhere in this prospectus.
In addition, our interest income is sensitive to changes in the
general level of U.S. interest rates. We had cash and cash
equivalents of $17.1 million and $13.1 million as of
September 30, 2009 and December 31, 2008,
respectively. Our cash and cash equivalents are maintained
primarily in short term, treasury-backed accounts.
Effects
of Inflation
We believe that inflation has not had a material impact on our
results of operations in the periods presented. We cannot assure
you that future inflation will not affect our operating expense
in future periods.
Recently
Issued Accounting Standards
In December 2007, the Financial Accounting Standards Board, or
FASB, amended Accounting Standards Codification, or ASC,
Topic 805, Business Combinations, or
FASB ASC 805 (formerly, Statement No. 141(R),
Business Combinations), which establishes principles and
requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in the
acquiree, and the goodwill acquired in an acquisition. FASB
ASC 805 also establishes disclosure requirements to enable
the evaluation of the nature and financial effects of the
business combination. This amended topic is effective for
acquisitions in fiscal years beginning after December 15,
2008, and early adoption is prohibited. We will apply the
provisions of this topic to any future acquisitions.
In February 2008, the FASB issued an amendment to FASB ASC
Topic 820, Fair Value Measurements and Disclosures,
or FASB ASC 820, (formerly FASB Staff Position, or FSP,
FAS No. 157-2,
Effective Date for FASB Statement No. 157). This
amendment permitted the delayed application of FASB ASC 820
for all nonrecurring fair value measurements of nonfinancial
assets and nonfinancial liabilities until fiscal years beginning
after November 15, 2008. We adopted this portion of the
statement on February 1, 2009, and the adoption did not
have a material impact on our consolidated financial condition
or results of operations or cash flows.
In March 2008, the FASB issued an amendment to FASB ASC
Topic 815, Derivatives and Hedging, or FASB
ASC 815, (formerly FASB Statement No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement 133).
This amendment requires enhanced disclosures about a
companys derivative and hedging activities. These enhanced
disclosures will discuss (a) how and why a company uses
derivative instruments, (b) how derivative instruments and
related hedged items are accounted for and (c) how
derivative instruments and related hedged items affect a
companys financial position, results of operations, and
cash flows. This amendment is effective for fiscal years
beginning on or after November 15, 2008, with earlier
adoption allowed. The implementation of this standard did not
have a material effect on our consolidated financial condition
or results of operations or cash flows.
In April 2008, the FASB issued an amendment to FASB ASC
Topic 350, Intangibles Goodwill and
Other, or FASB ASC 350 (formerly FSP FASB
No. 142-3,
Determination of the Useful Life of Intangible Assets).
This amendment modifies the factors that should be considered in
developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under FASB
ASC 350. This amendment is effective for fiscal years
beginning after December 15, 2008. The implementation of
this topic did not have a material effect on the our
consolidated financial condition or results of operations or
cash flows.
In April 2009, the FASB issued an amendment to FASB ASC
Topic 825, Financial Instruments, or FASB
ASC 825 (formerly FSP
No. FAS 107-1
and APB
28-1,
Interim Disclosures about Fair Value of Financial
Instruments). This amendment requires disclosures about fair
value of financial instruments in interim as well as in annual
financial statements. This amendment also requires those
disclosures in all interim financial statements. This amendment
was effective for interim and annual periods ending after
June 15, 2009. The implementation of this amendment did not
have a material effect on the Companys consolidated
financial condition or results of operations or cash flows.
65
In May 2009, the FASB issued an amendment to FASB ASC
Topic 855, Subsequent Events, or FASB ASC 855
(formerly FASB Statement No. 165, Subsequent
Events). FASB ASC 855 provides general standards for
the accounting and reporting of subsequent events that occur
between the balance sheet date and issuance of financial
statements. The topic requires the issuer to recognize the
effects, if material, of subsequent events in the financial
statements if the subsequent event provides additional evidence
about conditions that existed as of the balance sheet date. The
issuer must also disclose the date through which subsequent
events have been evaluated and the nature of any nonrecognized
subsequent events. Nonrecognized subsequent events include
events that provide evidence about conditions that did not exist
as of the balance sheet date, but which are of such a nature
that they must be disclosed to keep the financial statements
from being misleading. The topic is effective for interim and
annual periods ending after June 15, 2009. This topic did
not have a material impact on our financial position, results of
operations or cash flows.
In June 2009, the FASB issued FASB ASC Topic 105, Generally
Accepted Accounting Principles, or FASB ASC 105 (formerly
FASB Statement No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles a Replacement of FASB
Statement No. 162). FASB ASC 105 provides for the FASB
Accounting Standards Codification (the Codification)
to become the single official source of authoritative,
nongovernmental GAAP. FASB ASC 105 is effective for interim and
annual periods ending after September 15, 2009. This topic
had no impact on our financial position, results of operations
or cash flows.
66
INDUSTRY
AND MARKET DATA
This prospectus includes industry and market data that we
obtained from periodic industry publications, third-party
studies and surveys, filings of public companies in our industry
and internal company surveys. These sources include the National
Center for Education Statistics, the World Economic Forum, the
Nielsen Company, Outsell, Inc., U.S. Bureau of Labor
Statistics, Consortium for School Networking and Market Data
Retrieval. Industry publications and surveys generally state
that the information contained therein has been obtained from
sources believed to be reliable. Although we believe the
industry and market data to be reliable as of the date of this
prospectus, this information could prove inaccurate. Industry
and market data could be wrong because of the method by which
sources obtained their data and because information cannot
always be verified with complete certainty due to the limits on
the availability and reliability of raw data, the voluntary
nature of the data gathering process and other limitations and
uncertainties. In addition, we do not know all of the
assumptions regarding general economic conditions or growth that
were used in preparing the forecasts from sources cited herein.
67
BUSINESS
Our
Company
Archipelago Learning is a leading subscription-based online
education company. We provide standards-based instruction,
practice, assessments and productivity tools that improve the
performance of educators and students via proprietary web-based
platforms. Study Island, our core product line, helps students
in Kindergarten through 12th grade, or K-12, master grade
level academic standards in a fun and engaging manner. As of
September 30, 2009, Study Island products were utilized by
approximately 8.9 million students in 21,000 schools in
50 states. In the 2008-2009 school year, students answered
over 2.8 billion of our practice questions. We recently
began offering online postsecondary programs through our
Northstar Learning product line.
We capitalize on two significant trends in the education market:
(1) an increased focus on higher academic standards and
educator accountability for student achievement, which has led
to periodic assessment in the classroom to gauge student
learning and inform instruction, also known as formative
assessment, and (2) the increased availability and
utilization of web-based technologies to enhance and supplement
teacher instruction, engage todays technology-savvy
learners and improve student outcomes.
Despite spending an estimated $630 billion in the
2007-2008
school year on K-12 education more than any other
developed country the United States ranks
25th in the world in the quality of its primary education
system, according to the World Economic Forum. In response to
this gap, policymakers and parents are paying greater attention
to the effectiveness of U.S. public schools, demanding
higher educational standards and accountability from teachers,
administrators and school districts. In addition, increased
usage and acceptance of online technology is changing how
educational content, such as lessons, homework and assessments,
is delivered and utilized. These new educational tools and
technologies help improve the learning experience of students by
augmenting the teaching techniques of skilled teachers and
supporting and strengthening the skills of inexperienced or less
effective instructors. An estimated $11.5 billion was spent
on the K-12 instructional materials market in 2008, according to
Outsell. In 2009, Outsell projects that spending on
instructional content will grow by about 2-4%, and spending on
assessment, tutoring and test preparation services will grow by
about 4.8-5.2%. Between 2010 and 2012 the overall market is
expected to grow at an annual compounded growth rate of 5.5%
according to Outsell.
Our Study Island products are designed to improve educational
results and meet accountability criteria, leveraging the
widespread adoption of online technologies. Study Island
combines rigorous content that is highly customized to specific
standards in reading, math, science and social studies with
interactive features that reinforce and reward student
accomplishments. We believe faculty and school administrators
purchase Study Island because it is an innovative, low-cost and
high-impact solution for enhancing teacher effectiveness,
promoting student learning of core subject concepts and skills
and preparing students for state standardized tests. By enabling
teachers to track student performance in real-time, Study Island
facilitates differentiated instruction to address learning gaps
for individual students, while allowing administrators to
monitor student progress and measure teacher effectiveness.
Study Island was recognized as one of the top
100 educational products for the
2008-2009
school year by District Administration magazines
readers choice survey.
Our flexible web-based distribution model and in-house content
development capabilities allow us to continually update and
improve our products, distribute our products in a
cost-efficient manner, and price our products affordably. Over
the last nine years we have created a digital library of
approximately 324,000 proprietary questions and explanations, a
simple but elegant content management system and HTML authoring
system, and a built-in ability to dynamically generate
additional questions.
We have significantly grown the number of students and schools
served by our products since our inception in 2000. From 2000 to
2006, we concentrated our efforts on developing our Study Island
products, increasing from 27 products to 429 products during
that period. In 2007, we began focusing on managing our growth
and operations more efficiently, particularly with the hiring of
our current management team. In addition, we have developed a
sophisticated sales and marketing force that has been successful
in growing our
68
sales and customer base. We increased the number of school
customers and registered student users of our Study Island
products, from approximately 7,800 and 3.0 million,
respectively, in 2006, to approximately 21,000 and
8.9 million, respectively, in September 2009.
We intend to utilize our Study Island content development and
assessment expertise to target various instruction, assessment
and exam preparation areas within the postsecondary education
market through our Northstar Learning product line, which
provides instruction, practice, assessment and test preparation
for targeted high enrollment postsecondary course areas.
Our
Markets
The U.S. educational system, consisting of K-12 and
postsecondary education, collectively includes approximately
74 million students and approximately $1 trillion in
educational expenditures according to NCES.
The
K-12 Education Market
The U.S. K-12 education market consists of approximately
55 million students in more than 118,000 schools, according
to MDR. The U.S. K-12 school system has over 94,000 public
schools in over 15,200 school districts and county and regional
centers and more than 24,000 private and Catholic schools,
according to MDR.
Key
Dynamics in the K-12 Education Market
A number of key dynamics have impacted the K-12 education market
in recent years:
Increased Accountability. Despite spending an
estimated $630 billion during the
2007-2008
school year on K-12 education more than any other
developed country the United States ranks
25th in the world in the quality of its primary education
system, according to a
2008-2009
report by the World Economic Forum, which describes this as a
competitive disadvantage. American students are
slipping further behind their foreign peers in international
assessments, and fewer are showing an interest in the science,
technology, engineering and math fields that are vital to
innovation and entrepreneurial vigor. Within the United States,
there exists a growing disparity in the academic performance of
students in public schools in affluent communities compared to
that of students in poorer neighborhoods. As a result,
policymakers and parents have paid greater attention to the
effectiveness of U.S. public schools, demanding higher
educational standards and accountability from teachers,
administrators and school districts. States publish
accountability reports that show each schools progress and
ability to meet proficiency standards, and these results are
often reported by local press outlets. This increased visibility
into school performance has led to increased parent and
policymaker pressure on schools and teachers, including at the
presidential level. President Obamas administration has
launched the $4.35 billion Race to the Top fund
to highlight and replicate innovative education strategies as
part of the administrations highly publicized efforts to
reform education.
Legislative Developments. In 2001, Congress
passed the reauthorization of the Elementary and Secondary
Education Act, commonly referred to as No Child Left Behind, or
NCLB. NCLB requires states receiving federal funding for
education to establish high, state-wide, academic standards in
reading, mathematics and science for students in grades 3
through 8 and in high school and to assess students
proficiency in meeting these standards annually. NCLB requires
states to set incremental milestones for all students to show
yearly proficiency improvements, with the goal that all students
perform at grade-level proficiency by 2014. As states
implemented new, higher academic standards and assessments in
response to NCLB, it became clear that after the first two years
of implementation, many schools, particularly those in large,
urban, poorer communities were not meeting NCLBs Adequate
Yearly Progress, or AYP, milestones. As a result, educators
began exploring instructional tools to help students master
academic standards and improve performance on accountability
assessments. This has driven demand for standards-based content
and both formative and summative, or end-of-year, assessment
products. The Elementary and Secondary Education Act initially
was scheduled for reauthorization in October 2008, but was
extended in order to allow the new U.S. presidential
administration to impact the direction of any future
reauthorization. We believe NCLB will
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be considered for reauthorization in 2010. More recently, in
early 2009, Congress passed the American Recovery and
Reinvestment Act, better known as the stimulus act, which
provides more than $64 billion of federal funds for the
Department of Education, with a phased roll-out of such funds to
states between April 2009 and the spring of 2010. In order to
receive these education funds, states must satisfy certain
conditions, which are expected to correspond with the basic
tenets of NCLB reauthorization. These conditions include
assurances that states will strive to meet more rigorous
educational standards, improve underperforming schools, lower
high school dropout rates and ensure student readiness for
success in college and in the workforce.
Increased Access to Computers and the
Internet. Todays students use computer
technology in and out of the classroom, and many students have
access to internet-enabled computers at school and home.
Increased usage and acceptance of online technology is changing
how educational content is delivered and utilized by teachers
and students. According to the Consortium for School Networking,
98% of rural and wealthy schools have high-speed internet access
in classrooms, as do 93% of classrooms in poor urban school
districts. More than 80% of Americans now have a computer in
their homes and, of those, almost 92% have internet access,
according to a study on home internet access from The Nielsen
Company. In addition, NCLB mandates that schools improve
school-to-home or school-to-parent communication and involvement
in their childs education. As a result, schools are
increasingly looking for integrated website portals and
productivity tools to more easily comply with this mandate, more
effectively use student achievement data to keep parents
informed and more readily guide parents ability to help
their children improve their skills and proficiency.
The
Market for Supplemental Learning Materials
Schools use a variety of supplemental materials to augment their
core curriculum, provide remediation and enrichment and offer
additional learning opportunities in the classroom and at home.
These materials include traditional print-based materials, such
as textbooks, workbooks, problem sheets and printed reading
materials. With increased availability and use of computers in
the classroom and at home, vendors have developed software and,
increasingly, online programs and content as an alternative to
print-based materials.
An estimated $11.5 billion was spent on the K-12
instructional materials market in 2008, according to Outsell. In
2009, Outsell projects that spending on instructional content
will grow by about 2-4%, and spending on assessment, tutoring
and test preparation services will grow by about 4.8-5.2%.
Between 2010 and 2012 the overall market is expected to grow at
an annual compounded growth rate of 5.5% according to Outsell.
Increased accountability, combined with the need for districts
and states to meet the requirements of NCLB and other
legislative developments, has resulted in a significant decrease
in spending on traditional print-based and software-based
supplemental materials and a growing market for innovative
online programs that offer functionality and real-time
assessment and reporting not provided by traditional solutions.
Limitations of Traditional Print
Products. Educators increasingly are recognizing
the limitations of traditional print-based textbook and workbook
learning materials, which are static, cannot be quickly
corrected for errors or updated to address evolving standards,
cannot provide individualized feedback to students, do not
provide teachers with a method to quickly track student progress
and become ragged and obsolete with time and usage. Such
traditional print-based learning materials are costly and need
to be replaced on a regular basis due to the publication of
newer editions or, in the case of workbooks, use by students.
These materials also do not provide administrators with easily
obtainable metrics to measure the performance of classes,
teachers or individual grades in their schools on a regular
basis.
Limitations of Software Products. As a result
of the recognition of the limitations of print-based products
and the perceived advantages of computer-based materials,
educators began to utilize software-based supplemental
materials, such as CD-ROMs. However, these materials also have
significant limitations. Software products are designed to run
on specific operating systems with specific memory requirements,
and require installation on individual computers or costly and
time-consuming installations on centralized computer systems.
Software products place increased demands on schools
limited IT personnel, systems and
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budgets. Access to these products is typically limited to the
computers in a specific classroom or computer lab and cannot be
used at home unless schools provide a student with a disk
containing the software and the student has access to a computer
with the appropriate operating system or ability to play a
CD-ROM. Any updates require the publication, receipt,
distribution and installation of new software or CD-ROMs, which
could take months and require the school to purchase new
versions. In addition, software-based products are typically
unable to provide real-time feedback about student performance
to teachers or educators.
Advantages of Online Learning
Solutions. Online products can provide educators
with real-time feedback on student progress, allowing for
tailored instruction based on individual student or classroom
needs, and can generate school-wide reports to administrators.
Online products also are easily, automatically and frequently
updated with new or more current content, additional features
and enhancements and provide students with instant feedback,
positive reinforcement and remediation when proficiency levels
are not met. Also, unlike software- or CD-ROM-based learning
materials, web-based products require no software to be
installed in school or home computers and can be accessed
anywhere the internet is available. Web-based products can be
offered at lower prices as they do not require expenditures for
publishing, paper or electronic media, shipping or warehousing.
Our
Competitive Strengths
We believe the following are our key competitive strengths:
Customized, Standards-Based Content. Study
Island offers online, standards-based instruction, practice and
assessments for K-12 built from applicable standards in all
50 states, as well as Washington, DC. We believe this deep
customization is attractive to educators, providing them with a
resource that meets their specific state and grade-level
teaching needs in a variety of subjects. We offer over 1,190
grade level Study Island products in math, reading/language
arts, writing, science and social studies. In addition,
Northstar Learning offers instruction, practice, assessments and
test preparation for the GED and allied health licensure exams,
as well as developmental studies in college readiness
English/language arts and mathematics.
Real-time Student Tracking, Built-in Remediation and
Enrichment. We provide real-time reporting on
student achievement, allowing educators to quickly identify
learning gaps and provide targeted instruction and practice.
Study Island also provides students with immediate feedback and
explanations and, when required, remediation content designed to
build foundational skills in order to accelerate students to
grade-level
proficiency. In addition, our products provide professional
development materials that provide
best-practice
techniques for teachers to help students grasp key concepts and
skills.
Engaging, Fun and Easy to Use for
Students. Our products utilize a simple,
graphical user interface that is intuitive and easy to use. In
addition, our Study Island products incorporate games and
rewards in order to make learning fun and engaging for students.
By engaging students and providing them with the tools they need
to succeed, we enable them to take control of their own
learning, boost their confidence and keep them interested in
using our products, while creating a culture of academic success.
Accessible, Dynamic Web-based Platform. Our
products are delivered entirely online so they can be used by
teachers and students on computers wherever internet access is
available, such as classrooms, computer labs, media centers,
school libraries, public libraries or at home. Our programs are
compatible with existing school and school district enterprise
systems and require no additional software, no installation or
maintenance and no extensive implementation or training.
Moreover, unlike traditional workbooks or software products, our
Study Island and Northstar Learning content is easily and
quickly updated whenever content or functionality enhancements
are introduced or products are modified due to changes in state
standards.
High Impact, Low Cost Solution. Study Island
offers a comprehensive online educational solution on a hosted
platform and provides high quality content, assessment and
reporting for core subjects in a wide range of grade levels.
This eliminates the need for schools to have multiple vendors or
systems, thereby simplifying purchasing, training and
implementation. At an average annual price per student per
subject of $3, or $10 per student for all subjects, Study Island
products are significantly less expensive than competing
traditional print, software and online alternatives provided by
large education publishers. Northstar Learning
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products are priced in the $10 to $45 range and are also
substantially less expensive than traditional textbook and
software products currently purchased by students at community
colleges, technical colleges, proprietary or for-profit colleges.
Management Team with Strong Education Industry
Expertise. Members of our senior management team
have extensive experience in the education industry and in
serving the academic community. Our Chief Executive Officer Tim
McEwen, who has approximately 34 years of experience in the
industry, and our Chief Financial Officer James Walburg, who has
27 years of public company accounting and finance
experience, both joined us in 2007. Our Chief Technology Officer
Ray Lowrey, who has approximately 14 years of experience in
the education industry, joined us in 2008. Under their
leadership, our business has grown significantly and the number
of school customers and registered student users of our Study
Island products have increased from approximately 7,800 and
3.0 million, respectively, in 2006, to approximately 21,000
and 8.9 million, respectively, in September 2009.
Key
Attributes of Business Model
We believe the following are the key attributes of our business
model:
High Revenue Visibility and Strong Cash Flow
Generation. We believe we have an attractive
business model characterized by a visible recurring revenue
stream and high profit margins. Our subscription-based revenue
model and high recurring revenue provide strong earnings
visibility. Our operations are designed to achieve and maintain
attractive profit margins through our highly scalable 100%
online delivery platform, low research and development
requirements and viral marketing strategy. In addition, we
believe our low capital expenditure requirements and up-front
subscription payments by customers generate strong cash flow and
high returns on invested capital.
Scalability and Flexibility. We continue to
scale our business by increasing our product offerings, our
sales and the number of students, teachers and schools using our
products without incurring significant incremental expense. Our
content development processes allow us to quickly and
inexpensively update or create products and we can easily add
these new products as well as new users through our single
online delivery platform. Our flexible sales model incorporates
in-house web optimization, direct mail and email marketing,
which allows us to incrementally expand our sales and marketing
efforts at a relatively low cost. In addition, our centralized,
online delivery model is more cost-effective for our customers
relative to traditional licensed and installed software
solutions and traditional textbook and workbook publishers.
Powerful, Demand-Driven Sales and
Marketing. Our Study Island products are often
introduced into the classroom by principals or teachers, rather
than mandated by district-level administrators. Approximately
58% to 78% of surveyed customers of Study Island reported that
they discovered Study Island through word-of-mouth endorsements
from other educators, according to annual independent Market
Measurement surveys of 500 Study Island customers conducted
since 2006. In addition to this viral demand for our products
and services, we have a 124 member team of specialized sales and
marketing professionals who are experienced in generating new
sales of online educational products. We believe that our focus
on the classroom and site-level sales results in greater
customer loyalty, as evidenced by growing revenue from our
existing customer base. In addition, the price points for our
Study Island products are set at levels that typically fall
within a school principals discretionary budget or can be
funded by individual teachers or through parent fundraising
efforts. Once teachers and principals in one school become
dedicated customers, we believe their recommendations often lead
to additional sales within the school and other schools within
the district. Over time, these site-based customer advocates are
instrumental in helping us gain access to district
administrators and achieve district-wide purchases.
Our
Growth Strategy
Our goal is to be the leading provider of subscription-based
online education tools across the K-12 and postsecondary
education markets through the following strategies:
Expand the Number of Schools Using Our Study Island
Products. As of September 30, 2009, our
Study Island products were used in approximately 21,000 schools
throughout all 50 states and Washington,
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DC, representing approximately 17.6% of the over 94,000 public
and 24,000 private and Catholic K-12 schools in the United
States. We believe that there is a significant opportunity to
expand the number of schools that use Study Island. For example,
only approximately 10% of our service revenue in 2008 was
derived from sales of our Study Island products to high schools.
We believe the Obama administrations focus on lowering the
high school drop-out rate and improving high school graduate
college and job readiness will drive increased demand for our
high school products. Accordingly, we believe high schools
provide us with a significant market opportunity. We also
continue to expand our sales organization in specific states,
targeting our direct mail and
e-marketing
efforts to educators in schools that do not use Study Island,
encouraging a viral marketing model through the use
of customer references and referrals, providing free product
trials and optimizing the appearance of Study Island in key-word
searches on leading web search engines. In addition, as we
deepen our school penetration, we increasingly are focused on
selling Study Island at the district level.
Increase Revenue per School. In many schools
that we serve, we have the opportunity to sell additional core
grade level and subject area products, as well as new products,
such as our benchmark assessments and graphic novel reading
intervention, to teachers who already subscribe to one or more
of our products. Our inside sales team specifically targets our
existing customer base to sell add-on products. As we enhance
our products with new features and functionality that increase
the value of Study Island to our customers, we believe we will
be able to price these enhancements accordingly. In addition,
the increased complexity of high school subject matter and
related assessment standards allow us to price high school
products higher than those for the elementary and middle school
markets, and high school enrollments are usually larger,
resulting in higher average revenue from invoiced sales. We
intend to leverage our domain expertise in instruction, practice
and assessment to introduce new high school oriented products,
including reading and math remediation products and core subject
end of course and exit exam preparation, advanced placement exam
preparation, PSAT, SAT, ACT and other test preparation, and high
school courses for credit and credit recovery.
Develop New Products and Enhance our Online
Platform. We continually develop new Study Island
products, as well as new features and functionality for our
online platform, to address student needs and teacher requests.
These products also provide additional revenue opportunities.
For example, we recently introduced state-specific benchmark
assessment products to enable teachers to predict student
performance and provide diagnostic information to guide
instruction, as well as a graphic novel reading intervention
product that is designed to remediate students who are
significantly below grade-level reading expectations. We plan to
introduce a new version of our Study Island online platform in
January 2010, which will include a custom assessment builder,
lesson plans and lessons, video content, special needs support
(including expanded
text-to-speech
functionality), a writing utility, digital locker, new and more
sophisticated games, and embedded professional development for
teachers.
Expand Into New Related Markets. We believe
there is a significant opportunity to sell our products and
services in the postsecondary market and in new geographic and
end markets.
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Launched in 2009, Northstar Learning targets the postsecondary
market utilizing our content development, instruction, exam
preparation and assessment expertise. Currently, Northstar
Learning has products in developmental studies for the
approximately $2.5 billion college remedial studies market
and in vocational education and licensure exam preparation in
the healthcare occupational field. Our Northstar Learning
products also include GED exam preparation products, and we are
planning to introduce new PRAXIS teacher certification
preparation products in the fourth quarter of 2009 and in 2010.
We intend to develop additional Northstar Learning products to
address other technical career certification exams. We plan to
expand our marketing efforts to increase awareness of the
Northstar Learning brand and products.
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We introduced our Study Island products in the three largest
English-speaking Canadian provinces in October 2009. We
believe other English-speaking countries, including the United
Kingdom, Australia, New Zealand and South Africa, also provide
potential near-term growth opportunities, and we intend to
develop products for these markets. In addition, we are
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exploring the opportunities to sell Study Island products
directly to parents as well as expanding our sales efforts to
public libraries, school libraries and homeschool settings.
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Pursue Acquisitions and Strategic
Relationships. Since 2007, we have sought
acquisitions and strategic alliances that expand our product and
service offerings and provide additional revenue opportunities.
We intend to continue to pursue acquisitions that have products,
services and businesses that are compatible with our Archipelago
Learning brand identity, culture and corporate mission. We
expect that our acquisition activity will be focused primarily
on web-based products and services for our target markets. In
addition, we believe our large student audience of over
8 million K-12 students provides a significant and valuable
opportunity to enter into strategic relationships in order to
cross-sell
other appropriate, teacher- and parent-approved products to our
students.
Our
Products and Services
Archipelago Learning is a leading subscription-based online
education company. Our products provide standards-based
instruction, practice, assessments and productivity tools that
improve the performance of educators and students via
proprietary web-based platforms.
Core
Educational Principles
We believe that one of the keys to our success lies in our core
educational principles that guide product design and development:
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Clear expectations. Each Study Island and
Northstar Learning session focuses on an academic standard or
underlying topic and sets forth a clear goal for the student to
master the targeted skill or concept.
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High quality, rigorous content. We have
internal subject area writer and editor expertise and deep
knowledge of each set of specific standards for which we offer
products. We build content from the
ground-up,
customized to each set of standards for a particular subject. We
utilize a scaffolding approach to content development that
begins with skill building and then builds to higher level
thinking skills. This building block learning
approach ensures that students master grade level content and
are prepared for state assessments.
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Fun and engaging assignments. Study Island
sessions are embedded with short games segments and reward
student mastery of standards with achievement certificates.
These features provide continual positive reinforcement and
reward learning to engage students and build student confidence.
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Immediate feedback. Students receive immediate
feedback and explanations for each question, allowing them to
learn and quickly apply new knowledge to subsequent questions
and to build skills and conceptual understanding in order to
handle more complex content that follows.
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Student responsibility for learning. Study
Island automatically offers explanations and prescribes remedial
or building block topics when a student does not
master a standard or sub-topic, allowing the student to quickly
address any learning weakness. The student can continue with
these remediation topics until he or she gradually accelerates
back to grade level proficiency, receiving built-in rewards for
learning along the way.
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Study
Island
Study Island offers subscription-based online products that
provide standards-based instruction, practice, assessment and
productivity tools for teachers and students. Each of Study
Islands products is specifically built from the
requirements for a subject area in a grade level in a particular
state. We offer products for math, reading, language arts,
writing, science and social studies. Our in-house content
development team creates between five and ten new subject and
grade level product offerings a month, and we offer specialty
products based on national standards in subject areas such as
technological literacy, health and fine arts. Customers may
subscribe to any number of products to best suit their
individual classroom or school needs. Subscriptions are
typically for one year, although we do sell some multi-year
subscriptions as well.
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Additionally, promotional incentives, such as complimentary
months of service, are offered periodically to new Study Island
customers, resulting in a subscription term longer than one year.
Students can log in to Study Island from any computer with
internet access. Typically, teachers assign topics based on the
specific standards or topics that were covered in class during a
particular week. In some schools, students are permitted to take
control and move through the Study Island program independently,
earning awards as each standard is mastered. Once logged in,
students can select to move through the content in a
traditional, multiple choice test mode or game mode, which
includes short game segments to reward student achievement. Each
topic contains a mini-lesson that can be reviewed by the student
prior to beginning the session. Teachers can customize sessions
for the number of questions asked as well as the number of
correct answers needed to reach proficiency in a standard or
sub-topic. The questions are dynamically generated and therefore
constantly changing, compelling students to learn concepts
rather than memorize answers. Students who master a topic
receive a Blue Ribbon Achievement Award, which is
denoted by an icon of a blue ribbon beside the topic as well as
a printable certificate. Upon answering a question incorrectly,
students are shown the correct answer along with a detailed
explanation of this response. When students are having
difficulty answering questions correctly for a particular
standard or sub-topic and require additional help to reach
proficiency, Study Island automatically moves them down to
appropriate building block or remedial topics, where
students can earn White Ribbon Achievement Awards as
they gradually accelerate back to grade level proficiency and
ultimately earn the Blue Ribbon Achievement Award.
Study Island has also linked its program to popular classroom
response hand-held devices, or clickers, which are manufactured
and sold by other companies and enable Study Island sessions to
be conducted in the classroom. The teacher typically teaches a
particular standard or sub-topic and then projects Study Island
questions on a whiteboard or a projection screen, and students
answer using their handheld clickers. The teacher immediately
receives results on his or her computer to determine whether the
class is comprehending the material or whether additional
instruction is required. This classroom methodology enables
teachers to ensure as opposed to assume
that learning has effectively occurred.
Study Island offers add-on features and programs, such as a
benchmark assessment that enables educators to predict student
performance on the end-of-year state assessment and provides
diagnostic information to guide instruction. In addition, our
graphic novel reading intervention product is designed to
remediate students who are behind in grade level reading. We
regularly release new product enhancements to increase the value
of Study Islands core standard specific learning programs.
We plan to introduce a new version of our Study Island online
platform in January 2010, which will include new features and
functionality most desired by our existing customer base and
prospects, including a custom assessment builder,
standards-based
lesson plans and lessons, video content, special needs support
(including expanded
text-to-speech
functionality), a writing utility, new and more sophisticated
games, and embedded professional development for teachers. In
addition, we intend to introduce new high school oriented
products, including reading and math remediation products, end
of course and exit exam preparation, advanced placement exam
preparation, PSAT, SAT, ACT and other norm-referenced test
preparation, and high school courses for credit and credit
recovery.
We expanded Study Islands market by releasing its first
international products in October 2009 for three Canadian
provinces: Ontario, Alberta and British Columbia.
TeacherWeb
TeacherWeb, which we acquired in June 2008, is a website portal
and productivity tool for educators in the K-12 market, which
enables teachers and schools to easily and affordably create and
maintain functional, professional-looking websites. TeacherWeb
was designed to enable teachers and administrators to quickly
and easily communicate information to students and parents
through these websites. We expect to complete the sale of
TeacherWeb in November 2009 upon finalizing an amendment to our
credit facility permitting the sale.
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Northstar
Learning
In recognition of the significant postsecondary education market
opportunity, we developed our Northstar Learning product line,
which was initially launched in April 2009. Northstar Learning
uses the same proprietary web platform as Study Island, to
provide instruction, practice, assessment and test preparation
for targeted high enrollment postsecondary course areas. The key
features and product functions of Northstar Learning are
substantially similar to those of Study Island.
We currently offer Northstar Learning products for GED exam
preparation, developmental studies in college readiness
English/language arts and mathematics and allied health, and we
launched a PRAXIS teacher certification product in September
2009.
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GED exam preparation. Northstar Learning
offers products for each of the five GED testing modules covered
in the GED exam, which grants a diploma to adults that do not
have a high school diploma. These modules are reading, writing,
math, social studies and science.
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Developmental Studies. Northstar Learning
offers developmental English/language arts and math programs for
the approximately 42% of community college freshmen and 20% of
four-year
college freshmen who are required to raise their proficiency
levels before colleges and universities allow them to enroll in
credit-bearing courses.
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Allied Health programs. We recently launched
six allied health products to help students in these certificate
and Associate Degree allied health programs master the required
content and pass the applicable health career licensure exams.
We intend to launch five additional products in late 2009.
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PRAXIS teacher certification. Northstar
Learning has begun publishing products and will continue to
launch additional ones through early 2010 to assist educators to
prepare for and pass the PRAXIS series assessments developed by
the Educational Testing Service and used by states as part of
their teacher licensure and certification processes.
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We intend to develop additional Northstar Learning products to
address other vocational-technical career programs that require
certification exams and online study guides for more difficult
college and university courses. We also intend to expand our
marketing and sales efforts to increase awareness of the
Northstar Learning brand and products, and replicate our K-12
sales efforts and word-of-mouth viral marketing in the
postsecondary market.
Northstar
Market Opportunity
We developed Northstar Learning to capitalize on the
U.S. postsecondary education market, which is significant.
NCES estimates that approximately 18.2 million students
were enrolled in degree-granting postsecondary institutions
during the
2007-2008
school year. In 2006, approximately 39 million adults in
the United States in the
18-64 age
group did not have a high school diploma, but only about 0.9% of
them earned a GED. Only about 68% of adults who took at least
one of the five GED tests passed the test in 2006, 72% passed in
2007 and 73% passed in 2008. In 2008, 777,000 candidates took at
least one of the five GED tests versus 714,000 in 2006, a 8.8%
growth rate.
In addition, U.S. adult education enrollment in adult basic
education, adult secondary education and English as a second
language programs was about 2.4 million in the
2006-2007
school year. About 38% of these students were enrolled in basic
education reading and/or math levels below eighth grade courses,
16% were enrolled in adult secondary education courses and 46%
were enrolled in English as a second language courses.
Many of the occupations projected to grow the fastest in the
economy are concentrated in the health care industry. According
to a U.S. Bureau of Labor Statistics report, health care
was the largest U.S. industry in 2006 and health care will
generate 3 million wage and salary jobs between 2006 and
2016, more than any other industry. Many of these occupations
require some form of licensure or certification, but most
workers have jobs that require less than four years of college
education, according to the U.S. Bureau of Labor Statistics
report.
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Our
Customers
Approximately 97% of our service revenue in 2008 came from Study
Island subscriptions from U.S. public and private schools
and individual buys. As of September 30, 2009, Study Island
products were used by approximately 8.9 million students in
21,000 schools across 50 states and Washington, DC. Our
principle customers are teachers, school principals, curriculum
directors, Title I and Title III directors,
superintendents, chief technology officers and other
administrators. In 2008, the average school invoice price for
Study Island was $1,854. In addition, no single customer
accounted for more than 1.5% of our total invoiced sales in
2006, 2007 or 2008.
As of September 30, 2009 TeacherWeb had 89,332 customers
across 13,901 U.S. and Canadian schools and approximately
12,634 international customers across 83 countries. We expect to
complete the sale of TeacherWeb in November 2009.
As of September 30, 2009, we had 1,582 Northstar Learning
subscribers for our GED products.
Marketing,
Sales and Customer Support
Marketing
Activities
Our marketing strategy is to continually increase Study Island
brand awareness, to introduce the Northstar Learning brand, and
to continually generate qualified prospect leads for our sales
teams. We focus our marketing efforts on individual schools,
principals and teachers for sales to both new and existing
customers.
Our primary Study Island marketing activities include:
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targeted campaigns to schools, such as search engine marketing,
direct mail,
e-mail
marketing and print advertisements;
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participation in tradeshows;
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building on relationships with satisfied school customers to
target new sales in other schools in the same district, in the
entire district or in adjacent school districts;
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customer newsletters and advertising inserts sent to schools
with renewal reminders, including information about new and
upgraded products;
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webinars for existing customers introducing them to new
products, add-on features and upgrades;
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incentives such as free months to attract new customers or free
trials of add-on products to attract renewals; and
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assistance by our grant/bid writer and contract manager to
existing customers for funding, grant requests and completion of
district contracts.
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We are developing our marketing plans for our recently launched
Northstar Learning product line. We have launched successful
print advertising campaigns for Northstar Learning and expect
additional marketing activities to be similar to those of Study
Island, but with a focus on adult learning centers and
alternative high schools for GED and postsecondary public and
private institutions for developmental studies and allied
health. We recently hired a Northstar Learning marketing
coordinator who is responsible for search engine optimization,
direct mail and
e-mail
marketing campaigns and participation in tradeshows to capture
sales and qualified leads in the postsecondary market.
Study Island pricing is available on Study Islands website
(www.studyisland.com) at each state landing page. Northstar
Learnings pricing is available on Northstar
Learnings website (www.northstarlearning.com). Our
products and services are strategically priced to fall within
the discretionary spending budgets of teachers and school
administrators. The information that appears on these websites
is not part of, or incorporated into, this prospectus. We
evaluate our pricing on an annual basis and determine increases
to reflect product enhancements, operating costs, the increased
value of our products to our customers, and inflation and other
economic factors impacting our markets.
77
Field-based
and Inside Sales Channels
We have three sales teams: a Study Island sales team, a
Northstar Learning sales team and a TeacherWeb sales team.
The Study Island sales team, our largest, is led by our vice
president of sales and is divided into outside or field-based
sales representatives overseen by five regional managers, a
smaller inside sales team and an inside account manager with a
team focused on renewals and sales of add-on products. Our
field-based sales representatives are strategically located in
and are responsible for larger enrollment metropolitan customer
bases, and our inside sales team focuses on sales in more rural
geographies. Our Study Island sales strategy begins with
site-based or school level contact and focuses on individual
school principals and teachers. Additionally, the Study Island
sales team strives to enhance customer awareness of our newer
Northstar Learning brand.
Similar to the Study Island sales team, our Northstar Learning
sales team consists of four field-based sales representatives
(east, south, midwest and west) and two inside sales
representatives who handle rural accounts, both managed by our
national sales manager. This group will focus exclusively on
adult learning centers and postsecondary institutions. Over
time, we plan to add more sales representatives and eventually
hire a dedicated postsecondary sales manager.
Our TeacherWeb sales team consists of four inside sales and
customer services representatives. We expect to complete the
sale of TeacherWeb in November 2009, after which we will
only have Study Island and Northstar Learning sales teams.
Customer
Support
We provide our customers with service through our
Implementation, Training, and Customer Relations teams. Our
Implementation team provides free customized implementation
assistance to schools, including contacting schools when we
detect low levels of usage to learn how we may improve
implementation and usage of our product in the school. Our
Training department develops teacher and administrator training
materials, hosts webinars and conducts site visits and in-school
training sessions, as well as online trainings and phone
consultations. Our Customer Relations team provides free
unlimited support to our customers, who may contact us via
phone, live chat or by email. Approximately 27% of our Customer
Relations team are former teachers, and 53% have customer
service and IT backgrounds. Our Customer Relations team also
recently won the 2009 STEVIE AWARD, sponsored by Business Week,
in recognition of its outstanding level of customer service.
Our
Competition
Study Island competes primarily with other providers of
supplemental educational materials and online learning tools. We
believe Study Islands principal competitors include:
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providers of online and offline supplemental instructional
materials for the core subject areas of reading, mathematics,
science and social studies for K-12 institutions;
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companies that provide K-12-oriented software and online-based
educational assessment and remediation products and services to
students, educators, parents and educational institutions;
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the assessment divisions of established education publishers,
including Pearson Education, Inc., The McGraw-Hill Companies and
Houghton Mifflin Harcourt Company;
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providers of online and offline test preparation materials;
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traditional print textbook and workbook companies that publish
K-12 core subject educational materials, standardized test
preparation materials or paper and pencil assessment tools;
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summative assessment companies that have expanded their product
lines to include formative assessment and instruction products;
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non-profit and membership educational organizations and
government agencies that offer online and offline products and
services, including in some cases at no cost, to assist
individuals in standards mastery and test preparation; and
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providers of website hosting for teachers and schools.
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78
We believe the principal competitive factors in Study
Islands market are:
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quality of content and deep customization to standards;
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formative assessment and reporting to inform instruction;
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ease of use, including whether a product is available online;
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program efficacy and the ability to provide improved student
outcomes;
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ability to engage students;
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quality of customer support;
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vendor reputation; and
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price.
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Northstar Learning competes primarily with textbook, workbook,
study guide and software products published by the large
postsecondary publishers, such as Pearson, McGraw-Hill, Cengage,
Wiley and Mosby (Reed Elsevier).
We believe the principal competitive factors in Northstar
Learnings market are similar to those outlined above for
Study Island.
Technology
Engineering
Our Study Island and Northstar Learning systems are built upon
lightweight platforms enabling our customers to access the full
set of functionality via a standard browser. Our systems operate
in a completely hosted manner, eliminating the need for our
customers to run any special hardware or software. This is a
basic design criteria in our software architecture, to provide
the most extensive set of services possible that are completely
independent from our customers unique systems environment.
We will continue to invest in improving the performance,
functional depth and the usability of our services to better
meet our customers needs.
Our systems are constructed as highly scalable,
software-as-a-service (SaaS) applications that use commercially
available hardware and a combination of proprietary and
off-the-shelf software from companies such as Adobe and
Microsoft. Our software development team has constructed
proprietary services and leveraged existing capabilities such as
database connection pooling and user session management tuned to
our specific architecture and environment, allowing us to
continue to scale our service. This provides a stateless
environment, in which users are not bound to a single server but
can be routed in the most optimal way to any number of servers,
with an advanced data caching layer.
Our systems have been implemented to allow all customers to
operate as logically separate tenants in the central
applications and databases. This allows us to spread the cost of
delivering the total set of services across the user base, such
that we do not have to manage thousands of distinct applications
with their own business logic and database schemas. As a result,
we have the ability to scale our application and core business
in a very fast and efficient manner. Moreover, we can focus our
resources on building new functionality to deliver to our
customer base as a whole rather than on maintaining an
infrastructure to support each of their distinct applications.
Our engineering team is constantly focused on improving and
enhancing the features, functionality and security of our
existing service offerings, as well as developing new
capabilities such as the upcoming release of a new version of
Study Island. As a result of our proven SaaS model, our existing
customers will be able to realize the full value of these
enhancements without the need to go through a massive upgrade
process.
Operations
We serve all of our customers and users from a single,
third-party web-hosting facility located in Dallas, Texas,
leased from Colo4Dallas, Inc. The Colo4Dallas facility is built
to a high level of availability
79
and control and is secured by around-the-clock guards, biometric
access screening and escort-controlled access, and is supported
by on-site
backup generators in the event of a power failure. Bandwidth to
the internet is provided by multiple independent companies and
we continuously monitor the performance of this service. The
monitoring features that exist include centralized performance
consoles, automated load distribution tools and various
self-diagnostic tools and programs.
In the first quarter of 2010, as part of our disaster recovery
arrangements, all of our customers data will be replicated
in a separate
back-up
facility near Chicago, Illinois. This is designed to both
protect our customers data and ensure service continuity
in the event of a major disaster. Even in the case of a
catastrophic disaster at the Colo4Dallas facility, our strategy
will allow for full operation within 24 hours or less.
Integration
with District Student Interoperability Systems
The Study Island core web application has been designed to
integrate with Student Interoperability Systems, or SIS, which
employ the Student Interoperability Framework, of SIF,
specifications, as a method for overall student tracking. SIF
creates a common set of specifications to allow different
applications to interact and share data, and facilitates the use
of technology in education. The use of SIF allows Study Island
to maintain a real-time roster for each one of its SIF enabled
districts, and facilitates the transition of information from
one school to another within a district. Our engineering team is
available to work directly with a school districts
technology team to assist with information transfers.
Intellectual
Property
We develop proprietary educational content and assessment and
reporting materials, and a significant majority of the questions
and materials in our Study Island and Northstar Learning
products have been developed internally. We rely on copyright
protection for our internally developed content. We also own or
license a number of trademarks, service marks, trade secrets and
other intellectual property rights that relate to our products
and services. Our content development costs in the years ended
December 31, 2006, 2007 and 2008 were $0.7 million,
$1.2 million and $2.2 million, respectively. We
continue to invest in our intellectual property as we develop
new content and expand the scope of our products and services.
As appropriate, we also utilize confidentiality and licensing
agreements with our employees, students, independent contractors
and suppliers.
We license a portion of our content from third parties. For
example, we currently license graphic novels from ABDO Books and
content based on the
Timbertoes®
characters from Highlights for Children. We attempt to use
internally developed or public domain material in our products
when possible, but as we continue to develop new products and
services, we may enter into licenses with additional third
parties.
We own several internet domain names that include the terms
Study Island, Archipelago Learning and Northstar Learning, among
others.
Employees
As of September 30, 2009 we had 233 employees,
consisting of 228 full-time and 5 part-time employees.
As of September 30, 2009, we had 58 employees in
content development, 124 employees in sales and marketing,
24 employees in IT and programming and 27 general and
administrative employees. None of our employees are represented
by a collective bargaining agreement. We believe our employee
relations are good.
Properties
Our corporate headquarters are located in Dallas, Texas, where
we lease a total of 18,508 square feet of space under a
lease that expires on May 31, 2012 and 7,304 square
feet of space under a lease that expires on June 30, 2010.
We do not lease office space for our field-sales representatives.
Legal
Proceedings
We currently are not subject to any material litigation or
regulatory proceedings.
80
MANAGEMENT
Executive
Officers and Directors
The following table sets forth the names and ages as of
November 2, 2009, of each person who is and who will be a
director or executive officer of Archipelago Learning, Inc. upon
the Corporate Reorganization and the consummation of this
offering. The descriptions below include each such persons
service as a board member, executive officer or employee of
Archipelago Learning Holdings, LLC and our predecessors.
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Name
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Age
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Position
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Tim McEwen
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56
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President, Chief Executive Officer and Director
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James Walburg
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55
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Executive Vice President, Chief Financial Officer and Secretary
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Ray Lowrey
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52
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Senior Vice President and Chief Technology Officer
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Martijn Tel
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40
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Senior Vice President and Chief Operating Officer
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Cameron Chalmers
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33
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Vice President and Director
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Julie Huston
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43
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Vice President of Sales
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David Muzzo
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34
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Vice President and Director
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David Phillips
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32
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Director
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Michael Powell
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46
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Director
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Peter Wilde
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41
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Chairman
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Brian H. Hall
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Director Nominee
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Tim McEwen has been our President and Chief Executive
Officer since March 2007. From January 2004 to March, 2007,
Mr. McEwen served as Chief Executive Officer of Harcourt
Achieve, Inc., a multinational supplemental education company.
From July 2000 to December 2003, Mr. McEwen served as
Executive Vice President and Chief Operating Officer of Haights
Cross Communications, Inc., which specializes in the development
and publication of educational products. From 1996 to 2000,
Mr. McEwen served as President and Chief Executive Officer
of Thomson Learnings Higher Education and Lifelong
Learning Groups (now Cengage Learning), a publisher of print and
digital educational products. Mr. McEwen serves on the
board of directors of Edline Holdings LLC, an educational
technology company. Mr. McEwen received a B.S. in Education
from East Stroudsburg State University and an M.S. in Education
from the University of Georgia.
James Walburg has been our Executive Vice President and
Chief Financial Officer since May 2007. From January 2004 to
March 2007, Mr. Walburg served as Senior Vice President and
Chief Financial Officer of First American Payment Systems, L.P.,
a large credit card processing company. From September 1994 to
January 2004, Mr. Walburg served as Senior Vice President
of Finance and Administration as well as Vice President and
Treasurer of IMCO Recycling Inc., a publicly traded metals
company. Prior to this, Mr. Walburg also held management
positions at NTS, Inc. and Diamond Shamrock Corporation.
Mr. Walburg is a certified public accountant and received a
B.S. in Economics from the University of Pennsylvanias
Wharton School and an M.B.A. from the Southern Methodist
University Cox School of Business.
Ray Lowrey has been our Senior Vice President and Chief
Technology Officer since September 2008. From May 2006 to
September 2008, Mr. Lowrey served as a Senior Vice
President and Chief Technology Officer of Cengage Learning, a
publisher or print and digital educational products. Prior to
May 2006, Mr. Lowrey also served as Chief Technology
Officer of Thomson Gale, an educational publisher, and served in
several senior level positions in technology management and
software development for EG&G Mound Applied Technologies
and Monsanto Research Corporation. Mr. Lowrey received a
B.S. in Computer Science and an M.B.A. from the University of
Dayton.
Martijn Tel has been our Senior Vice President and Chief
Operating Officer since October 2009. From January 2009 to
October 2009, Mr. Tel served as Chief Financial Officer and
Chief Operating Officer of Medical Media Holdings LLC, a
continuing medical education company. From March 2007 to January
2008,
81
Mr. Tel served as the Chief Financial Officer of Harcourt
Inc.s Global Operations Division, an education publishing
company. From April 2004 to February 2008, Mr. Tel served
as the Chief Financial Officer of Harcourt Achieve, Inc., a
multinational supplemental education company. From November 2002
until March 2004, Mr. Tel served as the Chief Financial
Officer of Classroom Connect, an education company. Mr. Tel
started his career at Elsevier Science and served in several
chief financial officer roles, most notably for its
e-business,
including ScienceDirect and the Global Sales Organization.
Mr. Tel has a graduate degree in accounting and finance and
a postgraduate controllers degree from the Vrije Universiteit,
located in The Netherlands.
Cameron Chalmers co-founded Study Island, in May 2000 and
has been Vice President and Director since January 2007. Prior
to founding us, Mr. Chalmers served as a software
engineering Lead Developer for Lucent Technologies.
Mr. Chalmers received a B.S. from Vanderbilt University.
Mr. Chalmers intends to resign from the board of directors
upon the consummation of this offering but will continue to
serve as Vice President.
Julie Huston has been our Vice President of Sales since
April 2008. Ms. Huston joined us as an independent
contractor as a Michigan sales representative in August 2002. In
January 2007, Ms. Huston was employed by us as a regional
sales manager before becoming our Vice President of Sales in
April 2008. Prior to joining us, Ms. Huston was Co-Founder
and President of Training Express. From 1989 to 1991,
Ms. Huston also served as Director of Public Relations and
Advertising for Olympia Entertainment. Ms. Huston received
a B.A. in English from the University of Michigan.
David Muzzo co-founded Study Island in May 2000 and has
been Vice President and Director since January 2007. Prior to
founding us, Mr. Muzzo co-founded Captive Marketing
Concepts, an advertising firm specializing in indoor billboard
advertising which was later sold to AJ Indoor Advertising in
1999. Mr. Muzzo received a B.S. from Vanderbilt University.
Mr. Muzzo intends to resign from the board of directors
upon the consummation of this offering but will continue to
serve as Vice President.
David Phillips has been a member of our board of
directors since January 2007. Mr. Phillips is a Vice
President of Providence Equity Partners. Prior to joining
Providence Equity Partners in 2005, Mr. Phillips worked at
Hutchison Whampoa China and at Goldman Sachs in the Principal
Investment Area. Mr. Phillips serves on the board of
directors of Edline Holdings, Inc. an educational technology
company, and JBP Holdings, LLC, which owns Assessment
Technologies Institute, a provider of online educational
products, and Jones & Bartlett Publishers, an educational
publisher for higher education and vocational training.
Mr. Phillips received a B.A. from Princeton University and
an M.B.A. from Harvard Business School.
Michael Powell has been a member of our board of
directors since December 2008. Mr. Powell is the chairman
and chief executive of the MK Powell Group, a communications
consulting firm, where he has been employed since April 2005.
Mr. Powell served also as a Senior Advisor of Providence
Equity Partners since July 2005. From January 2001 to April
2005, Mr. Powell served as Chairman of the Federal
Communications Commission and just prior, from October 1997 to
December 2000, as a Commissioner. From December 1996 to October
1997, Mr. Powell served as Chief of Staff of the Antitrust
Division of the Department of Justice. From July 1994 to
December 1996, Mr. Powell was an associate in the law firm
of OMelveny & Meyers and clerked for the Hon.
Harry T. Edwards, Chief Judge of the U.S. Court of Appeals
for the D.C. Circuit from July 1993 to July 1994. From March
1988 to July 1990, Mr. Powell served as a policy advisor to
Secretary of Defense Richard B. Cheney. Mr. Powell serves
on the board of directors of Cisco Systems, Altegrity, Object
Video, the Rand Corporation, the Aspen Institute and
Americas Promise. He also serves on the board of advisors
for the Disabled Veterans for Life Memorial effort.
Mr. Powell received a B.A. in Government from the College
of William and Mary and received a J.D. from Georgetown
University Law Center.
Peter Wilde has been a member of our board of directors
and Chairman since January 2007. Mr. Wilde is a Managing
Director of Providence Equity Partners. Prior to joining
Providence Equity Partners in 2002, Mr. Wilde was a General
Partner at BCI Partners, where he began his career in private
equity investing in 1992. Mr. Wilde is also a director of
Asurion Corp., a provider of wireless subscriber services,
Decision Resources, Inc., a provider of healthcare research,
Edline Holdings, Inc. an educational technology company,
Education Management Corporation, a provider of post-secondary
education, JBP Holdings, LLC,
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which owns Assessment Technologies Institute, a provider of
online educational products, and Jones & Bartlett
Publishers, an educational publisher for higher education and
vocational training, Kerasotes Theatres, Inc., a motion picture
exhibition company, and Survey Sampling International LLC.
Mr. Wilde received a B.A. from Colorado College and an
M.B.A. from Harvard Business School.
Brian H. Hall will become a member of our board of
directors upon the consummation of this offering. From January
2007 through August 2007, Mr. Hall served as Vice Chairman
of Thomson Corporation, a business and professional information
company, where he created and led the new corporate investment
process, and directed Thomsons corporate strategy,
marketing, communications and branding initiatives. Previously,
from 1998 through 2006, Mr. Hall served as President and
CEO of Thomson Legal & Regulatory and West Publishing,
a legal information company. Prior to joining Thomson,
Mr. Hall was President of Shepards and Executive Vice
President of
McGraw-Hill.
Mr. Hall graduated from The Defiance College and has an MBA
from the Rochester Institute of Technology. He is a former board
member of Bank One of Colorado Springs and Ryerson of Canada.
Mr. Hall currently serves on the board of IHS, Inc., a
business software and services company based in Englewood,
Colorado.
Board of
Directors
Our business and affairs are managed under the direction of our
board of directors. Our bylaws will provide that our board of
directors will consist of
between
and
directors. Upon the consummation of this offering, our board of
directors will consist
of
directors.
Director
Independence and Controlled Company Exception
Our board of directors has affirmatively determined
that
are independent directors under the rules of Nasdaq and as such
term is defined in
Rule 10A-3(b)(1)
under the Exchange Act.
After completion of this offering, Providence Equity Partners
will continue to control a majority of our outstanding common
stock. As a result, we are a controlled company
within the meaning of Nasdaq corporate governance standards.
Under these rules, a controlled company may elect
not to comply with certain Nasdaq corporate governance
standards, including:
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the requirement that a majority of the board of directors
consist of independent directors;
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the requirement that we have a nominating and corporate
governance committee that is composed entirely of independent
directors with a written charter addressing the committees
purpose and responsibilities;
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the requirement that we have a compensation committee that is
composed entirely of independent directors with a written
charter addressing the committees purpose and
responsibilities; and
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the requirement for an annual performance evaluation of the
nominating and corporate governance committee and compensation
committee.
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Following this offering, we intend to utilize these exemptions.
As a result, we will not have a majority of independent
directors, our nominating and corporate governance committee and
compensation committee will not consist entirely of independent
directors and such committees will not be subject to annual
performance evaluations. Accordingly, you will not have the same
protections afforded to shareholders of companies that are
subject to all of Nasdaq corporate governance requirements.
Board
Committees
Our board of directors has the authority to appoint committees
to perform certain management and administration functions. Upon
the consummation of this offering, our board of directors will
have three committees: the audit committee, the compensation
committee, the nominating and corporate governance committee.
83
Audit
Committee
The primary purpose of the audit committee is to assist the
boards oversight of:
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the integrity of our financial statements;
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our systems of control over financial reporting and disclosure
controls and procedures;
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our compliance with legal and regulatory requirements;
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our independent auditors qualifications and independence;
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the performance of our independent auditors and our internal
audit function;
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all related person transactions for potential conflict of
interest situations on an ongoing basis; and
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the preparation of the report required to be prepared by the
committee pursuant to SEC rules.
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Upon the consummation of this offering,
Messrs. Hall,
and
will serve on the audit committee. Mr. Hall will serve as
chairman of the audit committee and also qualifies as an
audit committee financial expert as such term has
been defined by the SEC in Item 401(h)(2) of
Regulation S-K.
Our board of directors has affirmatively determined that
Messrs. Hall,
and
meet the definition of independent directors for the
purposes of serving on the audit committee under applicable SEC
and Nasdaq rules, and we intend to comply with these
independence requirements within the time periods specified.
Compensation
Committee
The primary purpose of our compensation committee is to:
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recommend to our board of directors for consideration, the
compensation and benefits of our executive officers and key
employees;
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monitor and review our compensation and benefit plans;
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administer our stock and other incentive compensation plans and
programs and prepare recommendations and periodic reports to the
board of directors concerning such matters;
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prepare the compensation committee report required by SEC rules
to be included in our annual report;
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prepare recommendations and periodic reports to the board of
directors as appropriate; and
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handle such other matters that are specifically delegated to the
compensation committee by our board of directors from time to
time.
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Upon the consummation of this offering,
Messrs. ,
and
will serve on the compensation committee, and
Mr.
will serve as the chairman. Our board of directors has
affirmatively determined that each
of ,
and
meets the definition of outside director for the
purposes of Section 162(m) of the Internal Revenue Code of
1986, as amended and the definition of non-employee
director for the purposes of Section 16 of the
Exchange Act.
Nominating
and Corporate Governance Committee
The primary purpose of the nominating and corporate governance
committee is to:
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identify and recommend to the board individuals qualified to
serve as directors of our company and on committees of the board;
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advise the board with respect to the board composition,
procedures and committees;
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develop and recommend to the board a set of corporate governance
guidelines and principles applicable to us; and
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review the overall corporate governance of our company and
recommend improvements when necessary.
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Upon the consummation of this offering,
Messrs. ,
and
will serve on the nominating and corporate governance committee,
and
Mr.
will serve as the chairman.
Compensation
Committee Interlocks and Insider Participation
Upon the completion of this offering, none of our executive
officers will serve on the compensation committee or board of
directors of any other company of which any of the members of
our compensation committee or any of our directors is an
executive officer.
Code of
Business Conduct and Ethics
We have adopted a code of business conduct and ethics that
applies to all of our employees, officers and directors,
including those officers responsible for financial reporting.
These standards are designed to deter wrongdoing and to promote
honest and ethical conduct. The code of business conduct and
ethics will be available on our website at
www.archipelagolearning.com. Any amendments to the code, or any
waivers of its requirements, will be disclosed on our website.
The information that appears on our website is not part of, and
is not incorporated into, this prospectus.
Executive
Officers
Each of our executive officers has been elected by our board of
directors and will serve until his or her successor is duly
elected and qualified.
Director
Compensation
Prior to this offering, we have not paid our directors any
compensation for their board service. We expect our board of
directors to approve a plan for annual compensation for our
directors who are not our employees or employees of Providence
Equity Partners, effective as of the date of the consummation of
this offering. These directors will receive an annual retainer
of $20,000 and a fee of $1,000 for each meeting they attend. The
annual retainer will be payable at the directors option
either 100% in cash or 100% in shares of our common stock. In
addition, these directors will receive an annual restricted
share award with a grant date fair market value of $25,000,
which will vest on the first anniversary of the grant date. The
non-management chair of the audit committee will receive an
additional $10,000 fee payable at his or her option either 100%
in cash or 100% in shares of our common stock. No separate
committee meeting fees will be paid.
All directors are reimbursed for reasonable travel and lodging
expenses incurred by them in connection with attending board and
committee meetings.
Indemnification
of Officer and Directors
Our certificate of incorporation and bylaws provide that we will
indemnify our directors and officers to the fullest extent
permitted by Delaware General Corporation Law, or DGCL. Upon the
completion of this offering, we intend to have in place
directors and officers liability insurance that
insures such persons against the costs of defense, settlement or
payment of a judgment under certain circumstances.
In addition, our certificate of incorporation will provide that
our directors will not be liable for monetary damages for breach
of fiduciary duty, except for liability relating to any breach
of the directors duty of loyalty, acts or omissions not in
good faith or which involve intentional misconduct or a knowing
violation of law, violations under Section 174 of the DGCL
or any transaction from which the director derived an improper
personal benefit.
85
In addition, prior to the completion of this offering, we will
enter into indemnification agreements with each of our executive
officers and directors. The indemnification agreements will
provide the executive officers and directors with contractual
rights to indemnification, expense advancement and
reimbursement, to the fullest extent permitted under the
Delaware General Corporation Law.
There is no pending litigation or proceeding naming any of our
directors or officers to which indemnification is being sought,
and we are not aware of any pending or threatened litigation
that may result in claims for indemnification by any director or
officer.
86
COMPENSATION
DISCUSSION AND ANALYSIS
This compensation discussion and analysis section provides
information about the material elements of the compensation
paid, awarded to or earned by our named executive
officers, who consist of our chief executive officer, our
senior vice president and chief financial officer, and our four
other most highly compensated executive officers. For 2008, the
named executive officers were:
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Tim McEwen, our President and Chief Executive Officer;
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James Walburg, our Executive Vice President, Chief Financial
Officer and Secretary;
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Ray Lowrey, our Senior Vice President and Chief Technology
Officer;
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Cameron Chalmers, our Vice President and Director;
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Julie Huston, our Vice President of Sales; and
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David Muzzo, our Vice President and Director.
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This compensation discussion and analysis section addresses and
explains the compensation practices that were followed in 2008
and prior periods, the numerical and related information in the
summary compensation and other tables presented below as well as
a discussion of our anticipated future compensation policy and
approach.
History
Prior to this offering, we were a privately held company with a
limited number of equityholders. As such, we have not been
subject to stock exchange listing requirements or SEC rules
requiring a majority of our board of directors be independent or
relating to the formation and functioning of board committees,
including a compensation committee. We intend to establish a
compensation committee in connection with this offering.
Most, if not all, of our prior compensation policies have been
the product of negotiations between the named executive officers
and our founders or the board of managers of Archipelago
Learning Holdings, LLC. Prior to the Providence Equity
Transactions, compensation for all of our employees was
determined solely by our founders, Messrs. Chalmers and
Muzzo. In connection with the Providence Equity Transactions and
the hiring of Messrs. McEwen, Walburg and Lowrey, we
entered into employment agreements with our founders,
Mr. Chalmers and Mr. Muzzo, as well as with certain of
our named executive officers, including Mr. McEwen,
Mr. Walburg and Mr. Lowrey. In August 2009, we
entered into an employment agreement with Ms. Huston. In
August 2009, Messrs. McEwen and Walburg entered into new
employment agreements, which we refer to as each of their
new employment agreements. The terms of all of those
employment agreements were negotiated by the employee and the
board of managers of Archipelago Learning Holdings, LLC.
Compensation decisions for 2008 relating to our named executive
officers who were party to employment agreements, including the
determination of annual bonuses and other incentive-based
awards, were also made by the board of managers of Archipelago
Learning Holdings, LLC. Compensation decisions for 2008 relating
to Ms. Huston, the only named executive officer who did not
have employment agreement in 2008, were made collectively by
Messrs. McEwen and Walburg, in consultation with the board
of managers of Archipelago Learning Holdings, LLC.
Objectives
and Philosophy of Executive Compensation Policy
Our objective is to maintain a compensation policy that provides
a competitive total executive compensation package that attracts
and retains individuals of exceptional ability and managerial
talent in a highly competitive market. Our executive
compensation program is designed to align executive compensation
with our key strategic, financial and operational goals and with
the long-term interests of our stockholders.
After the consummation of this offering, the compensation
committee will be responsible for implementing and administering
all aspects of our benefits and compensation plans and programs.
Members of our compensation committee will be outside
directors for the purposes of Section 162(m) of the
Internal
87
Revenue Code, as amended. We anticipate that the compensation
committee will make certain determinations in consultation with
and based on recommendations by Messrs. McEwen and Walburg.
For 2009, the compensation committee will review overall company
and individual performance, as well as the applicable terms of
any employment agreements, in connection with the review and
determination of each named executive officers
compensation. For company performance, it is anticipated that
the compensation committee will review service revenue, invoiced
sales and Adjusted EBITDA. See Prospectus
Summary Summary Historical Consolidated Financial
and Other Data and Managements Discussion and
Analysis of Financial Condition and Results of
Operations Components of Service Revenue and
Expense for more detailed descriptions of these metrics.
As an emerging growth company, we believe that increasing
revenue and profitability are directly related to increasing
stockholder value and linking compensation with company
performance in these areas is supportive of the long-term
interests of stockholders. Ms. Hustons performance
will also be based on the achievement of sales goals, including
overall sales, new business sales and sales to existing
customers. For individual performance, we also anticipate that
the compensation committee will review the executives
achievement of non-financial objectives and will consult with
and consider the recommendations of Mr. McEwen. The
compensation committee may also make compensation decisions on a
discretionary basis.
We anticipate that in future periods, the compensation committee
may engage an independent outside compensation consultant to
construct a peer group of companies, provide market information,
provide advice on market practices and support specific
decisions regarding compensation for named executive officers.
In addition, we expect that Messrs. McEwen and Walburg, in
consultation with the board of directors, will establish an
annual budget that will include sales targets and other
performance-related goals, which the compensation committee may
consult in making decisions with respect to bonuses and other
payments.
Tax and
Accounting Considerations
While we generally considered the financial accounting and tax
implications of our executive compensation, neither element was
a material consideration in the compensation awarded to our
named executive officers in 2008.
Elements
of Executive Compensation
Our executive compensation includes the following elements: base
salaries, annual performance bonuses, an equity compensation
plan, a defined contribution plan and a benefits package.
Base
Salary
We establish base salaries for our executive officers generally
based on the scope and essential elements of each of his or her
duties, as well as the abilities, performance and experience of
the named executive officers. We seek to set these salaries
competitively, with the intent to attract and retain our key
executive officers. Each of Messrs. McEwens,
Walburgs, Lowreys, Muzzos and Chalmerss
and Ms. Hustons employment agreement establishes
their respective base salaries, which may be increased at the
discretion of the board of managers of Archipelago Learning
Holdings, LLC based on their evaluation of our performance over
the year, the executive officers performance of his or her
duties and the impact of the executive officers
performance in driving our growth and earnings. We use Adjusted
EBITDA as a key measure in determining our performance and,
therefore, Adjusted EBITDA is another factor the board of
managers may consider in making adjustments to base salaries. We
anticipate that the board of directors and the compensation
committee may consider market practice in adjusting base
salaries as well. The board of managers of Archipelago Learning
Holdings, LLC approved increases in each of
Messrs. McEwens, Walburgs, Chalmerss and
Muzzos base salaries for 2008 and approved increases in
each of Messrs. McEwens and Walburgs base
salaries for 2009. The board of managers of Archipelago Learning
Holdings, LLC also approved each of Messrs. McEwens and
Walburgs new employment agreements. See
Employment Agreements.
Ms. Hustons base salary for 2008 was established by
the board of managers of Archipelago Learning Holdings, LLC in
consultation with Messrs. McEwen and Walburg and has been
88
reviewed on an annual basis, based on factors including the
general performance of our sales team, growth into additional
sales markets resulting in increased responsibility, the growth
of our sales team and annual increases in our sales. We
anticipate that Messrs. McEwen and Walburg will continue to
make recommendations and consult with our board of directors and
the compensation committee in making compensation decisions
after the completion of this offering.
Annual
Performance Bonus
We believe it is important to provide cash incentive bonuses to
provide incentives for our executive officers to meet annual
company and individual objectives established by our board of
directors, in consultation with Messrs. McEwen and Walburg
(other than bonuses for the chief executive officer and chief
financial officer, which were established solely by the board of
managers of Archipelago Learning Holdings, LLC and will be
established by our board of directors), and to reward
performance for meeting those objectives. Bonus arrangements are
identified in employment agreements and are generally determined
by company performance as measured against the budget for the
applicable year. For a discussion of the bonus arrangements in
the employment agreements for the named executive officers and
for amounts awarded in 2008, see Employment
Agreements and Grants of Plan-Based
Awards in 2008. In 2008, the board of managers of
Archipelago Learning Holdings, LLC made discretionary
adjustments to the bonus payments to Messrs. McEwen,
Walburg, Chalmers and Muzzo set forth in their respective
employment agreements based on an evaluation of our performance,
the executive officers performance of his duties and the
impact of the executive officers performance in driving
our growth and earnings. We use Adjusted EBITDA as a key measure
in determining our performance and therefore, Adjusted EBITDA is
another factor the board of managers considers in making
adjustments to annual bonus payments. In 2008, Adjusted EBITDA
was $21.9 million compared to $14.1 million in 2007
and $8.1 million in 2006. Given this 55% increase in
Adjusted EBITDA from 2007 to 2008 and 73% increase in Adjusted
EBITDA from 2006 to 2007, our board of managers approved
increases in bonus payment for certain of our executive officers
for both 2007 and 2008. We anticipate that the compensation
committee will also exercise a measure of discretion in
determining bonus awards in future periods based on similar
factors.
Executive officers and other employees who are not party to
employment agreements are also eligible for annual performance
bonuses. Ms. Huston, as the Vice President of Sales, is
eligible for a performance bonus twice a year, as set forth in
her employment agreement, and prior to her entry into an
employment agreement, as established by the board of directors
in consultation with Messrs. McEwen and Walburg, reflecting
performance during the two six-month sales cycles in a calendar
year, ending in June and December. Historically,
Messrs. McEwen and Walburg have determined
Ms. Hustons bonus based on the results during the
applicable period as compared with target sales levels,
previously set according to a formula tied to overall sales
results for the business and specific performance targets. We
expect that the compensation committee will continue to assess
Ms. Hustons and other members of the sales
teams performance bonus in this manner after the
consummation of this offering. Bonus payments for
Messrs. McEwen, Walburg, Lowrey, Chalmers and Muzzo are
made once a year after our financial results for the prior year
are available. Bonus payments for our other executive officers
and employees are made twice a year, based on six-month
performance periods. We expect that the compensation committee
will consult with Messrs. McEwen and Walburg and continue
to assess these performance bonuses in a similar manner after
the consummation of this offering.
Equity
Compensation Plan
In connection with the Providence Equity Transactions, we
established the 2007 Equity Compensation Plan as a long-term
compensation program that compensates our executive officers and
certain other employees using equity-based awards and
accordingly compensates our executive officers and certain other
employees based on the value of our equity. We believe that when
our executive officers possess an ownership interest in us, they
have a continuing stake in our long-term success.
Under the 2007 Equity Compensation Plan we granted Class B
and Class C shares in Archipelago Learning Holdings, LLC to
our executive officers and certain other employees in accordance
with the terms of
89
the Archipelago Learning Holdings, LLC Agreement. These
participation shares were granted to employees who we determined
to be key employees for our business, in connection with certain
employee promotions and to certain newly hired employees. The
Class B shares vest over time subject to the
participants continued employment by or service to
Archipelago Learning, LLC. The Class C shares are subject
to performance hurdles and holders of the Class C shares
are only entitled to distributions if he or she is employed by
or provides service to Archipelago Learning, LLC at the time
that distributions are made.
Each vested Class B share and Class C share is
entitled to participate in distributions in accordance with the
terms of the Archipelago Learning Holdings, LLC Agreement. No
holder of Class B or Class C shares is eligible to
receive distributions until the holders of the Class A and
Class A-2
shares have received distributions equal to 100% of their
capital contributions and the holders of Class A shares
have also received a preferred return of 12% per annum on the
Class A capital contributions. Once these distributions
have been made, holders of the Class A,
Class A-2
and vested Class B shares become eligible to receive
distributions subject to cumulative percent limitations. No
distribution can be made on account of a Class B share that
has not yet vested. Amounts that would otherwise be paid on
account of these shares are credited to the members
capital accounts and will be distributed once these shares have
vested. If any unvested shares are forfeited, such amounts will
be distributed to the Class A and
Class A-2
holders on a pro rata basis, in proportion to the number of
shares held by Class A and
Class A-2
holders. In addition, some of the Class B shares are
subject to a distribution threshold, which means they are not
entitled to receive any portion of any distribution until the
aggregate amount of distributions on all shares outstanding on
the date of grant of such Class B shares has exceeded a
specified distribution threshold. Once the distribution
threshold has been met, such Class B shares are entitled to
participate in distributions. The Class C shares are not
entitled to any portion of any distributions until the holders
of Class A and
Class A-2 shares
have received certain multiples of cash-based returns on their
respective investment in the Class A and
Class A-2 shares.
Once the Class B and Class C shares become entitled to
participate in distributions, each Class B and Class C
share entitled to participate in a distribution is entitled to a
pro rata amount of the distribution payable on the Class B
shares and Class C shares, respectively, in proportion to
the total number of Class B shares and Class C shares,
respectively.
All Class C shares and any unvested Class B shares
will be forfeited if any participant is no longer our employee.
All Class B and Class C shares will be forfeited if
the participants employment is terminated by us for cause
or by the participant without good reason. In addition, all
Class B shares and Class C shares will be forfeited
upon a holders breach of any covenants relating to
non-competition, non-solicitation or non-disclosure in any
agreement.
The initial public offering is treated as a liquidation event of
Archipelago Learning Holdings, LLC, and holders of Class B
shares and Class C shares will receive our common stock,
restricted common stock and/or restricted stock unit awards in
an amount equal to the value they would have received upon a
liquidation of Archipelago Learning Holding, LLC with
liquidation proceeds implied by the initial public offering
price. In connection with this offering and upon the
consummation of the Corporate Reorganization, Archipelago
Learning, Inc. will:
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issue an aggregate
of shares
of common stock to our officers, directors and employees who
hold Class B shares of Archipelago Learning Holdings, LLC
in exchange for all of their vested Class B shares;
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issue an aggregate
of shares
of restricted common stock subject to time-based vesting to our
officers, directors and employees in exchange for all of their
unvested Class B shares of Archipelago Learning Holdings,
LLC;
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issue an aggregate
of shares
of common stock and an aggregate
of
restricted stock unit awards subject to vesting based on, among
other things, the trading price of our common stock, to our
officers, directors and employees (other than our chief
executive officer, chief financial officer, chief technology
officer and co-founders) in exchange for their Class C
Shares; and
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issue an aggregate
of shares
of restricted common stock and an aggregate
of
restricted stock unit awards, in each case subject to vesting
based on, among other things, the cash returns to Providence
Equity Partners in respect of shares of common stock held by
Providence Equity Partners, to our chief executive officer,
chief financial officer, chief technology officer and
co-founders in exchange for their Class C shares.
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See Corporate Reorganization and Certain
Relationships and Related Person Transactions.
In addition, in connection with this offering, our board of
directors will adopt a new equity benefit plan as described
under 2009 Omnibus Incentive Plan
pursuant to which a total
of shares
of our common stock will be reserved for issuance and an
employee stock purchase plan described under
Employee Stock Purchase Plan pursuant to
which
shares of our common stock will be reserved for issuance. The
compensation committee will determine, subject to any employment
agreements, any future equity awards that each named executive
officer will be granted pursuant to the 2009 Omnibus Incentive
Plan.
Other
Benefits
We provide the following benefits to our named executive
officers on the same basis as other eligible employees:
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health, vision and dental insurance;
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life insurance;
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long-term and short-term disability; and
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a 401(k) defined contribution retirement plan.
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In addition, we provide a matching contribution to all employees
of up to 3% of employee contributions to the defined
contribution retirement plan, plus 50% of the amount of the plan
participants deferred compensation that exceeds 3% of the
participants compensation, but not in excess of 5% of the
participants compensation.
91
Summary
Compensation Table
The following table sets forth certain information with respect
to compensation for the years ended December 31, 2008, 2007
and 2006 earned by or paid to our named executive officers.
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Class B
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Class C
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Cash
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Equity
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Equity
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All Other
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Salary(1)
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Bonus
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Awards(2)
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Awards(2)
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Compensation
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Total
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Name and Principal Position
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Year
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($)
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($)
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($)
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($)
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($)
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($)
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Tim McEwen
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2008
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259,875
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260,000
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150,929
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6,404
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677,208
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President and
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2007
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199,904
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123,750
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146,794
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121,717
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134,059
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726,224
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Chief Executive Officer(3)
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2006
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James Walburg
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2008
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215,000
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215,000
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27,965
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6,086
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9,308
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473,359
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Executive Vice President,
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2007
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118,974
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100,000
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23,854
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19,779
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2,667
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265,274
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Chief Financial Officer and
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2006
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Secretary(4)
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Ray Lowrey
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2008
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82,462
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130,000
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6,074
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218,536
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Senior Vice President and
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2007
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Chief Technology Officer(5)
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2006
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Julie Huston
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2008
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136,788
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132,500
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9,099
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6,086
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9,613
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294,086
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Vice President of Sales(6)
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2007
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134,203
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62,760
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5,505
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4,564
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4,815
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211,847
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2006
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249,829
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249,829
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Cameron Chalmers
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2008
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131,250
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100,000
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56,598
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5,285
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293,133
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Vice President(7)
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2007
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125,000
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125,000
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55,048
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45,644
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4,938
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355,630
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2006
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213,200
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213,200
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David Muzzo
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2008
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131,250
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100,000
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56,598
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8,973
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296,821
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Vice President(8)
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2007
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125,000
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125,000
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55,048
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45,644
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4,938
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355,630
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2006
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213,200
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213,200
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(1) |
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Reflects base salary earned during the fiscal year covered. |
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(2) |
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Reflects the compensation expense we recognized in 2008 and 2007
for financial statement reporting purposes under FASB Statement
No. 123(R) with respect to grants of Class B and C
participations shares to the named executive officer. These
values have been determined based on the assumptions set forth
in Note 12 to our consolidated financial statements for
2008. |
|
|
|
(3) |
|
Mr. McEwen elected to defer payment of his 2007 salary in
the amount of $199,904 to 2008. Mr. McEwens All
Other Compensation for 2008 includes $340 for group term
life insurance and $6,064 of 401(k) matching benefits.
Mr. McEwens All Other Compensation for
2007 includes $134,059 of relocation expenses. |
|
(4) |
|
Mr. Walburgs All Other Compensation for
2008 includes $258 for group term life insurance, $450 for
unused vacation days and $8,600 of 401(k) matching benefits.
Mr. Walburgs All Other Compensation for
2007 includes $2,667 of 401(k) matching benefits. |
|
(5) |
|
Mr. Lowreys All Other Compensation for
2008 includes $92 for group term life insurance and $5,982 of
relocation expenses. Mr. Lowreys Cash
Bonus for 2008 represents the portion of his signing bonus
that he was paid in 2008 pursuant to his employment agreement
and his annual performance bonus in 2008. See
Employment Agreements. |
|
(6) |
|
Ms. Hustons All Other Compensation for 2008
includes $41 for group term life insurance and $9,572 of 401(k)
matching benefits. Ms Hustons All Other
Compensation for 2007 includes $4,815 of 401(k) matching
benefits. Ms. Huston was engaged as an independent
contractor until January 2007, at which point she became
employed by us first as Regional Sales Manager and subsequently
as the Vice President of Sales. In 2006 she received $249,829 as
total compensation for her work as an independent contractor |
92
|
|
|
|
|
sales representative. An employment agreement was entered into
with Ms. Huston on August 28, 2009. See
Employment Agreements. |
|
(7) |
|
Mr. Chalmerss All Other Compensation for
2008 includes $35 for group term life insurance and $5,250 of
401(k) matching benefits. Mr. Chalmerss All
Other Compensation for 2007 includes $4,938 of 401(k)
matching benefits. |
|
(8) |
|
Mr. Muzzos All Other Compensation for
2008 includes $35 for group term life insurance and $8,938 of
401(k) matching benefits. Mr Muzzos All Other
Compensation for 2007 includes $4,938 of 401(k) matching
benefits. |
Grants of
Plan-Based Awards in 2008
The following table sets forth certain information with respect
to grants of plan-based awards for the year ended
December 31, 2008 with respect to the named executive
officers.
|
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|
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|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
All Other
|
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|
|
|
|
|
|
|
|
Estimated Future Payouts Under Equity
|
|
Equity
|
|
Grant Date
|
|
|
|
|
|
|
|
|
|
|
Incentive Plan Awards(2)
|
|
Awards:
|
|
Fair Value
|
|
|
|
|
Estimated Future Payouts Under Non-Equity Incentive Plan
Awards(1)
|
|
|
|
|
|
|
|
Number
|
|
Number of
|
|
of Equity
|
|
|
Grant
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
of Shares
|
|
Shares(3)
|
|
Awards(4)
|
Name
|
|
Date
|
|
($)
|
|
($)
|
|
($)
|
|
(#)
|
|
(#)
|
|
(#)
|
|
(#)
|
|
(#)
|
|
($)
|
|
Tim McEwen
|
|
|
|
|
|
|
|
|
|
|
103,950
|
|
|
|
129,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James Walburg
|
|
|
May 7, 2008
|
|
|
|
|
|
|
|
86,000
|
|
|
|
107,500
|
|
|
|
|
|
|
|
91,288
|
|
|
|
|
|
|
|
91,288
|
|
|
|
91,288
|
|
|
|
32,458
|
|
Ray Lowrey
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Julie Huston
|
|
|
May 7, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,288
|
|
|
|
|
|
|
|
91,288
|
|
|
|
91,288
|
|
|
|
32,458
|
|
Cameron Chalmers
|
|
|
|
|
|
|
|
|
|
|
87,544
|
|
|
|
87,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Muzzo
|
|
|
|
|
|
|
|
|
|
|
87,544
|
|
|
|
87,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents payments made pursuant to the annual performance
bonus described under Elements of Executive
Compensation Annual Performance Bonus and as
set forth in the employment agreements described under
Employment Agreements.
Messrs. McEwens, Walburgs and Lowreys
target amounts are equal to 40% of each of his base salary, and
their maximum amounts are equal to 50% of each of his base
salary, subject to increases or decreases at the discretion of
the board of managers of Archipelago Learning Holdings, LLC.
Messrs. Chalmerss and Muzzos target amounts and
maximum amounts are equal to two-thirds of each of his base
salary, subject to increases or decreases at the discretion of
the board of managers of Archipelago Learning Holdings, LLC. For
2008, Ms. Hustons compensation was determined by
board of managers of Archipelago Learning Holdings, LLC in
consultation with Messrs. McEwen and Walburg. The board of
managers of Archipelago Learning Holdings, LLC determined that
each of Messrs. McEwen, Walburg, Chalmers and Muzzo would
be awarded bonus amounts exceeding the maximum amounts set forth
for 2008. |
|
(2) |
|
Represents grants of Class C shares pursuant to the 2007
Equity Compensation Plan. The Class C shares are subject to
performance hurdles and holders of Class C shares are
entitled to distributions after holders of Class A and
Class A-2 shares
receive certain threshold multiples of cash-based returns on
their respective Class A and
Class A-2 shares,
subject to such Class C share holders continued
employment by or service to us. See Elements
of Executive Compensation Equity Compensation
Plan. |
|
(3) |
|
Represents grants of Class B shares, which vest ratably
over five years from the grant date subject to a
participants continued employment by or service to us. See
Elements of Executive Compensation
Equity Compensation Plan. |
|
|
|
(4) |
|
Represents managements determination of the fair market
value of the Class B shares and Class C shares on the
grant date computed in accordance with SFAS 123(R). |
93
Outstanding
Equity Awards at 2008 Fiscal Year-End
The following table sets forth certain information with respect
to outstanding equity awards of our named executive officers as
of December 31, 2008 with respect to the named executive
officers. The market value of the shares in the following table
is the fair value of such shares at December 31, 2008.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive
|
|
|
|
|
|
|
|
|
|
Equity Incentive
|
|
|
Plan Awards:
|
|
|
|
|
|
|
|
|
|
Plan Awards:
|
|
|
Market Value of
|
|
|
|
Number of Shares
|
|
|
Market Value of
|
|
|
Number of Shares
|
|
|
Shares That Have
|
|
|
|
That Have Not
|
|
|
Shares That Have
|
|
|
That Have Not
|
|
|
Not Vested ($)
|
|
Name
|
|
Vested (#)
|
|
|
Not Vested ($)(1)
|
|
|
Vested (#)(3)
|
|
|
(1)(3)
|
|
|
Tim McEwen
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Shares(2)
|
|
|
1,947,468
|
|
|
$
|
1,226,905
|
|
|
|
|
|
|
|
|
|
Class C Shares(3)
|
|
|
|
|
|
|
|
|
|
|
2,434,335
|
|
|
$
|
365,150
|
|
James Walburg
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Shares(2)
|
|
|
407,751
|
|
|
$
|
245,929
|
|
|
|
|
|
|
|
|
|
Class C Shares(3)
|
|
|
|
|
|
|
|
|
|
|
486,867
|
|
|
$
|
70,291
|
|
Ray Lowrey
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Shares(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class C Shares(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Julie Huston
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Shares(2)
|
|
|
164,318
|
|
|
$
|
92,566
|
|
|
|
|
|
|
|
|
|
Class C Shares(3)
|
|
|
|
|
|
|
|
|
|
|
182,576
|
|
|
$
|
24,648
|
|
Cameron Chalmers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Shares(2)
|
|
|
456,439
|
|
|
$
|
287,556
|
|
|
|
|
|
|
|
|
|
Class C Shares(3)
|
|
|
|
|
|
|
|
|
|
|
639,014
|
|
|
$
|
95,852
|
|
David Muzzo
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Shares(2)
|
|
|
456,439
|
|
|
$
|
287,556
|
|
|
|
|
|
|
|
|
|
Class C Shares(3)
|
|
|
|
|
|
|
|
|
|
|
639,014
|
|
|
$
|
95,852
|
|
|
|
|
(1) |
|
The market value of unvested shares is based on
managements determination of the fair market value at
December 31, 2008 computed in accordance with
SFAS No. 123(R). |
|
(2) |
|
The unvested Class B shares vest ratably on an annual basis
over five years subject to a participants continued
employment by or service to us. As of December 31, 2008,
486,867 of Mr. McEwens Class B shares were
scheduled to vest on January 10 of each of 2009, 2010, 2011 and
2012. As of December 31, 2008, 79,116 of
Mr. Walburgs Class B shares were scheduled to
vest on January 10 of each of 2009, 2010, 2011 and 2012, and
18,258 of Mr. Walburgs Class B shares were
scheduled to vest on May 7 of each of 2009, 2010, 2011, 2012 and
2013. As of December 31, 2008, Mr. Lowrey had no
Class B shares. As of December 31, 2008, 18,258 of
Ms. Hustons Class B shares were scheduled to
vest on January 10 of each of 2009, 2010, 2011, 2012 and 2013,
and 18,258 of Ms. Hustons Class B shares were
scheduled to vest on May 7 of each of 2009, 2010, 2011, 2012 and
2013. As of December 31, 2008, 182,575 of
Mr. Chalmerss Class B shares were scheduled to
vest on January 10 of 2009 and 91,288 of
Mr. Chalmerss Class B shares were scheduled to
vest on January 10 of each of 2010, 2011 and 2012. As of
December 31, 2008, 182,575 of Mr. Muzzos
Class B shares were scheduled to vest on January 10 of 2009
and 91,288 of Mr. Muzzos Class B shares were
scheduled to vest on January 10 of each of 2010, 2011 and 2012. |
|
(3) |
|
The Class C shares are subject to performance hurdles and
holders of Class C shares are entitled to distributions
after holders of Class A and
Class A-2 shares
receive certain threshold multiples of
cash-based
returns on their respective Class A and
Class A-2 shares,
subject to such Class C share holders continued
employment by or service to us. |
94
Stock
Vested
The following table sets forth certain information with respect
to equity awards of our named executive officers that have fully
vested as of December 31, 2008 with respect to the named
executive officers.
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares Acquired
|
|
|
Value Realized
|
|
|
|
on Vesting
|
|
|
on Vesting
|
|
Name
|
|
(#)(1)
|
|
|
($)(2)
|
|
|
Tim McEwen
|
|
|
486,867
|
|
|
|
306,726
|
|
James Walburg
|
|
|
79,116
|
|
|
|
49,843
|
|
Ray Lowrey
|
|
|
|
|
|
|
|
|
Julie Huston
|
|
|
18,258
|
|
|
|
11,502
|
|
Cameron Chalmers
|
|
|
182,575
|
|
|
|
115,022
|
|
David Muzzo
|
|
|
182,575
|
|
|
|
115,022
|
|
|
|
|
(1) |
|
Represents Class B shares for each of Messrs. McEwen,
Walburg, Chalmers and Muzzo and Ms. Huston that in each
case were granted on May 22, 2007 and vested on
January 10, 2008. |
|
(2) |
|
Represents managements determination of the fair market
value at December 31, 2008 computed in accordance with
SFAS No. 123(R). |
Pension
Benefits
In the year ended December 31, 2008, our named executive
officers received no pension benefits and had no accumulated
pension benefits.
Nonqualified
Deferred Compensation
In the year ended December 31, 2008, our named executive
officers received no nonqualified deferred compensation and had
no deferred compensation balances.
Potential
Payments Upon Termination or Upon Change in Control
The information below describes and quantifies certain
compensation that would become payable under each named
executive officers employment agreement if, as of
December 31, 2008, his employment had been terminated, if
80% of the voting securities of Archipelago Learning Holdings,
LLC or its subsidiaries were to be sold or if all or
substantially all of the assets of Archipelago Learning
Holdings, LLC or its subsidiaries were to be sold. Due to the
number of factors that affect the nature and amount of any
benefits provided upon the events discussed below, any actual
amounts paid or distributed may be different. Factors that could
affect these amounts include the timing during the year of any
such event.
Each of Messrs. McEwen, Walburg, Lowrey, Chalmers and Muzzo
and Ms. Huston are entitled to payment upon termination of their
employment pursuant to their respective employment agreements.
If any of Messrs. McEwen, Walburg, Lowrey, Chalmers or Muzzo or
Ms. Huston were terminated for cause or if he terminates his or
her employment without good reason, he or she will be entitled
to receive (i) his or her base salary though the
termination date; (ii) all benefits that are accrued but
unpaid as of the termination date; and (iii) all benefits
expressly available upon termination of employment in accordance
with the plans and programs applicable to each such executive
officer on the termination date. If any of Messrs. McEwen,
Chalmers or Muzzo were terminated without cause or if he
terminates his employment for good reason, he would additionally
be entitled to receive an amount payable equal to his base
salary during a
12-month
period commencing on the termination date; if Mr. Walburg
or Ms. Huston were terminated without cause or if he or she
terminates his or her employment for good reason, he or she
would additionally be entitled to an amount payable equal to his
or her base salary during a six-month period commencing on the
termination date; and if Mr. Lowrey were terminated without
cause or if he terminates his employment for good reason, he
would additionally be entitled to an amount payable equal to his
base salary during a nine-month period, in each case payable in
equal installments in
95
accordance with our normal payroll practices. Under the terms of
each of their new employment agreements, if either of
Messrs. McEwen or Walburg were terminated without cause or
for good reason, he would additionally be entitled to receive a
bonus or pro-rated bonus for the year in which the termination
date fell. In addition, under the terms of his new employment
agreement, Mr. Walburg would also be entitled to an amount
payable equal to his base salary during a
12-month
period upon termination without cause or for good reason. If any
of Messrs. McEwen, Chalmers or Muzzo or Ms. Huston is
terminated as a result of the expiration of the term of his or
her employment or as a result of his or her death or disability,
he or she is entitled to receive the same payments as he would
receive if he or she were terminated for cause. If any of
Messrs. Walburg or Lowrey were terminated as a result of
the expiration of the term of his employment, he would be
entitled to receive the same payments as he would receive if he
were terminated without cause, and if he were terminated as a
result of death or total disability, he would be entitled to
receive the same payments as he would receive if he were
terminated for cause. Under the terms of each of their new
employment agreements, if either of Messrs. McEwen or
Walburg is terminated as a result of the expiration of the term
of his employment or as a result of death or disability, he is
entitled to receive the same payments as he would receive if he
were terminated for cause.
Under each executive officers employment agreement,
cause generally means any of the following events:
(i) the executive officer repeatedly refuses or fails to
perform any of his or her duties and responsibilities, including
his or her persistent neglect of duty, chronic unapproved
absenteeism or refusal to comply with any lawful directive or
policy of the board of managers of Archipelago Learning
Holdings, LLC, in each case not cured within 30 days notice
to the executive officer by us, (ii) the executive officer
acts in a manner that constitutes gross and willful misconduct
or gross negligence in the performance of his or her duties,
(iii) the executive officer commits a material act of
fraud, personal dishonesty or misappropriation relating to us,
(iv) the executive officer commits a material act of
dishonesty, embezzlement, unauthorized use or disclosure of
confidential information or other intellectual property or trade
secrets or any other fraud with respect thereto, (v) a
breach by the executive officer of a material provision of his
or her employment agreement, (vi) the executive
officers indictment for or conviction of a felony or
misdemeanor involving material dishonesty or moral turpitude or
(vii) the executive officers habitual or repeated
misuse of, or habitual or repeated performance of the executive
officers duties under the influence of, alcohol or
controlled substances.
Under each executive officers employment agreement,
good reason generally means any of the following
events without the executive officers express written
consent: (i) any breach by us of a material provision of
the executive officers employment agreement, (ii) a
reduction in the executive officers base salary or
(iii) a material reduction or diminution of the executive
officers duties, responsibilities or authorities, which
are caused by an act by us.
In addition, upon the sale of more than 80% of the voting
securities of Archipelago Learning Holdings, LLC or its
subsidiaries or upon the sale of all or substantially all of the
assets of Archipelago Learning Holdings, LLC or its
subsidiaries, Mr. McEwen may be entitled to the repurchase
of his equity incentive participation shares in an amount equal
to $500,000 times the number of his complete years of employment
with Archipelago Learning Holdings, LLC, such amount to be
called the incentive gap, or a bonus equal to such incentive
gap, in each case not to exceed $2,000,000, if at the time of
the event, the total amount that he would receive in respect of
these equity incentive shares would be less than $500,000
multiplied by the total number of his complete years of
employment by Archipelago Learning Holdings, LLC or its
subsidiaries.
Furthermore, upon the sale of more than 80% of the voting
securities of Archipelago Learning Holdings, LLC or upon the
sale of all or substantially all of the assets of Archipelago
Learning Holdings, LLC, each of Messrs. McEwens,
Walburgs, Lowreys, Chalmerss, Muzzos and
Ms. Hustons unvested Class B shares will fully
vest to the extent that his or her employment is not terminated
prior to such sale or his or her employment with us is
terminated other than for cause within 60 days prior to the
execution of definitive and final agreements with respect to
such sale.
All Class C shares and any unvested Class B shares
will be forfeited if any participant is no longer our employee.
All Class B and Class C shares will be forfeited if
the participants employment is terminated
96
by us for cause or by the participant without good reason. In
addition, all Class B shares and Class C shares will
be forfeited upon a holders breach of any covenants
relating to non-competition, non-solicitation and non-disclosure
in any agreement.
The following table summarizes the potential payments to our
named executive officers assuming that such events occurred as
of December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
Severance
|
|
|
|
|
|
Benefit
|
|
|
Incentive
|
|
|
|
|
|
|
Amounts
|
|
|
Benefits
|
|
|
Continuation
|
|
|
Payments
|
|
|
Total
|
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Tim McEwen
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination for cause or without good reason
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination without cause or for good reason(1)
|
|
|
259,875
|
|
|
|
|
|
|
|
|
|
|
|
306,726
|
|
|
|
566,601
|
|
Termination other than for cause upon a change of
control(2)
|
|
|
259,875
|
|
|
|
|
|
|
|
|
|
|
|
1,533,631
|
|
|
|
1,793,506
|
|
Change of control(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,533,631
|
|
|
|
1,533,631
|
|
James Walburg
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination for cause or without good reason
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination without cause or for good reason(1)
|
|
|
107,500
|
|
|
|
|
|
|
|
|
|
|
|
49,843
|
|
|
|
157,343
|
|
Termination other than for cause upon a change of
control(2)
|
|
|
107,500
|
|
|
|
|
|
|
|
|
|
|
|
295,772
|
|
|
|
403,272
|
|
Change of control(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
295,772
|
|
|
|
295,772
|
|
Ray Lowrey
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination for cause or without good reason
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination without cause or for good reason(1)
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
240,000
|
|
Termination other than for cause upon a change of
control(2)
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
240,000
|
|
Change of control(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cameron Chalmers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination for cause or without good reason
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination without cause or for good reason(1)
|
|
|
131,250
|
|
|
|
|
|
|
|
|
|
|
|
115,022
|
|
|
|
246,272
|
|
Termination other than for cause upon a change of
control(2)
|
|
|
131,250
|
|
|
|
|
|
|
|
|
|
|
|
402,578
|
|
|
|
533,828
|
|
Change of control(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
402,578
|
|
|
|
402,578
|
|
David Muzzo
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination for cause or without good reason
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination without cause or for good reason(1)
|
|
|
131,250
|
|
|
|
|
|
|
|
|
|
|
|
115,022
|
|
|
|
246,272
|
|
Termination other than for cause upon a change of
control(2)
|
|
|
131,250
|
|
|
|
|
|
|
|
|
|
|
|
402,578
|
|
|
|
533,828
|
|
Change of control(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
402,578
|
|
|
|
402,578
|
|
Julie Huston
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination for cause or without good reason
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination without cause or for good reason(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,502
|
|
|
|
11,502
|
|
Termination other than for cause upon a change of
control(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,068
|
|
|
|
104,068
|
|
Change of control(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,068
|
|
|
|
104,068
|
|
|
|
|
(1) |
|
Severance Amounts includes the amount payable to
each of Messrs. McEwen, Walburg, Lowrey, Chalmers and Muzzo
pursuant to each of his agreement as of December 31, 2008.
Equity Incentive Payments includes the fair value of
each of Messrs. McEwens, Walburgs,
Lowreys, Chalmerss and |
footnotes continued on following page
97
|
|
|
|
|
Muzzos and Ms. Hustons vested Class B
shares (which we may repurchase from an employee upon a
termination without cause or for good reason) at
December 31, 2008. |
|
(2) |
|
Severance Amounts includes the amount payable to
each of Messrs. McEwen, Walburg, Lowrey, Chalmers and Muzzo
pursuant to his employment agreement as of December 31,
2008. Equity Incentive Payments includes the fair
value of each of Messrs. McEwens, Lowreys,
Chalmerss and Muzzos and Ms. Hustons
vested Class B shares (which we may repurchase from an
employee upon a termination other than for cause upon change of
control) at December 31, 2008 and unvested Class B
shares (which would be accelerated upon a change of control) at
December 31, 2008. |
|
(3) |
|
Equity Incentive Payments includes the fair value of
each of Messrs. McEwens, Walburgs,
Chalmerss and Muzzos and Ms. Hustons
vested Class B shares (which each employee would in any
case be entitled to) at December 31, 2008 and unvested
Class B shares (which would be accelerated upon a change of
control) at December 31, 2008. |
Employment
Agreements
We have entered into employment agreements with each of
Mr. McEwen, our chief executive officer, Mr. Walburg,
our chief financial officer, Mr. Lowrey, our chief
technology officer, Ms. Huston, our vice president of
sales, Mr. Chalmers, our vice president, Mr. Muzzo,
our vice president and Mr. Martijn Tel, our chief operating
officer.
Pursuant to the terms of their respective employment agreements,
Mr. McEwens annual base salary is $247,500,
Mr. Walburgs annual base salary is $200,000,
Mr. Lowreys annual base salary is $320,000,
Mr. Chalmerss annual base salary is $125,000,
Mr. Muzzos annual base salary is $125,000,
Ms. Hustons base salary is $155,000 and
Mr. Tels base salary is $300,000. Pursuant to the
terms of each of their new employment agreements entered into in
August 2009, Mr. McEwens annual base salary is
$328,000 and Mr. Walburgs annual base salary is
$275,000. The board of managers of Archipelago Learning
Holdings, LLC may, in its sole discretion, make any increase in
any of Messrs. McEwens, Walburgs,
Lowreys, Chalmerss, Muzzos or Tels or
Ms. Hustons annual base salary, as it deems appropriate.
The board of managers of Archipelago Learning Holdings, LLC
approved increases in base salaries for Messrs. McEwen,
Walburg, Chalmers and Muzzo for 2008, for which their base
salaries were $259,875, $215,000, $131,250 and $131,250,
respectively, representing payment above their base salaries set
forth in their employment agreements of 5%, 7.5%, 5% and 5%,
respectively. The board of managers of Archipelago Learning
Holdings, LLC also approved increases in each of
Messrs. McEwens and Walburgs base salaries for
2009, for which their base salaries are $300,000 and $255,000,
respectively, representing payment above their base salaries set
forth in their employment agreements of approximately 21% and
28%, respectively. In addition, under the terms of Mr.
McEwens previous employment agreement, but not his new
employment agreement, the board of managers of Archipelago
Learning Holdings, LLC may consider in good faith an appropriate
adjustment to Mr. McEwens annual base salary if our
Adjusted EBITDA, as determined based on the provisions of our
credit facility as of the end of any fiscal year, exceeds
$25.0 million. In addition, each of Messrs. Chalmers
and Muzzo agreed that as a result of their reducing their
working hours and taking an extended leave of absence beginning
in or around June 2009 and ending in or around October 2009, as
of January 10, 2009 each of their base salaries beginning
would be $62,500, the total number of each of their vested
Class B shares would be 365,150.4 shares and the total
number of each of their unvested Class B shares would be
reduced by 273,862.8 shares.
Each of Messrs. McEwen, Walburg, Lowrey and Tel are
eligible to receive an annual performance bonus of up to 40% of
his base salary based on performance targets established by the
board of managers of Archipelago Learning Holdings, LLC in any
particular fiscal year, and if such performance targets are
exceeded in any fiscal year, the maximum bonus that each of
Messrs. McEwen, Walburg, Lowrey and Tel are eligible to
receive will be an amount equal to 50% of his base salary. For
2009, Mr. Tel will be eligible to receive a total bonus payment
of $20,000 in respect of the period beginning on the start date
of his employment on October 26, 2009 until
December 31, 2009. Each of Messrs. Chalmers and Muzzo
are eligible to receive an annual performance bonus in an amount
equal to up to two-thirds of his base salary based on, among
other things, performance targets established by the board of
managers of Archipelago Learning
98
Holdings, LLC. Under the terms of her employment agreement,
Ms. Huston is eligible to receive a semi-annual performance
bonus of up to 50% of her base salary based on performance
targets established by our board of directors for such
semi-annual period; and if such performance targets are exceeded
in any such period, the maximum bonus she is eligible to receive
is 60% of her base salary in a semi-annual period. Each of
Messrs. McEwen and Walburg under the terms of their new
employment agreements are eligible to receive an annual
performance bonus of up to 50% of his base salary based on
performance targets established by our board of directors in any
particular fiscal year; and if such performance targets are
exceeded in any fiscal year the maximum bonus he is eligible to
receive is 60% of his base salary. In addition, Mr. Lowrey
was eligible for an additional bonus payment of $55,000 to be
paid in 2009 upon achieving certain objectives between
September 29, 2008, the day he commenced his employment
with us, and December 31, 2008. Mr. Lowrey also
received a signing bonus of $150,000, of which $75,000 was paid
in the first payroll period after his start date and the
remainder of which was paid in the first payroll period in
January 2009. If Mr. Lowreys employment is terminated
for any reason prior to September 29, 2009, he is required
to repay us the full $150,000. If his employment is terminated
for any reason on or after September 29, 2009 but on or
before September 29, 2010, he is required to repay us
$75,000 of this signing bonus.
The employment agreements for each of Messrs. McEwen,
Walburg, Lowrey, Chalmers and Muzzo and Ms. Huston provide that
they are eligible to participate in our 2007 Equity Compensation
Plan. Mr. McEwen received 2,434,335 Class B shares and
2,434,335 Class C shares and Mr. Walburg received
395,579 Class B Shares and 395,579 Class C shares in
connection with their employment agreements. Mr. Lowrey
received 552,875 Class B shares and 552,875 Class C
shares, which represented an increase in the amounts set forth
in his employment agreement as a result of an updated valuation
of the shares approved by the board of managers of Archipelago
Learning Holdings, LLC. Each of Messrs. Chalmers and Muzzo
received 912,876 Class B shares and 912,876 Class C
shares in connection with their employment agreements. In
connection with the agreements relating to their leave of
absence, Messrs. Chalmers and Muzzo each forfeited 273,862
unvested Class B shares and retained 639,014 Class B
shares and 912,876 Class C shares. For a description of the
equity participation shares and vesting schedules see
Certain Relationships and Related Person
Transactions Participation Shares.
Mr. Tels employment agreement provides that he will
be eligible to participate in Archipelago Learning, Inc.s
stock option plan upon the completion of the initial public
offering at a level consistent with senior management who report
to the chief executive officer, as determined by the Board of
Directors of Archipelago Learning, Inc.
Messrs. McEwen, Walburg, Lowrey, Chalmers and Muzzo and Ms.
Huston are entitled to certain benefits if their employment is
terminated or upon other events. See Potential
Payments Upon Termination Upon Change in Control. Under
the terms of his employment agreement, Mr. Tel also is
entitled to payment upon termination of his employment. If
Mr. Tel is terminated for cause or if he terminates his
employment without good reason, he will be entitled to receive
(i) his base salary through the termination date;
(ii) all benefits that are accrued but unpaid as of the
termination date; and (iii) all benefits expressly
available upon termination of employment in accordance with the
plans and programs applicable to him. If Mr. Tel is
terminated without cause or if he terminates his employment for
good reason, he would additionally be entitled to receive an
amount payable equal to his base salary during a six-month
period commencing on the termination date, payable in equal
installments in accordance with his normal payroll practices,
and a bonus or a pro-rated bonus for the year in which the
termination date fell. If Mr. Tel is terminated as a result
of the expiration of the term of his employment or as a result
of death or disability, he is entitled to receive the same
payments as he would receive if he were terminated for cause.
The meanings of cause and good reason are the same in
Mr. Tels employment agreement as in the employment
agreements of the other executive officers. In addition, in
connection with Messrs. Chalmerss and Muzzos
scheduled leave of absence, each of them may be terminated for
cause if such leave of absence exceeds 120 days.
Non-Competition
and Non-Solicitation
The employment agreements for Messrs. McEwen, Walburg,
Lowrey, Chalmers, Muzzo and Tel or Ms. Huston contain
provisions relating to non-competition and non-solicitation.
Pursuant to each of his or her employment agreements (including
Messrs. McEwens and Walburgs new employment
agreements), each of
99
Messrs. McEwen and Lowrey has agreed not to compete with
us or solicit any of our employees for a period following one
year of his termination, each of Messrs. Walburg and Tel
and Ms. Huston has agreed not to compete with us or solicit any
of our employees for a period following six months of his or her
termination, and each of Messrs. Chalmers and Muzzo has
agreed not to compete with us or solicit any of our employees
for a period following two years of his termination.
2009
Omnibus Incentive Plan
We intend to adopt our 2009 Omnibus Incentive Plan, or the 2009
Plan, in connection with this offering. The 2009 Plan will
become effective prior to the consummation of this offering and
a total
of shares
of our common stock will be reserved for sale. The 2009 Plan
provides for grants of nonqualified stock options, incentive
stock options, stock appreciation rights, restricted stock,
other
stock-based
awards and performance-based compensation. Directors, officers
and other employees of us and our subsidiaries, as well as other
individuals performing services for us, will be eligible for
grants under the 2009 Plan. The purpose of the 2009 Plan is to
provide incentives that will attract, retain and motivate highly
competent officers, directors, employees and other service
providers by providing them with appropriate incentives and
rewards either through a proprietary interest in our long-term
success or compensation based on their performance in fulfilling
their personal responsibilities. The following is a summary of
the material terms of the 2009 Plan, but does not include all of
the provisions of the 2009 Plan. For further information about
the 2009 Plan, we refer you to the complete copy of the 2009
Plan, which we will file as an exhibit to the registration
statement of which this prospectus is a part.
Administration
The 2009 Plan provides for its administration by the
compensation committee of our board of directors or any
committee designated by our board of directors to administer the
2009 Plan. The committee is empowered to determine the form,
amount and other terms and conditions of awards, clarify,
construe or resolve any ambiguity in any provision of the 2009
Plan or any award agreement and adopt such rules, forms,
instruments and guidelines for administering the 2009 Plan as it
deems necessary or proper. All actions, interpretations and
determinations by the committee or by our board of directors are
final and binding.
Shares
Available
The 2009 Plan makes available an aggregate
of shares
of our common stock, subject to adjustments. In the event that
any outstanding award expires, is forfeited, cancelled or
otherwise terminated without the issuance of shares or is
otherwise settled for cash, shares of our common stock allocable
to such award, to the extent of such forfeiture, cancellation,
expiration, termination or settlement for cash, shall again be
available for the purposes of the 2009 Plan. If any award is
exercised by tendering shares of our common stock to us, either
as full or partial payment, in connection with the exercise of
such award under the 2009 Plan or to satisfy our withholding
obligation with respect to an award, only the number of shares
of our common stock issued net of such shares tendered will be
deemed delivered for purposes of determining the maximum number
of shares of our common stock then available for delivery under
the 2009 Plan.
Eligibility
for Participation
Members of our board of directors, as well as employees of, and
service providers to, us or any of our subsidiaries and
affiliates are eligible to participate in the 2009 Plan. The
selection of participants is within the sole discretion of the
committee.
Types
of Awards
The 2009 Plan provides for the grant of nonqualified stock
options, incentive stock options, stock appreciation rights,
shares of restricted stock, or restricted stock,
other stock-based awards and performance-based compensation,
collectively, the awards. The committee will, with
regard to each award, determine the terms and conditions of the
award, including the number of shares subject to the award, the
vesting terms of the award, and
100
the purchase price for the award. Awards may be made in
assumption of or in substitution for outstanding awards
previously granted by us or our affiliates, or a company
acquired by us or with which we combine.
Award
Agreement
Awards granted under the 2009 Plan shall be evidenced by award
agreements (which need not be identical) that provide additional
terms and conditions associated with such awards, as determined
by the committee in its sole discretion; provided, however, that
in the event of any conflict between the provisions of the 2009
Plan and any such award agreement, the provisions of the 2009
Plan shall prevail.
Options
An option granted under the 2009 Plan will permit a participant
to purchase from us a stated number of shares at an option price
established by the committee, subject to the terms and
conditions described in the 2009 Plan, and such additional terms
and conditions, as established by the committee, in its sole
discretion, that are consistent with the provisions of the 2009
Plan. Options shall be designated as either a nonqualified stock
option or an incentive stock option, provided that options
granted to non-employee directors and other non-employee service
providers shall be nonqualified stock options. An option granted
as an incentive stock option shall, to the extent it fails to
qualify as an incentive stock option, be treated as a
nonqualified option. None of us, including any of our affiliates
or the committee, shall be liable to any participant or to any
other person if it is determined that an option intended to be
an incentive stock option does not qualify as an incentive stock
option. Each option shall conform to the requirements of the
2009 Plan, and may contain such other provisions as the
committee shall deem advisable.
The exercise price of an option granted under the 2009 Plan may
not be less than 100% of the fair market value of a share of our
common stock on the date of grant, provided the exercise price
of an incentive stock option granted to a person holding greater
than 10% of our voting power may not be less than 110% of such
fair market value on such date. The committee will determine the
term of each option at the time of grant in its discretion;
however, the term may not exceed ten years (or, in the case of
an incentive stock option granted to a ten percent stockholder,
five years).
Stock
Appreciation Rights
A stock appreciation right entitles the holder to receive, upon
its exercise, the excess of the fair market value of a specified
number of shares of our common stock on the date of exercise
over the grant price of the stock appreciation right. The
payment of the value may be in the form of cash, shares of our
common stock, other property or any combination thereof, as the
committee determines in its sole discretion. Subject to the
terms of the 2009 Plan and any applicable award agreement, the
grant price (which shall not be less than 100% of the fair
market value of a share of our common stock on the date of
grant), term, methods of exercise, methods of settlement, and
any other terms and conditions of any stock appreciation right
shall be determined by the committee. The term of a stock
appreciation right may not exceed 10 years.
Restricted
Stock
An award of restricted stock is a grant of a specified number of
shares of our common stock, which are subject to forfeiture upon
the occurrence of specified events. Each award agreement
evidencing a restricted stock grant shall specify the period(s)
of restriction, the number of shares of restricted stock subject
to the award, the performance, employment or other conditions
(including the termination of a participants service
whether due to death, disability or other cause) under which the
restricted stock may be forfeited to the company and such other
provisions as the committee shall determine. The committee may
require that the stock certificates evidencing such shares be
held in custody or bear restrictive legends until the
restrictions thereon shall have lapsed. Unless otherwise
determined by the committee and set forth in the award
agreement, a participant holding restricted stock will not have
the right to vote and will not receive dividends with respect to
such restricted stock.
101
Other
Stock-Based Awards
The committee, in its sole discretion, may grant awards of
shares of our common stock and awards that are valued, in whole
or in part, by reference to, or are otherwise based on the fair
market value of, such shares (the other stock-based
awards). Such other stock-based awards shall be in such
form, and dependent on such conditions, as the committee shall
determine, including, without limitation, the right to receive
one or more shares of our common stock (or the equivalent cash
value of such stock) upon the completion of a specified period
of service, the occurrence of an event
and/or the
attainment of performance objectives. Subject to the provisions
of the 2009 Plan, the committee shall determine to whom and when
other stock-based awards will be made, the number of shares of
our common stock to be awarded under (or otherwise related to)
such other stock-based awards, whether such other stock-based
awards shall be settled in cash, shares of our common stock or a
combination of cash and such shares, and all other terms and
conditions of such awards.
Performance-Based
Compensation
To the extent permitted by Section 162(m) of the Internal
Revenue Code, or the Code, the committee is authorized to design
any award so that the amounts or shares payable and
distributable thereunder are treated as qualified
performance-based compensation within the meaning of
Section 162(m) of the Code. The vesting, crediting
and/or
payment of performance-based compensation shall be based on the
achievement of objective performance goals based on one or more
of the following measures: (a) consolidated earnings before
or after taxes (including earnings before interest, taxes,
depreciation and amortization); (b) net income;
(c) operating income; (d) earnings per share;
(e) book value per share; (f) return on
shareholders equity; (g) expense management;
(h) return on investment; (i) improvements in capital
structure; (j) profitability of an identifiable business
unit or product; (k) maintenance or improvement of profit
margins; (l) stock price; (m) market share;
(n) revenues or sales; (o) costs; (p) cash flow;
(q) working capital; and (r) return on assets. Such
measures may be used to measure our performance or the
performance of any of our business units and may be used to
compare our performance against the performance of a group of
comparable companies, or a published index.
Transferability
Unless otherwise determined by the committee, an award shall not
be transferable or assignable by a participant except in the
event of his or her death (subject to the applicable laws of
descent and distribution) and any such purported assignment,
alienation, pledge, attachment, sale, transfer or encumbrance
shall be void and unenforceable against us or any of our
subsidiaries or affiliates. Any permitted transfer of the awards
to heirs or legatees of a participant shall not be effective to
bind us unless the committee has been furnished with written
notice thereof and a copy of such evidence as the committee may
deem necessary to establish the validity of the transfer and the
acceptance by the transferee or transferees of the terms and
conditions of the 2009 Plan.
Stockholder
Rights
Except as otherwise provided in the applicable award agreement,
a participant has no rights as a stockholder with respect to
shares of our common stock covered by any award until the
participant becomes the record holder of such shares.
Adjustment
of Awards
In the event of any corporate event or transaction such as a
merger, consolidation, reorganization, recapitalization,
separation, stock dividend, stock split, reverse stock split,
split up, spin-off, combination of shares of our common stock,
exchange of shares of our common stock, dividend in kind,
extraordinary cash dividend, or other like change in capital
structure (other than normal cash dividends) to our
stockholders, or any similar corporate event or transaction, the
committee, to prevent dilution or enlargement of
participants rights under the 2009 Plan, shall substitute
or adjust, in its sole discretion, the number and kind of shares
that
102
may be issued under the 2009 Plan or under particular forms of
awards, the number and kind of shares subject to outstanding
awards, the option price, grant price or purchase price
applicable to outstanding awards, the annual award limits,
and/or other
value determinations applicable to the 2009 Plan or outstanding
awards.
Upon the occurrence of a change in control, unless otherwise
specifically prohibited under applicable laws or by the rules
and regulations of any governing governmental agencies or
national securities exchanges, or unless the committee shall
determine otherwise in the award agreement, the committee is
authorized (but not obligated) to make adjustments in the terms
and conditions of outstanding awards, including without
limitation the following (or any combination thereof):
(i) continuation or assumption of such outstanding awards
under the 2009 Plan by us (if it is the surviving company or
corporation) or by the surviving company or corporation or its
parent; (ii) substitution by the surviving company or
corporation or its parent of awards with substantially the same
terms for such outstanding awards; (iii) accelerated
exercisability, vesting
and/or lapse
of restrictions under all then outstanding awards immediately
prior to the occurrence of such event; (iv) upon written
notice, provide that any outstanding awards must be exercised,
to the extent then exercisable, within fifteen days immediately
prior to the scheduled consummation of the event, or such other
period as determined by the committee (in either case contingent
upon the consummation of the event), and at the end of such
period, such awards shall terminate to the extent not so
exercised within the relevant period; and (v) cancellation
of all or any portion of outstanding awards for fair value (as
determined in the sole discretion of the committee) which, in
the case of options and stock appreciation rights, may equal the
excess, if any, of the value of the consideration to be paid in
the change of control transaction to holders of the same number
of shares subject to such options or stock appreciation rights
(or, if no such consideration is paid, fair market value of the
shares subject to such outstanding awards or portion thereof
being canceled) over the aggregate option price or grant price,
as applicable, with respect to such awards or portion thereof
being canceled.
Amendment
and Termination
Our board of directors may amend, alter, suspend, discontinue,
or terminate the 2009 Plan or any portion thereof or any award
(or award agreement) thereunder at any time.
Compliance
with Code Section 409A
To the extent that the 2009 Plan
and/or
awards are subject to Section 409A of the
U.S. Internal Revenue Code, or the Code, the committee may,
in its sole discretion and without a participants prior
consent, amend the 2009 Plan
and/or
awards, adopt policies and procedures, or take any other actions
(including amendments, policies, procedures and actions with
retroactive effect) as are necessary or appropriate to
(a) exempt the 2009 Plan
and/or any
award from the application of Section 409A of the Code,
(b) preserve the intended tax treatment of any such award,
or (c) comply with the requirements of Section 409A of
the Code, Department of Treasury regulations and other
interpretive guidance issued thereunder, including without
limitation any such regulations or other guidance that may be
issued after the date of the grant. This plan shall be
interpreted at all times in such a manner that the terms and
provisions of the 2009 Plan and awards are exempt from or comply
with Section 409A guidance.
Employee
Stock Purchase Plan
We intend to adopt our Employee Stock Purchase Plan, or the
ESPP, in connection with this offering. The ESPP is designed to
provide an incentive to attract, retain and reward eligible
employees. The ESPP will be generally available to all eligible
employees, including our named executive officers under the same
offering and eligibility terms, and will not be tied to any
performance
criteria. shares
of our common stock will be reserved for issuance under the
ESPP. The number of shares reserved pursuant to the ESPP is
subject to adjustment to prevent dilution or enlargement of
participants rights in the event of a stock split or other
change in our capital structure. The following is a summary of
the material terms of the ESPP, but does not include all of the
provisions of the ESPP. For further information about the ESPP,
we refer you to a complete copy of the ESPP, which we will file
as an exhibit to the registration statement of which this
prospectus is a part.
103
Administration
The ESPP will be administered by our board of directors or a
committee of the board. The plan administrator will have the
authority to construe and interpret the terms of the ESPP and
the purchase rights granted under it, to determine eligibility
to participate, and to establish policies and procedures for
administration of the ESPP.
Eligibility
All full-time employees of us or of any subsidiary or any other
employees designated by the administrator will be eligible to
participate in the ESPP, except that an employee may not be
granted a right to purchase stock under the ESPP if, immediately
after the grant, the employee would own stock possessing 5% or
more of the total combined voting power or value of all classes
of our capital stock or of any parent or subsidiary entity.
Offerings
The ESPP will be implemented through a series of six-month
offering periods.
Participation
Eligible employees who enroll in the ESPP may elect to have up
to a certain percent of their eligible compensation, to be
determined by the administrator, withheld and accumulated for
the purchase of shares at the end of each offering period in
which they participate. All eligible employees will be
automatically enrolled in the ESPPs initial offering
period and may purchase shares by delivering an exercise notice
and payment of the applicable purchase price prior to the
initial purchase date referred to above. Participation shall end
automatically upon termination of employment for any reason.
Purchase
of Shares
Amounts accumulated for each participant will be used to
purchase shares of our common stock at the end of each offering
period (each, a purchase date) at a price equal to
100% of the fair market value on the purchase date. The maximum
number of shares a participant may purchase in any calendar year
will be determined by the administrator.
Corporate
Transactions
In the event of certain corporate transactions, an acquiring or
successor corporation may assume our rights and obligations
under the ESPP. If the acquiring or successor corporation does
not assume such rights and obligations or does not substitute
them with similar rights and obligations, then the purchase date
of the offering periods then in progress will be accelerated to
a date prior to the effective time of the corporate transaction.
104
CERTAIN
RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
Archipelago
Learning Holdings, LLC Agreement
On June 30, 2008, investment funds affiliated with
Providence Equity Partners, together with Cameron Chalmers and
David Muzzo (our founders and vice presidents) MHT-SI, L.P. and
Jeanne Bodnar, the founder of TeacherWeb, together constituting
all of the members of Archipelago Learning Holdings, LLC
(formerly known as Study Island Holdings, LLC), entered into a
second amended and restated limited liability company agreement,
or the Archipelago Learning Holdings, LLC Agreement, which
governs its operations. Prior to the consummation of this
offering and in accordance with and as contemplated by the
limited liability company agreement of Archipelago Learning
Holdings, LLC, Archipelago Learning, Inc., a newly formed
Delaware corporation, will consummate the Corporate
Reorganization whereby Archipelago Learning Holdings, LLC will
become a wholly owned subsidiary of Archipelago Learning, Inc.
The Archipelago Learning Holdings, LLC Agreement in an amended
form will continue to govern the operations of Archipelago
Learning Holdings, LLC. See Corporate Reorganization.
Archipelago Learning Holdings, LLC created a board of managers
of seven persons to manage the company and its business affairs.
Of the seven managers, four are appointed by Providence Equity
Partners, two are our founders, Cameron Chalmers and David
Muzzo, and one is the current chief executive officer, Tim
McEwen.
The Archipelago Learning Holdings, LLC Agreement sets forth the
rights of the Class A,
A-2, B and C
shareholders and the vesting and forfeiture provisions of the
Class B and C shares. Holders of Class A and
Class A-2 shares
vote as a single class, with each holder of Class A or
Class A-2 shares
entitled to one vote per share that it owns. Holders of
Class B and Class C shares are not entitled to vote
their shares. The Class B shares of Archipelago Learning
Holdings, LLC vest ratably over five years subject to a
participants continued employment by or service to us. The
Class C shares are subject to performance hurdles and
holders of Class C shares are entitled to distributions
after holders of Class A and
Class A-2 shares
receive certain threshold multiples of cash-based returns on
their respective Class A and
Class A-2 shares,
subject to such Class C share holders continued
employment by or service to us. Both of the Class B and
Class C shares are granted under an equity incentive plan.
For a more detailed description of the Class B and
Class C shares, see Participation
Shares. The Class A,
A-2, B and C
shares will be exchanged for shares of the common stock, shares
of restricted common stock and restricted stock unit awards of
Archipelago Learning, Inc. in connection with the Corporate
Reorganization. See Corporate Reorganization.
Archipelago Learning Holdings, LLC may make distributions to its
members in accordance with the terms of the Archipelago Learning
Holdings, LLC Agreement in the sole discretion of the board of
managers. For a description of distributions made, see
Archipelago Learning Holdings LLC
Distributions.
The Archipelago Learning Holdings, LLC Agreement includes
indemnification provisions by Archipelago Learning
Holdings, LLC in favor of the board of managers, each current
and former manager and any of their respective affiliates.
Archipelago
Learning Holdings, LLC Distributions
From January 2007 through September 30, 2009, Archipelago
Learning Holdings, LLC paid aggregate distributions to its
equity holders of approximately $76 million, consisting of
$74.8 million in the year ended December 31, 2007 and
$1.3 million in the nine months ended September 30,
2009. These distributions were made in connection with the
Providence Equity Transactions and to enable equity holders to
meet their estimated tax obligations, and they include a
$73.2 million distribution made in November 2007 with the
proceeds of the term loan and cash on hand. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations. In October 2009,
Archipelago Learning Holdings, LLC made a special distribution
of $8.0 million to its equity holders representing a return
on such holders investment, which was paid in accordance
with the Archipelago Learning Holdings, LLC Agreement. In
addition, Archipelago Learning Holdings, LLC intends to make
distributions of approximately $1.5 million to its equity
holders to enable them to meet certain tax obligations
associated with the sale of TeacherWeb and approximately
105
$0.9 million to its equity holders to enable them to meet
their other estimated tax obligations for the period from
January 1, 2009 to the date of the Corporate
Reorganization, which will be based on Archipelago Learning
Holdings, LLCs estimated net taxable income from
January 1, 2009 to the date of the Corporate
Reorganization. Investors in this offering will not receive
these distributions.
Participation
Shares
In connection with the Providence Equity Transactions, we
adopted the 2007 Equity Incentive Plan, under which we granted
Class B and Class C shares of Archipelago Learning
Holdings, LLC to our executive officers and certain of our
employees as equity incentive compensation. The Class B and
Class C shares are awarded under the plan without any
up-front cost to a participant through a participation
agreement. The Class B shares are time-vesting shares that
vest ratably over five years subject to a participants
continued employment by or service to us. The Class C
shares are subject to performance hurdles and holders of
Class C shares are entitled to distributions after holders
of Class A and
Class A-2 shares
receive certain threshold multiples of cash-based returns on
their respective Class A and Class A-2 shares, subject
to such Class C share holders continued employment by
or service to us. All Class C shares and any unvested
Class B shares will be forfeited if any participant is no
longer our employee. All Class B and Class C shares
will be forfeited if the participants employment is
terminated by us for cause or by the participant without good
reason. In addition, all Class B shares and Class C
shares will be forfeited upon a holders breach of any
covenants relating to non-competition, non-solicitation or
non-disclosure in any agreement. Furthermore, upon the sale of
more than 80% of the voting securities of Archipelago Learning
Holdings, LLC or upon the sale of all or substantially all of
the assets of Archipelago Learning Holdings, LLC, holders of
unvested Class B shares will fully vest to the extent that
his or her employment is not terminated prior to such sale or
his or her employment with us is terminated other than for cause
within 60 days prior to the execution of definitive and
final agreements with respect to such sale.
Upon the consummation with this offering and in connection with
the Corporate Reorganization, holders of the Class B and
Class C shares will receive common stock, restricted stock
and restricted stock unit awards in exchange for their
Class B and Class C shares. See Corporate
Reorganization.
The following table sets forth the number and class of shares of
Archipelago Learning Holdings, LLC received by each named
executive officer as of November 2, 2009 and the number of
shares of common stock, restricted common stock and restricted
stock unit awards for which they will exchange their shares of
Archipelago Learning Holdings, LLC in connection with the
Corporate Reorganization:
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Number of Shares
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Number of Shares of
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of Restricted
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Number of Restricted
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Class B Shares
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Class C Shares
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Common Stock
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Common Stock
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Stock Unit Awards
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Timothy McEwen
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2,434,335
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2,434,335
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Cameron Chalmers
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639,014
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912,876
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David Muzzo
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639,014
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912,876
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Ray Lowrey
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552,875
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552,875
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James Walburg
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486,876
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486,876
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Julie Huston
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182,576
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182,576
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Stockholders
Agreement
Upon the completion of this offering, we intend to enter into a
stockholders agreement with our existing principal stockholders,
which include Providence Equity Partners, Cameron Chalmers,
David Muzzo, Jeanne Bodnar and MHT-SI, L.P. The stockholders
agreement will set forth certain terms relating to the rights of
our principal stockholders and restrictions on transfers of
shares of our common stock.
Registration
Rights Agreement
Upon the completion of this offering and in connection with the
Corporate Reorganization, we intend to enter into a registration
rights agreement with our principal shareholders, which include
Providence Equity
106
Partners, Cameron Chalmers, David Muzzo, Jeanne Bodnar and
MHT-SI L.P., providing for customary registration rights,
including demand, short-form and piggyback registration rights
of the common stock they will receive as a result of the
Corporate Reorganization.
Restricted
Stock and Restricted Stock Unit Awards
Upon the Corporate Reorganization, we intend to issue restricted
common stock and restricted stock unit awards in exchange for
the unvested Class B shares and the Class C shares.
Corporate
Reorganization
Prior to this offering, we conducted our business through
Archipelago Learning Holdings, LLC and its subsidiaries. Prior
to the consummation of this offering and in accordance with and
as contemplated by the limited liability company agreement of
Archipelago Learning Holdings, LLC, Archipelago Learning, Inc.,
a newly formed Delaware corporation, will directly and
indirectly, acquire all of the equity interests, of Archipelago
Learning Holdings, LLC in exchange for shares of common stock
and shares of restricted stock of Archipelago Learning, Inc. See
Corporate Reorganization.
MHT-Securities,
L.P. Agreements
On May 1, 2007, Archipelago Learning, LLC entered into an
agreement with MHT Securities, L.P. for the provision of
financial advice in connection with the identification,
evaluation and acquisition of one or more businesses. MHT
Securities, L.P. is an affiliate of MHT-SI, L.P. one of the
shareholders of Archipelago Learning Holdings, LLC. Under the
terms of the agreement, Archipelago Learning, LLC must pay a
transaction fee to MHT Securities, L.P. upon the successful
consummation of a merger, acquisition, consolidation, divesture
or similar transaction with any company initially identified and
contacted by MHT Securities, L.P. as a potential acquisition for
Archipelago Learning, LLC. The amount of this transaction fee is
dependent upon the size of the acquisition, but in no
circumstances less than $250,000. Archipelago Learning, LLC is
also responsible for reimbursing MHT Securities, L.P. for any
reasonable expenses incurred in connection with this agreement.
During 2008, we paid approximately $277,000 to MHT Securities,
L.P., consisting of $250,000 in connection with our acquisition
of TeacherWeb, and $27,000 in expenses.
Agreement
with CDW Corporation
We buy information technology and services from CDW Corporation,
a portfolio company of Providence Equity Partners, the majority
shareholder of Archipelago Learning Holdings, LLC. Although we
do not have any long-term contracts or purchase agreements
outstanding with CDW, we purchased approximately $344,000 and
$290,000 of information technology and services from CDW in 2008
and the nine months ended September 30, 2009, respectively.
Edline
Investment
In August 2009, in conjunction with Providence Equity
Partners acquisition of Edline, a private Chicago-based
educational technology company, we made a strategic minority
investment in Edline. We purchased 285,601 Series A shares
of Edline for $2.7 million, representing 6.9% of
Edlines outstanding Series A shares. In addition,
Edline borrowed $2.1 million from us pursuant to a
five-year promissory note, which bears interest at 9.5% per
annum and requires semi-annual interest-only payments. In
connection with these transactions, we received transaction fees
of $0.2 million. Edline provides online Learning Community
Management Systems, or LCMS, solutions that help schools improve
student performance by harnessing the power of parental
involvement, supporting teachers, and engaging the learning
community. Services include web hosting, content management,
information portals, tools for classroom management, gradebook,
notification, student data analytics, virtual storage and
related technologies.
We believe that we can benefit from strategic opportunities with
Edline, as Edline is capitalizing on the same trends in the K-12
education market as Study Island: (1) an increased focus on
higher academic achievement and (2) increased availability
and utilization of web-based technologies to enhance and
107
supplement instruction and improve school to home
communications. Accordingly, there are attractive strategic
partnership opportunities between us and Edline, including
linking Study Islands content to Edlines school and
district LCMS solutions and co-marketing arrangements to
capitalize on each companys customer base and sales force.
TeacherWeb
Sale
In October 2009, we were approached by Edline to consider
selling the operations of TeacherWeb. We believe the sale of
TeacherWeb, coupled with our earlier investment in Edline, will
enable us to focus on growing our core business of providing
online standards-based instruction, practice, assessment and
reporting programs through our Study Island and Northstar
Learning products, while partnering with Edline to integrate
Study Islands content with Edlines community
management solutions. We expect to complete our sale of the
operations of TeacherWeb to Edline in November 2009 for an
aggregate purchase price of $13 million, consisting of
$6.5 million in cash (to be reduced by approximately
$1.5 million of cash remaining on TeacherWebs balance
sheet), Series A shares of Edline valued at
$3.7 million and $2.8 million of five-year debt
securities that bear interest at 9.5% per annum and require
semi-annual interest-only payments. The sale will be completed
upon our finalizing an amendment to our credit facility
permitting the sale. In addition, we will prepay
$6.5 million on our term loan in connection with the sale.
As a result of the sale, TeacherWebs guarantee of our
credit facility will be released. Upon the completion of the
sale, we will hold 11.2% of Edlines outstanding
Series A shares and $4.9 million of Edlines
senior debt.
Board
Compensation
Upon consummation of this offering, directors who are our
employees or employees of our subsidiaries or employees of
Providence Equity Partners will receive no compensation for
their service as members of either our board of directors or
board committees.
On ,
our board of directors approved a plan for annual compensation
for our non-employee directors, effective as of the date of the
consummation of this offering. The non-employee directors will
receive an annual retainer of $
and a fee of $ for each meeting
they attend. The annual retainer will be payable at the
directors option either 100% in cash or 100% in shares of
our common stock. In addition, our non-employee directors will
receive an annual restricted share award with a grant date fair
market value of $ , which will vest
on the anniversary of the
grant date. The non-management chair of the audit committee will
receive an additional $ fee payable
at his or her option either 100% in cash or 100% in shares of
our common stock. No separate committee meeting fees will be
paid.
All directors are reimbursed for reasonable travel and lodging
expenses incurred by them in connection with attending board and
committee meetings.
Employment
Agreements
We have entered into employment agreements with each of
Messrs. McEwen, Walburg, Lowrey, Chalmers, Muzzo and Tel
and Ms. Huston. For more information regarding these
agreements, see Compensation Discussion and
Analysis Employment Agreements and
Compensation Discussion and
Analysis Potential Payments Upon Termination or
Change of Control.
Indemnification
Agreements
We intend to enter into indemnification agreements with each of
our directors and executive officers. These agreements, among
other things, require us to indemnify each director and
executive officer to the fullest extent permitted by Delaware
law, including indemnification of expenses such as
attorneys fees, judgments, fines and settlement amounts
incurred by the director or executive officer in any action or
proceeding, including any action or proceeding by or in right of
us, arising out of the persons services as a director or
executive officer.
108
Policies
for Approval of Related Person Transactions
In connection with this offering, we will adopt a written policy
relating to the approval of related person transactions. Our
audit committee will review and approve or ratify all
relationships and related person transactions between us and
(i) our directors, director nominees, executive officers or
their immediate family members, (ii) any 5% record or
beneficial owner of our common stock or (iii) any immediate
family member of any person specified in (i) and
(ii) above. Our controller will be primarily responsible
for the development and implementation of processes and controls
to obtain information from our directors and executive officers
with respect to related party transactions and for determining,
based on the facts and circumstances, whether we or a related
person have a direct or indirect material interest in the
transaction.
As set forth in the related person transaction policy, in the
course of its review and approval or ratification of a related
party transaction, the committee will consider:
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the nature of the related persons interest in the
transaction;
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the availability of other sources of comparable products or
services;
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the material terms of the transaction, including, without
limitation, the amount and type of transaction; and
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the importance of the transaction to us.
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Any member of the audit committee who is a related person with
respect to a transaction under review will not be permitted to
participate in the discussions or approval or ratification of
the transaction. However, such member of the audit committee
will provide all material information concerning the transaction
to the audit committee.
109
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table shows information regarding the beneficial
ownership of our common stock (i) immediately prior to and
(ii) as adjusted to give effect to this offering by:
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each person or group who is known by us to own beneficially more
than 5% of our common stock;
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each member of our board of directors and each of our named
executive officers;
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all members of our board of directors and our named executive
officers as a group; and
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each of the selling stockholders.
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For more information on selling stockholders, see Certain
Relationships and Related Person Transactions.
Beneficial ownership of shares is determined under rules of the
SEC and generally includes any shares over which a person
exercises sole or shared voting or investment power. Except as
noted by footnote, and subject to community property laws where
applicable, we believe based on the information provided to us
that the persons and entities named in the table below have sole
voting and investment power with respect to all shares of our
common stock shown as beneficially owned by them. Percentage of
beneficial ownership is based
on shares
of common stock outstanding as
of ,
2009 after giving effect to our Corporate Reorganization and
assuming an initial public offering price of
$ per share (the midpoint of the
price range set forth on the cover of this prospectus), shares
of common stock to be outstanding after the completion of this
offering, assuming no exercise of the over-allotment option,
or shares,
assuming full exercise of the over-allotment option. Except as
otherwise indicated, the persons named in the table below have
sole voting and investment power with respect to all shares of
capital stock held by them. Unless otherwise indicated, the
address for each holder listed below is Archipelago Learning,
Inc., 3400 Carlisle Street, Suite 345, Dallas, Texas 75204.
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Shares Beneficially
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Owned After
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this Offering
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Assuming Full
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Exercise of the
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Shares Beneficially Owned
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Shares Beneficially Owned
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Option to Purchase
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Before this Offering
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After this Offering(1)
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Additional Shares
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Number
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Percentage
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Shares
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Number
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Number
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Name and Address
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of Shares
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of Shares
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Offered(2)
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of Shares
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Percentage
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of Shares
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Percentage
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Providence Equity Partners V L.P.(3)
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MHT-SI L.P.(4)
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Timothy McEwen
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James Walburg
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Ray Lowrey
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Julie Huston
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Cameron Chalmers
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David Muzzo
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David Phillips(5)
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Michael Powell
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Peter Wilde(5)
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All board of director members and named executive officers as a
group ( persons)
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footnotes on following page
110
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* |
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Represents beneficial ownership less than 1% of our outstanding
common stock. |
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(1) |
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Beneficial ownership does not include any shares that may be
purchased in this offering. See Underwriting. |
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(2) |
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Represents the number of shares of common stock of Archipelago
Learning, Inc. to be offered after giving effect to the
Corporate Reorganization. If the underwriters exercise their
option to purchase additional shares of our common stock, the
additional shares sold by the selling stockholders will be
allocated as follows: . |
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(3) |
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The address of Providence Equity Partners V L.P. and Providence
Equity Partners V-A Study Island, LP is 50 Kennedy Plaza,
Suite 1801, Providence, Rhode Island, 02903. |
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(4) |
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The address of MHT-SI, L.P. is 2000 McKinney Avenue,
Suite 1200, Dallas, Texas, 75201. |
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(5) |
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Does not include shares held by Providence Equity Partners V
L.P. and its affiliated entities. By virtue of their
affiliations with Providence Equity Partners, each of
Messrs. Phillips and Wilde may be deemed to have or share
beneficial ownership of shares held by Providence Equity
Partners V L.P. and its affiliated entities. Each of
Messrs. Phillips and Wilde disclaims beneficial ownership
of such shares, except to the extent of his pecuniary interest
therein. |
111
DESCRIPTION
OF CAPITAL STOCK
The following is a description of the material terms of our
certificate of incorporation and bylaws as they will be in
effect following the Corporate Reorganization and prior to the
consummation of this offering. This summary does not purport to
be complete and is qualified in its entirety by reference to the
actual terms and provisions of our certificate of incorporation
and bylaws, copies of which will be filed as exhibits to the
registration statement of which this prospectus is a part.
Authorized
Capitalization
Upon the completion of the Corporate Reorganization prior to the
consummation of this offering, our authorized capital stock will
consist
of shares
of common stock, par value $0.001 per share,
and shares
of preferred stock, par value $
per share. Immediately following the completion of this
offering, shares
of common stock,
or shares
if the underwriters exercise their option to purchase additional
shares in full, will be outstanding, and there will be no
outstanding shares of preferred stock.
Common
Stock
The holders of our common stock are entitled to the following
rights.
Voting
Rights
Each share of common stock entitles the holder to one vote with
respect to each matter presented to our stockholders on which
the holders of common stock are entitled to vote. Our common
stock votes as a single class on all matters relating to the
election and removal of directors on our board of directors and
as provided by law, with each share of common stock entitling
its holder to one vote. Holders of our common stock will not
have cumulative voting rights. Except as otherwise provided in
our certificate of incorporation or required by law, all matters
to be voted on by our stockholders must be approved by a
majority of the shares present in person or by proxy at the
meeting and entitled to vote on the subject matter.
Dividend
Rights
Holders of common stock will share equally in any dividend
declared by our board of directors, subject to any preferential
rights of the holders of any outstanding preferred stock.
Liquidation
Rights
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of our affairs, holders of our common
stock would be entitled to share ratably in our assets that are
legally available for distribution to stockholders after payment
of liabilities. If we have any preferred stock outstanding at
such time, holders of the preferred stock may be entitled to
distribution
and/or
liquidation preferences. In either such case, we must pay the
applicable distribution to the holders of our preferred stock
before we may pay distributions to the holders of our common
stock.
Other
Rights
Our stockholders have no subscription, redemption or conversion
privileges. Our common stock does not entitle its holders to
preemptive rights for additional shares and does not have any
sinking fund provisions. All of the outstanding shares of our
common stock are fully paid and nonassessable. The rights,
preferences and privileges of the holders of our common stock
are subject to the rights of the holders of shares of any series
of preferred stock which we may issue.
112
Registration
Rights
Our existing shareholders have certain registration rights with
respect to our common stock pursuant to a registration rights
agreement. For further information regarding this agreement, see
Certain Relationships and Related Person
Transactions and Shares Eligible for Future
Sale.
Preferred
Stock
Our board of directors is authorized to provide for the issuance
of preferred stock in one or more series and to fix the
preferences, powers and relative, participating, optional or
other special rights, and qualifications, limitations or
restrictions thereof, including the dividend rate, conversion
rights, voting rights, redemption rights and liquidation
preference and to fix the number of shares to be included in any
such series without any further vote or action by our
stockholders. Any preferred stock so issued may rank senior to
our common stock with respect to the payment of dividends or
amounts upon liquidation, dissolution or winding up, or both. In
addition, any such shares of preferred stock may have class or
series voting rights. The issuance of preferred stock may have
the effect of delaying, deferring or preventing a change in
control of our company without further action by the
shareholders and may adversely affect the voting and other
rights of the holders of our common stock.
Anti-Takeover
Effects of the Delaware General Corporate Law and Our
Certificate of Incorporation and Bylaws
Upon the closing of this offering, our certificate of
incorporation and bylaws will contain provisions that may delay,
defer or discourage another party from acquiring control of us.
We expect that these provisions, which are summarized below,
will discourage coercive takeover practices or inadequate
takeover bids. These provisions are also designed to encourage
persons seeking to acquire control of us to first negotiate with
our board of directors, which we believe may result in an
improvement of the terms of any such acquisition in favor of our
stockholders. However, they also give our board the power to
discourage acquisitions that some stockholders may favor.
Section 203
of the Delaware General Corporate Law
Upon the closing of this offering, we will be subject to the
provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a
business combination with an interested
stockholder for a three-year period following the time
that this stockholder becomes an interested stockholder, unless
the business combination is approved in a prescribed manner. A
business combination includes, among other things, a
merger, asset or stock sale or other transaction resulting in a
financial benefit to the interested stockholder. An
interested stockholder is a person who owns 15% or
more of the corporations outstanding stock, or an
affiliate or associate of the corporation who did own 15% or
more of the corporations voting stock within three years
prior to the determination of interested stockholder status.
Under Section 203, a business combination between a
corporation and an interested stockholder is prohibited unless
it satisfies one of the following conditions:
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before the stockholder became interested, the board of directors
approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder;
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upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the voting stock
outstanding, shares owned by persons who are directors and also
officers, and employee stock plans, in some instances; or
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at or after the time the stockholder became interested, the
business combination was approved by the board of directors of
the corporation and authorized at an annual or special meeting
of the stockholders by the affirmative vote of at least
two-thirds of the outstanding voting stock which is not owned by
the interested stockholder.
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A Delaware corporation may opt out of Section 203 either
with an express provision in its original certificate of
incorporation or in an amendment to its certificate of
incorporation or bylaws approved by its stockholders. However,
we have not opted out, and do not currently intend to opt out,
of this provision. The statute could prohibit or delay mergers
or other takeover or change in control attempts and,
accordingly, may discourage attempts to acquire us.
Certificate
of Incorporation and Bylaw Provisions
Board Composition and Filling Vacancies. Our
bylaws will provide that directors may be removed only for cause
by the affirmative vote of the holders of a majority of the
voting power of the outstanding shares of common stock entitled
to vote. Furthermore, any vacancy on our board of directors,
however occurring, including a vacancy resulting from an
increase in the size of our board, may only be filled by the
affirmative vote of a majority of our directors then in office
even if less than a quorum.
No Stockholder Action by Written Consent. Our
certificate of incorporation will provide that, subject to the
rights of any holders of preferred stock to act by written
consent instead of a meeting, stockholder action may be taken
only at an annual meeting or special meeting of stockholders and
may not be taken by written consent instead of a meeting, unless
the action to be taken by written consent of stockholders and
the taking of this action by written consent has been expressly
approved in advance by the board of directors. Failure to
satisfy any of the requirements for a stockholder meeting could
delay, prevent or invalidate stockholder action.
Meetings of Stockholders. Our bylaws will
provide that only a majority of the members of our board of
directors then in office or the Chief Executive Officer may call
special meetings of the stockholders and only those matters set
forth in the notice of the special meeting may be considered or
acted upon at a special meeting of stockholders. Our bylaws will
limit the business that may be conducted at an annual meeting of
stockholders to those matters properly brought before the
meeting.
Advance Notice Requirements. Our bylaws will
establish an advance notice procedure for stockholders to make
nominations of candidates for election as directors or to bring
other business before an annual meeting of our stockholders. The
bylaws will provide that any stockholder wishing to nominate
persons for election as directors at, or bring other business
before, an annual meeting must deliver to our secretary a
written notice of the stockholders intention to do so. To
be timely, the stockholders notice must be delivered to or
mailed and received by us not later than the 60th day nor
earlier than the 90th day prior to the anniversary date of
the preceding annual meeting, except that if the annual meeting
is changed by more than 30 days from the date contemplated
at the time of the previous years proxy statement, we must
receive the notice not earlier than the 90th day prior to
such annual meeting and not later than the 60th day prior
to such annual meeting. If a public announcement of the date of
such annual meeting is made fewer than 70 days prior to the
date of such annual meeting, then notice must be received by us
no later than the tenth day following the public announcement of
the date of the meeting. The notice must include the information
specified in the bylaws.
Amendment to Bylaws and Certificate of
Incorporation. As required by Delaware law, any
amendment to our certificate of incorporation must first be
approved by a majority of our board of directors and, if
required by law or our certificate of incorporation, thereafter
be approved by a majority of the outstanding shares entitled to
vote on the amendment. Our bylaws may be amended by the
affirmative vote of a majority of the directors then in office,
subject to any limitations set forth in the bylaws, without
further stockholder action.
114
Blank Check Preferred Stock. 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 common stock.
Issuing preferred stock provides flexibility in connection with
possible acquisitions and other corporate purposes, but could
also, among other things, have the effect of delaying, deferring
or preventing a change in control of our company and may
adversely affect the market price of our common stock and the
voting and other rights of the holders of common stock.
Listing
We intend to apply to have our common stock listed on Nasdaq
under the symbol ARCL.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is
American Stock Transfer & Trust Company, LLC.
115
DESCRIPTION
OF MATERIAL INDEBTEDNESS
On November 16, 2007, Archipelago Learning, LLC, formerly
known as Study Island, LLC, as borrower, and the other persons
designated as credit parties from time to time, entered into a
credit facility providing for a $70.0 million term loan and
a $10.0 million revolving credit facility with General
Electric Capital Corporation, as a lender and as agent for all
lenders, NewStar Financial, Inc., as syndication agent, the
other parties thereto as lenders and GE Capital Markets, Inc.
and NewStar Financial, Inc., as joint lead arrangers and joint
bookrunners. This summary is not a complete description of all
of the terms of the agreements governing our credit facility.
The agreements setting forth the principal terms and conditions
of our credit facility are filed as exhibits to the registration
statement of which this prospectus forms a part.
In May 2009 the credit agreement governing the credit facility
was amended to permit the creation of AL Midco, LLC, or
AL Midco, a new wholly owned subsidiary of Archipelago
Learning Holdings, LLC, which assumed all of Archipelago
Learning Holdings, LLCs interests in Archipelago Learning,
LLC. AL Midco became a guarantor under the credit agreement
and Archipelago Learning Holdings, LLC was released as
guarantor. We expect to amend the credit agreement in November
2009 to permit the sale of TeacherWeb. This amendment further
modifies certain terms of the credit agreement, including adding
a LIBOR floor of 1.25% to the calculation of our interest rates
and reducing the letter of credit sublimit available to us under
the credit agreement from $2.0 million to
$1.0 million. In addition, we will prepay an aggregate
amount of $6.5 million upon the consummation of the sale of
TeacherWeb, which we expect to complete in November 2009 upon
finalizing the amendment. As a result of the sale, TeacherWeb,
Inc. will be released as a guarantor.
General
Our credit facility consists of a $70.0 million term loan
(of which $68.3 million was outstanding as of
September 30, 2009), which expires in November 2013, and a
$10.0 million revolving credit facility, none of which was
outstanding at September 30, 2009, which expires in
November 2013. We expect to repay $6.5 million of the term
loan in November 2009 in connection with the sale of TeacherWeb
upon finalizing an amendment to our credit facility permitting
the sale.
Upon the sale of TeacherWeb, the obligations under the credit
facility will be guaranteed only by AL Midco, as
TeacherWebs guarantee will be released. The credit
facility is secured on a first-priority basis by security
interests (subject to permitted liens) in substantially all
tangible and intangible assets, subject to certain exceptions,
owned by Archipelago Learning, LLC and AL Midco, including
pledges of the stock of Archipelago Learning, LLCs and
AL Midcos subsidiaries. In addition, any future
domestic subsidiaries of Archipelago Learning, LLC and
AL Midco will be required (subject to certain exceptions)
to guarantee the credit facility and grant liens on
substantially all of its assets to secure such guarantee.
Interest
and Fees
The term loan bears interest at rates based upon either a base
rate or LIBOR plus an applicable margin determined based on our
leverage ratio (3.25% as of September 30, 2009 and
December 31, 2008 and 4.00% as of December 31, 2007,
in each case for a LIBOR-based term loan). Amounts under the
revolving credit facility can be borrowed and repaid, from time
to time, at our option, subject to pro forma compliance with
certain financial covenants. We incurred $1.7 million of
debt financing costs in association with the term loan and
revolving credit facility during 2007. In 2008, we received a
refund of a portion of such costs in the amount of
$0.2 million.
As of September 30, 2009, $68.3 million of borrowings
were outstanding under the term loan and $0 were outstanding
under the revolving credit facility. As of December 31,
2008, $69.3 million and $0 million of borrowings were
outstanding under the term loan and the revolving credit
facility, respectively. For the year ended December 31,
2008 and for the nine months ended September 30, 2009, the
weighted average interest rate under the term loan was 7.03% and
3.71%, respectively, before giving effect to the interest rate
swap. The rate on our interest rate swap is the difference
between our fixed rate of 4.035% and the floating rate of
three-month
LIBOR.
116
In addition to paying interest on outstanding principal under
the credit facility, we are also required to pay a commitment
fee (0.25% as of September 30, 2009) on the average
daily unused commitments available to be drawn under the
revolving credit facility at a rate determined based on our
leverage ratio. Our leverage ratio was 2.15 to 1.00 as of
September 30, 2009. We are also required to pay letter of
credit fees, with respect to each letter of credit issued, at a
rate per annum equal to the applicable margin for LIBOR
revolving credit loans on the average daily amount of undrawn
letters of credit minus the amount of fronting fee referred to
below. We are also required to pay fronting fees, with respect
to each letter of credit issued, at a rate of 0.125% per annum
and to pay General Electric Capital Corporation certain
administrative fees from time to time, in its role as
administrative agent. Under certain circumstances, we may be
required to reimburse the lenders under our credit facility for
certain increased fees and expenses caused by a change
of law.
Prepayments
We have the right to optionally prepay our borrowings under the
term loan or the revolving credit facility, subject to the
procedures set forth in the credit facility. We may be required
to make prepayments on our borrowings under the term loan or the
revolving credit facility if we receive proceeds as a result of
certain asset sales, debt issuances, events of loss or if we
have excess cash flow (as defined in the credit facility).
Covenants
The credit facility requires us to maintain certain financial
ratios, including a leverage ratio (based on the ratio of
consolidated indebtedness, net of cash and cash equivalents
subject to control agreements, to consolidated EBITDA, defined
in the credit facility as earnings before interest, taxes,
depreciation, derivative losses, changes in deferred revenue,
stock based compensation, certain investments and permitted
acquisition expenses, certain permitted payments to Providence
Equity Partners, unusual non-recurring charges, certain agency
fees to the administrative agent and adjustments related to the
acquisition of TeacherWeb, or Adjusted EBITDA), an interest
coverage ratio (based on the ratio of Adjusted EBITDA to
consolidated interest expense, as defined in the credit
facility) and a fixed charge coverage ratio (based on the ratio
of Adjusted EBITDA to fixed charges, as defined in the credit
facility). Based on the formulations set forth in the credit
facility, as of September 30, 2009, we were required to
maintain a maximum leverage ratio of 4.50 to 1.00, a minimum
interest coverage ratio of 2.10 to 1.00 and a minimum fixed
charge coverage ratio of 1.40 to 1.00. As of September 30,
2009, our leverage ratio was 2.15 to 1.00, our interest coverage
ratio was 7.69 to 1.00 and our fixed charge coverage ratio was
4.73 to 1.00. The financial ratios we are required to maintain
become more restrictive over time.
The credit facility also contains certain affirmative and
restrictive covenants that, among other things, provide
limitations on the incurrence of additional indebtedness, liens
on property, sale and leaseback transactions, investments, loans
and advances, merger or consolidation, asset sales,
acquisitions, dividends, transactions with affiliates,
prepayments of any other indebtedness, modifications of our
organizational documents and restrictions on our subsidiaries.
The credit facility contains events of default that are
customary for similar facilities and transactions, including a
cross-default provision with respect to any other indebtedness
and an event of default that would be triggered by a change of
control, as defined in the credit facility, and which is not
expected to be triggered by this offering. As of
December 31, 2007, December 31, 2008 and
September 30, 2009, we were in compliance with all
covenants.
117
SHARES
ELIGIBLE FOR FUTURE SALE
Prior to this offering, there was no public market for our
common stock.
Sale of
Restricted Securities
After this offering, there will be
outstanding shares
(assuming no exercise of the underwriters option to
purchase additional shares),
or shares
(assuming full exercise of the underwriters option to
purchase additional shares), of our common stock. Of these
shares, all of the shares sold in this offering will be freely
tradable without restriction under the Securities Act of 1933,
as amended, unless purchased by our affiliates as
that term is defined in Rule 144 under the Securities Act.
The remaining shares of common stock that will be outstanding
after this offering are restricted securities within
the meaning of Rule 144 under the Securities Act.
Restricted securities may be sold in the public market only if
they are registered under the Securities Act or are sold
pursuant to an exemption from registration under Rule 144
under the Securities Act, which is summarized below. Subject to
the lock-up
agreements described below, shares held by our affiliates that
are not restricted securities may be sold subject to compliance
with Rule 144 of the Securities Act without regard to the
prescribed one-year holding period under Rule 144.
Lock-Up
Arrangements
In connection with this offering, we, each of our directors,
executive officers, the selling stockholders and substantially
all of our other stockholders have entered into
lock-up
agreements described under Underwriting that
restrict the sale of shares of our common stock for up
to days after the date of this prospectus, subject to
an extension in certain circumstances. In addition, in
connection with a registration rights agreement we intend to
enter into with our shareholders of Archipelago Learning
Holdings, LLC, in connection with this
offering, % of the shares of our common stock
acquired by holders of shares of Archipelago Learning Holdings,
LLC in connection with the Corporate Reorganization will not be
eligible for sale until days following the
expiration of the
lock-up
agreement with the underwriters and the remaining shares of our
common stock acquired by them in our corporate organization will
not become eligible for sale until the date that
is days following the expiration of the
lock-up
agreement with the underwriters.
Accordingly, shares
of our common stock will be available for
resale days following the expiration of the
lock-up
agreement,
and shares
of our common stock will be eligible for sale on the date that
is days following the expiration
of the
lock-up
agreement with the underwriters.
By exercising their registration rights, and selling a large
number of shares, the selling stockholders could cause the
prevailing market price of our common stock to decline.
Following the
lock-up
periods set forth in the stockholders agreement described
above, all of the shares of our common stock that are restricted
securities or are held by our affiliates as of the date of this
prospectus will be eligible for sale in the public market in
compliance with Rule 144 under the Securities Act.
Rule 144
The shares of our common stock sold in this offering will
generally be freely transferable without restriction or further
registration under the Securities Act, except that any shares of
our common stock held by an affiliate of ours may
not be resold publicly except in compliance with the
registration requirements of the Securities Act or under an
exemption under Rule 144 or otherwise. Rule 144
permits our common stock that has been acquired by a person who
is an affiliate of ours, or has been an affiliate of ours within
the past three months, to be sold into the market in an amount
that does not exceed, during any three-month period, the
greater of:
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one percent of the total number of shares of our common stock
outstanding; or
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the average weekly reported trading volume of our common stock
for the four calendar weeks prior to the sale.
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118
Such sales are also subject to specific manner of sale
provisions, a six-month holding period requirement, notice
requirements and the availability of current public information
about us.
Rule 144 also provides that a person who is not deemed to
have been an affiliate of ours at any time during the three
months preceding a sale, and who has for at least six months
beneficially owned shares of our common stock that are
restricted securities, will be entitled to freely sell such
shares of our common stock subject only to the availability of
current public information regarding us. A person who is not
deemed to have been an affiliate of ours at any time during the
three months preceding a sale, and who has beneficially owned
for at least one year shares of our common stock that are
restricted securities, will be entitled to freely sell such
shares of our common stock under Rule 144 without regard to
the current public information requirements of Rule 144.
Equity
Incentive Plans
We intend to file one or more registration statements on
Form S-8
under the Securities Act to register shares of our common stock
issued or reserved for issuance under our equity incentive
plans, including the equity incentive plan and the employee
stock purchase plan we intend to adopt in connection with this
offering. The first such registration statement is expected to
be filed soon after the date of this prospectus and will
automatically become effective upon filing with the SEC.
Accordingly, shares registered under such registration statement
will be available for sale in the open market, unless such
shares are subject to vesting restrictions with us or the
lock-up
restrictions described above.
119
CERTAIN
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the material
U.S. federal income and estate tax consequences of the
ownership and disposition of common stock that may be relevant
to you if you are a
non-U.S. Holder
(as defined below). This discussion is based on current law,
which is subject to change, possibly with retroactive effect.
This discussion is limited to
non-U.S. Holders
who hold shares of common stock as capital assets within the
meaning of the U.S. Internal Revenue Code. Moreover, this
discussion is for general information only and does not address
all the tax consequences that may be relevant to you in light of
your particular circumstances, nor does it discuss special tax
provisions, which may apply to you if you relinquished
U.S. citizenship or residence.
As used in this discussion, the term
non-U.S. Holder
means a beneficial owner of our common stock that is not, for
U.S. federal income tax purposes:
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an individual who is a citizen or resident of the United States;
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a corporation (or other entity classified as a corporation for
these purposes) created or organized in or under the laws of the
United States or of any political subdivision of the United
States;
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a partnership (including any entity or arrangement classified as
a partnership for these purposes);
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an estate whose income is includible in gross income for
U.S. federal income tax purposes regardless of its
source; or
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a trust, if (1) a U.S. court is able to exercise
primary supervision over the trusts administration and one
or more United States persons (within the meaning of
the U.S. Internal Revenue Code) has the authority to
control all of the trusts substantial decisions, or
(2) the trust has a valid election in effect under
applicable U.S. Treasury regulations to be treated as a
United States person.
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If you are an individual, you may, in many cases, be deemed to
be a resident alien, as opposed to a nonresident alien, by
virtue of being present in the United States for at least
31 days in the calendar year and for an aggregate of at
least 183 days during a three-year period ending in the
current calendar year. For these purposes, all the days present
in the current year, one-third of the days present in the
immediately preceding year, and one-sixth of the days present in
the second preceding year are counted. Resident aliens are
subject to U.S. federal income tax as if they were
U.S. citizens.
If a partnership, including any entity or arrangement treated as
a partnership for U.S. federal income tax purposes, is a
holder of our common stock, the tax treatment of a partner in
the partnership will generally depend upon the status of the
partner, the activities of the partnership and certain
determinations made at the partner level. A holder that is a
partnership, and the partners in such partnership, should
consult their own tax advisors regarding the tax consequences of
the purchase, ownership and disposition of our common stock.
EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT
A TAX ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX
CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR COMMON
STOCK, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE
LAWS OF ANY U.S. STATE, MUNICIPALITY OR OTHER TAXING
JURISDICTION, IN LIGHT OF THE PROSPECTIVE PURCHASERS
PARTICULAR CIRCUMSTANCES.
Dividends
We do not anticipate making any distributions on our common
stock in the foreseeable future. See Dividend
Policy. If distributions are paid on shares of our common
stock, such distributions will constitute dividends for
U.S. federal income tax purposes to the extent paid from
our current or accumulated earnings and profits, as determined
under U.S. federal income tax principles. If a distribution
exceeds our current and accumulated earnings and profits, it
will constitute a return of capital that reduces, but not below
zero, a
120
non-U.S.
Holders tax basis in our common stock. Any remainder will
constitute gain from the sale or exchange of our common stock.
If dividends are paid, as a
non-U.S. Holder,
you will be subject to withholding of U.S. federal income
tax at a 30% rate, or a lower rate as may be specified by an
applicable income tax treaty, on the gross amount of the
dividends paid to you. To claim the benefit of a lower rate
under an income tax treaty, you must properly file with the
payor an Internal Revenue Service
Form W-8BEN,
or successor form, claiming an exemption from or reduction in
withholding under the applicable tax treaty. In addition, where
dividends are paid to a
non-U.S. Holder
that is a partnership or other pass-through entity, persons
holding an interest in the entity may need to provide
certification claiming an exemption or reduction in withholding
under the applicable treaty.
If dividends are considered effectively connected with the
conduct of a trade or business by you within the United States
and, if required by an applicable income tax treaty, are
attributable to a U.S. permanent establishment of yours,
those dividends will be subject to U.S. federal income tax
on a net basis at applicable graduated individual or corporate
rates but will not be subject to withholding tax, provided an
Internal Revenue Service
Form W-8ECI,
or successor form, is filed with the payor. If you are a foreign
corporation, any effectively connected dividends may, under
certain circumstances, be subject to an additional branch
profits tax at a rate of 30% or a lower rate as may be
specified by an applicable income tax treaty.
You must comply with the certification procedures described
above, or, in the case of payments made outside the United
States with respect to an offshore account, certain documentary
evidence procedures, directly or under certain circumstances
through an intermediary, to obtain the benefits of a reduced
rate under an income tax treaty with respect to dividends paid
with respect to your common stock. In addition, if you are
required to provide an Internal Revenue Service
Form W-8ECI
or successor form, as discussed above, you must also provide
your tax identification number.
If you are eligible for a reduced rate of U.S. withholding
tax pursuant to an income tax treaty, you may obtain a refund of
any excess amounts withheld by timely filing an appropriate
claim for refund with the Internal Revenue Service.
Gain on
Disposition of Common Stock
As a
non-U.S. Holder,
you generally will not be subject to U.S. federal income or
withholding tax on any gain recognized on a sale or other
disposition of common stock unless:
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the gain is considered effectively connected with the conduct of
a trade or business by you within the United States and, if
required by an applicable income tax treaty, is attributable to
a U.S. permanent establishment of yours (in which case the
gain will be subject to U.S. federal income tax on a net
basis at applicable individual or corporate rates and, if you
are a foreign corporation, the gain may, under certain
circumstances, be subject to an additional branch profits tax
equal to 30% or a lower rate as may be specified by an
applicable income tax treaty);
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you are an individual who is present in the United States for
183 or more days in the taxable year of the sale or other
disposition and certain other conditions are met (in which case,
except as otherwise provided by an applicable income tax treaty,
the gain, which may be offset by U.S. source capital
losses, generally will be subject to a flat 30%
U.S. federal income tax, even though you are not considered
a resident alien under the U.S. Internal Revenue
Code); or
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we are or become a U.S. real property holding corporation
(USRPHC). We believe that we are not currently, and
are not likely not to become, a USRPHC. Even if we were to
become a USRPHC, gain on the sale or other disposition of common
stock by you generally would not be subject to U.S. federal
income tax provided:
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the common stock was regularly traded on an established
securities market; and
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you do not actually or constructively own more than 5% of the
common stock during the shorter of (i) the five-year period
ending on the date of such disposition or (ii) the period
of time during which you held such shares.
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121
Federal
Estate Tax
Individuals, or an entity the property of which is includable in
an individuals gross estate for U.S. federal estate
tax purposes, should note that common stock held at the time of
such individuals death will be included in such
individuals gross estate for U.S. federal estate tax
purposes and may be subject to U.S. federal estate tax,
unless an applicable estate tax treaty provides otherwise.
Information
Reporting and Backup Withholding Tax
We must report annually to the Internal Revenue Service and to
each of you the amount of dividends paid to you and the tax
withheld with respect to those dividends, regardless of whether
withholding was required. Copies of the information returns
reporting those dividends and withholding may also be made
available to the tax authorities in the country in which you
reside under the provisions of an applicable income tax treaty
or other applicable agreements.
Backup withholding is generally imposed (currently at a 28%
rate, which rate currently is scheduled to increase to 31% for
taxable years beginning on or after January 1,
2011) on certain payments to persons that fail to furnish
the necessary identifying information to the payor. You
generally will be subject to backup withholding tax with respect
to dividends paid on your common stock unless you certify your
non-U.S. status.
Dividends subject to withholding of U.S. federal income tax
as described above in Dividends would
not be subject to backup withholding.
The payment of proceeds of a sale of common stock effected by or
through a U.S. office of a broker is subject to both backup
withholding and information reporting unless you provide the
payor with your name and address and you certify your
non-U.S. status
or you otherwise establish an exemption. In general, backup
withholding and information reporting will not apply to the
payment of the proceeds of a sale of common stock by or through
a foreign office of a broker. If, however, such broker is, for
U.S. federal income tax purposes, a U.S. person, a
controlled foreign corporation, a foreign person that derives
50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States or a foreign
partnership that at any time during its tax year either is
engaged in the conduct of a trade or business in the United
States or has as partners one or more U.S. persons that, in
the aggregate, hold more than 50% of the income or capital
interest in the partnership, backup withholding will not apply
but such payments will be subject to information reporting,
unless such broker has documentary evidence in its records that
you are a
non-U.S. Holder
and certain other conditions are met or you otherwise establish
an exemption.
Any amounts withheld under the backup withholding rules
generally will be allowed as a refund or a credit against your
U.S. federal income tax liability provided the required
information is furnished in a timely manner to the Internal
Revenue Service.
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UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated is
acting as the representative of each of the underwriters named
below. Subject to the terms and conditions set forth in a
purchase agreement among us, the selling stockholders and the
underwriters, we and the selling stockholders have agreed to
sell to the underwriters, and each of the underwriters has
agreed, severally and not jointly, to purchase from us and the
selling stockholders, the number of shares of common stock set
forth opposite its name below.
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Number
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Underwriter
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of Shares
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Merrill Lynch, Pierce, Fenner & Smith
Incorporated
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Subject to the terms and conditions set forth in the purchase
agreement, the underwriters have agreed, severally and not
jointly, to purchase all of the shares sold under the purchase
agreement if any of these shares are purchased. If an
underwriter defaults, the purchase agreement provides that the
purchase commitments of the nondefaulting underwriters may be
increased or the purchase agreement may be terminated.
We and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of those
liabilities.
The underwriters are offering the shares, subject to prior sale,
when, as and if issued to and accepted by them, subject to
approval of legal matters by their counsel, including the
validity of the shares, and other conditions contained in the
purchase agreement, such as the receipt by the underwriters of
officers certificates and legal opinions. The underwriters
reserve the right to withdraw, cancel or modify offers to the
public and to reject orders in whole or in part.
Commissions
and Discounts
The representative has advised us and the selling stockholders
that the underwriters propose initially to offer the shares to
the public at the public offering price set forth on the cover
page of this prospectus and to dealers at that price less a
concession not in excess of $ per
share. The underwriters may allow, and the dealers may reallow,
a discount not in excess of $ per
share to other dealers. After the initial offering, the public
offering price, concession or any other term of the offering may
be changed.
The following table shows the public offering price,
underwriting discount and proceeds before expenses to us and the
selling stockholders. The information assumes either no exercise
or full exercise by the underwriters of their overallotment
option.
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Per Share
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Without Option
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With Option
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Public offering price
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$
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$
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$
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Underwriting discount
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$
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$
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$
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Proceeds, before expenses, to us
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$
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$
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$
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Proceeds, before expenses, to the selling stockholders
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$
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$
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$
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The expenses of the offering, not including the underwriting
discount, are estimated at $ and
are payable by us and the selling stockholders.
Overallotment
Option
The selling stockholders have granted an option to the
underwriters to purchase up
to
additional shares at the public offering price, less the
underwriting discount. The underwriters may exercise this option
for 30 days from the date of this prospectus solely to
cover any overallotments. If the underwriters exercise this
option, each will be obligated, subject to conditions contained
in the purchase agreement, to purchase a number of additional
shares proportionate to that underwriters initial amount
reflected in the above table.
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No Sales
of Similar Securities
We and the selling stockholders, our executive officers and
directors and our other existing security holders have agreed
not to sell or transfer any common stock or securities
convertible into, exchangeable for, exercisable for, or
repayable with common stock, for 180 days after the date of
this prospectus without first obtaining the written consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Specifically, we and these other persons have agreed, with
certain limited exceptions, not to directly or indirectly
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offer, pledge, sell or contract to sell any common stock,
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sell any option or contract to purchase any common stock,
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purchase any option or contract to sell any common stock,
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grant any option, right or warrant for the sale of any common
stock,
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lend or otherwise dispose of or transfer any common stock,
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request or demand that we file a registration statement related
to the common stock, or
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enter into any swap or other agreement that transfers, in whole
or in part, the economic consequence of ownership of any common
stock whether any such swap or transaction is to be settled by
delivery of shares or other securities, in cash or otherwise.
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This lock-up
provision applies to common stock and to securities convertible
into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired
later by the person executing the agreement or for which the
person executing the agreement later acquires the power of
disposition. In the event that either (x) during the last
17 days of
lock-up
period referred to above, we issue an earnings release or
material news or a material event relating to the Company occurs
or (y) prior to the expiration of the
lock-up
period, we announce that we will release earnings results or
become aware that material news or a material event will occur
during the
16-day
period beginning on the last day of the
lock-up
period, the restrictions described above shall continue to apply
until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event.
NASDAQ
Stock Market LLC Listing
We expect the shares to be approved for listing on Nasdaq,
subject to notice of issuance, under the symbol ARCL.
Before this offering, there has been no public market for our
common stock. The initial public offering price will be
determined through negotiations among us, the selling
stockholders and the representative. In addition to prevailing
market conditions, the factors to be considered in determining
the initial public offering price are
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the valuation multiples of publicly traded companies that the
representative believes to be comparable to us,
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our financial information,
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the history of, and the prospects for, our company and the
industry in which we compete,
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an assessment of our management, its past and present
operations, and the prospects for, and timing of, our future
revenues,
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the present state of our development, and
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the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to ours.
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An active trading market for the shares may not develop. It is
also possible that after the offering the shares will not trade
in the public market at or above the initial public offering
price.
124
The underwriters do not expect to sell more than 5% of the
shares in the aggregate to accounts over which they exercise
discretionary authority.
Price
Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may
limit underwriters and selling group members from bidding for
and purchasing our common stock. However, the representative may
engage in transactions that stabilize the price of the common
stock, such as bids or purchases to peg, fix or maintain that
price.
In connection with the offering, the underwriters may purchase
and sell our common stock in the open market. These transactions
may include short sales, purchases on the open market to cover
positions created by short sales and stabilizing transactions.
Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the
offering. Covered short sales are sales made in an
amount not greater than the underwriters option to
purchase additional shares in the offering. The underwriters may
close out any covered short position by either exercising their
overallotment option or purchasing shares in the open market. In
determining the source of shares to close out the covered short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through
the overallotment option. Naked short sales are
sales in excess of the overallotment option. The underwriters
must close out any naked short position by purchasing shares in
the open market. A naked short position is more likely to be
created if the underwriters are concerned that there may be
downward pressure on the price of our common stock in the open
market after pricing that could adversely affect investors who
purchase in the offering. Stabilizing transactions consist of
various bids for or purchases of shares of common stock made by
the underwriters in the open market prior to the completion of
the offering.
The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representative has repurchased shares sold by or for the account
of such underwriter in stabilizing or short covering
transactions.
Similar to other purchase transactions, the underwriters
purchases to cover the syndicate short sales may have the effect
of raising or maintaining the market price of our common stock
or preventing or retarding a decline in the market price of our
common stock. As a result, the price of our common stock may be
higher than the price that might otherwise exist in the open
market.
Neither we nor any of the underwriters make any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
our common stock. In addition, neither we nor any of the
underwriters make any representation that the representative
will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
Electronic
Offer, Sale and Distribution of Shares
In connection with the offering, certain of the underwriters or
securities dealers may distribute prospectuses by electronic
means, such as
e-mail. In
addition, Merrill Lynch, Pierce, Fenner & Smith
Incorporated may facilitate Internet distribution for this
offering to certain of its Internet subscription customers.
Merrill Lynch, Pierce, Fenner & Smith Incorporated may
allocate a limited number of shares for sale to its online
brokerage customers. An electronic prospectus is available on
the website maintained by Merrill Lynch, Pierce,
Fenner & Smith Incorporated. Other than the prospectus
in electronic format, the information on the Merrill Lynch,
Pierce, Fenner & Smith Incorporated website is not
part of this prospectus.
Other
Relationships
Some of the underwriters and their affiliates have engaged in,
and may in the future engage in, investment banking and other
commercial dealings in the ordinary course of business with us
or our affiliates. They have received, or may in the future
receive, customary fees and commissions for these transactions.
125
Notice to
Prospective Investors in the EEA
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a
Relevant Member State) an offer to the public of any
shares which are the subject of the offering contemplated by
this prospectus may not be made in that Relevant Member State,
except that an offer to the public in that Relevant Member State
of any shares may be made at any time under the following
exemptions under the Prospectus Directive, if they have been
implemented in that Relevant Member State:
(a) to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the
last financial year; (2) a total balance sheet of more than
43,000,000 and (3) an annual net turnover of more
than 50,000,000, as shown in its last annual or
consolidated accounts;
(c) by the underwriters to fewer than 100 natural or legal
persons (other than qualified investors as defined
in the Prospectus Directive) subject to obtaining the prior
consent of the representative for any such offer; or
(d) in any other circumstances falling within
Article 3(2) of the Prospectus Directive;
provided that no such offer of shares shall result in a
requirement for the publication by us or any representative of a
prospectus pursuant to Article 3 of the Prospectus
Directive.
Any person making or intending to make any offer of shares
within the EEA should only do so in circumstances in which no
obligation arises for us or any of the underwriters to produce a
prospectus for such offer. Neither we nor the underwriters have
authorized, nor do they authorize, the making of any offer of
shares through any financial intermediary, other than offers
made by the underwriters which constitute the final offering of
shares contemplated in this prospectus.
For the purposes of this provision, and your representation
below, the expression an offer to the public in
relation to any shares in any Relevant Member State means the
communication in any form and by any means of sufficient
information on the terms of the offer and any shares to be
offered so as to enable an investor to decide to purchase any
shares, as the same may be varied in that Relevant Member State
by any measure implementing the Prospectus Directive in that
Relevant Member State and the expression Prospectus
Directive means Directive 2003/71/EC and includes any
relevant implementing measure in each Relevant Member State.
Each person in a Relevant Member State who receives any
communication in respect of, or who acquires any shares under,
the offer of shares contemplated by this prospectus will be
deemed to have represented, warranted and agreed to and with us
and each underwriter that:
(a) it is a qualified investor within the
meaning of the law in that Relevant Member State implementing
Article 2(1)(e) of the Prospectus Directive; and
(b) in the case of any shares acquired by it as a financial
intermediary, as that term is used in Article 3(2) of the
Prospectus Directive, (i) the shares acquired by it in the
offering have not been acquired on behalf of, nor have they been
acquired with a view to their offer or resale to, persons in any
Relevant Member State other than qualified investors
(as defined in the Prospectus Directive), or in circumstances in
which the prior consent of the representative has been given to
the offer or resale; or (ii) where shares have been
acquired by it on behalf of persons in any Relevant Member State
other than qualified investors, the offer of those shares to it
is not treated under the Prospectus Directive as having been
made to such persons.
Notice to
Prospective Investors in Switzerland
This document, as well as any other material relating to the
shares which are the subject of the offering contemplated by
this prospectus, do not constitute an issue prospectus pursuant
to Article 652a of the Swiss Code of Obligations. The
shares will not be listed on the SWX Swiss Exchange and,
therefore, the
126
documents relating to the shares, including, but not limited to,
this document, do not claim to comply with the disclosure
standards of the listing rules of SWX Swiss Exchange and
corresponding prospectus schemes annexed to the listing rules of
the SWX Swiss Exchange. The shares are being offered in
Switzerland by way of a private placement, i.e. to a
small number of selected investors only, without any public
offer and only to investors who do not purchase the shares with
the intention to distribute them to the public. The investors
will be individually approached by us from time to time. This
document, as well as any other material relating to the shares,
is personal and confidential and do not constitute an offer to
any other person. This document may only be used by those
investors to whom it has been handed out in connection with the
offering described herein and may neither directly nor
indirectly be distributed or made available to other persons
without our express consent. It may not be used in connection
with any other offer and shall in particular not be copied
and/or
distributed to the public in (or from) Switzerland.
Notice to
Prospective Investors in the Dubai International Financial
Centre
This document relates to an exempt offer in accordance with the
Offered Securities Rules of the Dubai Financial Services
Authority. This document is intended for distribution only to
persons of a type specified in those rules. It must not be
delivered to, or relied on by, any other person. The Dubai
Financial Services Authority has no responsibility for reviewing
or verifying any documents in connection with exempt offers. The
Dubai Financial Services Authority has not approved this
document nor taken steps to verify the information set out in
it, and has no responsibility for it. The shares which are the
subject of the offering contemplated by this prospectus may be
illiquid
and/or
subject to restrictions on their resale. Prospective purchasers
of the shares offered should conduct their own due diligence on
the shares. If you do not understand the contents of this
document you should consult an authorised financial adviser.
Notice to
Prospective Investors in Australia
This document has not been lodged with the Australian
Securities & Investments Commission and is only
directed to certain categories of exempt persons. Accordingly,
if you receive this document in Australia:
a. you confirm and warrant that you are either:
i. a sophisticated investor under
section 708(8)(a) or (b) of the Corporations Act 2001
(Cth) of Australia (Corporations Act);
ii. a sophisticated investor under
section 708(8)(c) or (d) of the Corporations Act and
that you have provided an accountants certificate to the
section 708(8)(c)(i) or (ii) of the Corporations Act
and related regulations before the offer has been made;
iii. a person associated with the company under
section 708(12) of the Corporations Act; or
iv. professional investor within the meaning of
section 708(11)(a) or (b) of the Corporations Act, and
to the extent that you are unable to confirm or warrant that you
are an exempt sophisticated investor, associated person or
professional investor under the Corporations Act any offer made
to you under this document is void and incapable of acceptance.
b. you warrant and agree that you will not offer any of the
shares issued to you pursuant to this document for resale in
Australia within 12 months of those shares being issued
unless any such resale offer is exempt from the requirement to
issue a disclosure document under section 708 of the
Corporations Act.
Notice to
Prospective Investors in Japan
The Shares have not been and will not be registered under the
Financial Instruments and Exchange Law, as amended (the
FIEL). This document is not an offer of securities
for sale, directly or indirectly, in Japan or to, or for the
benefit of, any resident of Japan (which term as used herein
means any person resident in Japan, including any corporation or
entity organized under the laws of Japan) or to others for
reoffer or resale, directly or indirectly, in Japan or to, or
for the benefit of, any resident of Japan, except pursuant to an
127
exemption from the registration requirements under the FIEL and
otherwise in compliance with such law and any other applicable
laws, regulations and ministerial guidelines of Japan.
Notice to
Prospective Investors in Hong Kong
This prospectus has not been approved by or registered with the
Securities and Futures Commission of Hong Kong or the Registrar
of Companies of Hong Kong. No person may offer or sell in Hong
Kong, by means of any document, any Shares other than
(a) to professional investors as defined in the
Securities and Futures Ordinance (Cap. 571) of Hong Kong
and any rules made under that Ordinance; or (b) in other
circumstances which do not result in the document being a
prospectus as defined in the Companies 121 Ordinance
(Cap. 32) of Hong Kong or which do not constitute an offer
to the public within the meaning of that Ordinance. No person
may issue or have in its possession for the purposes of issue,
whether in Hong Kong or elsewhere, any advertisement, invitation
or document relating to the Shares which is directed at, or the
contents of which are likely to be accessed or read by, the
public of Hong Kong (except if permitted to do so under the
securities laws of Hong Kong) other than with respect to Shares
which are or are intended to be disposed of only to persons
outside Hong Kong or only to professional investors
as defined in the Securities and Futures Ordinance and any rules
made under that Ordinance.
The contents have not been reviewed by any regulatory authority
in Hong Kong. You are advised to exercise caution in relation to
the offer. If you are in any doubt about any of the contents of
this document, you should obtain independent professional advice.
Notice to
Prospective Investors in Singapore
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore under the Securities and Futures
Act, Chapter 289 of Singapore (the Securities and Futures
Act). Accordingly, the shares may not be offered or sold or made
the subject of an invitation for subscription or purchase nor
may this prospectus or any other document or material in
connection with the offer or sale or invitation for subscription
or purchase of any shares be circulated or distributed, whether
directly or indirectly, to any person in Singapore other than
(a) to an institutional investor pursuant to
Section 274 of the Securities and Futures Act, (b) to
a relevant person, or any person pursuant to
Section 275(1A) of the Securities and Futures Act, and in
accordance with the conditions specified in Section 275 of
the Securities and Futures Act, or (c) pursuant to, and in
accordance with the conditions of, any other applicable
provision of the Securities and Futures Act.
Each of the following relevant persons specified in
Section 275 of the Securities and Futures Act who has
subscribed for or purchased shares, namely a person who is:
(a) a corporation (which is not an accredited investor) the
sole business of which is to hold investments and the entire
share capital of which is owned by one or more individuals, each
of whom is an accredited investor; or
(b) a trust (where the trustee is not an accredited
investor) whose sole purpose is to hold investments and each
beneficiary is an accredited investor;
should note that shares, debentures and units of shares and
debentures of that corporation or the beneficiaries rights
and interest in that trust shall not be transferable for six
months after that corporation or that trust has acquired the
shares under Section 275 of the Securities and Futures Act
except:
(a) to an institutional investor under Section 274 of
the Securities and Futures Act or to a relevant person, or any
person pursuant to Section 275(1A) of the Securities and
Futures Act, and in accordance with the conditions, specified in
Section 275 of the Securities and Futures Act;
(b) where no consideration is given for the
transfer; or
(c) by operation of law.
128
LEGAL
MATTERS
Weil, Gotshal & Manges LLP has passed upon the
validity of the common stock offered hereby on behalf of us.
Certain legal matters will be passed upon on behalf of the
underwriters by Fried, Frank, Harris, Shriver &
Jacobson LLP, New York, New York.
EXPERTS
The balance sheet of Archipelago Learning, Inc. as of
September 30, 2009, included in this prospectus, has been
audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report
appearing herein and elsewhere in the registration statement of
which this prospectus is a part. Such balance sheet is included
in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of Archipelago Learning Holdings, LLC
as of December 31, 2007 and 2008, and for each of the three
years in the period ended December 31, 2008, included in
this prospectus, have been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as
stated in their report appearing herein and elsewhere in the
registration of which this prospectus is a part. Such financial
statements are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
WHERE YOU
CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act with respect to the common stock
offered hereby. This prospectus does not contain all of the
information set forth in the registration statement and the
exhibits and schedules thereto. For further information with
respect to Archipelago Learning, Inc. and the common stock
offered hereby, you should refer to the registration statement
and to the exhibits and schedules filed therewith. Statements
contained in this prospectus regarding the contents of any
contract or any other document that is filed as an exhibit to
the registration statement are not necessarily complete, and
each such statement is qualified in all respects by reference to
the full text of such contract or other document filed as an
exhibit to the registration statement. A copy of the Archipelago
Learning, Inc. registration statement and the exhibits and
schedules thereto may be inspected without charge at the public
reference room maintained by the SEC located at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Copies of all or any portion of the
registration statements and the filings may be obtained from
such offices upon payment of prescribed fees. The public may
obtain information on the operation of the public reference room
by calling the SEC at
1-800-SEC-0330
or
(202) 551-8090.
The SEC maintains a website at www.sec.gov that contains
reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC.
You may obtain a copy of any of our filings, at no cost, by
writing or telephoning us at:
Archipelago Learning, Inc.
3400 Carlisle Street, Suite 345
Dallas, TX 75204
(800) 419-3191
129
INDEX TO
FINANCIAL STATEMENTS
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|
|
|
|
|
|
Page
|
|
Archipelago Learning, Inc.
|
|
|
|
|
|
|
|
|
|
Audited Financial Statement
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
|
|
Archipelago Learning Holdings, LLC
|
|
|
|
|
|
|
|
|
|
Audited Consolidated Financial Statements
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
F-9
|
|
|
|
|
F-10
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Archipelago Learning, Inc.
Dallas, Texas
We have audited the accompanying balance sheet of Archipelago
Learning, Inc. (the Company) as of
September 30, 2009. This financial statement is the
responsibility of the Companys management. Our
responsibility is to express an opinion on this financial
statement 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 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 Companys 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, such financial statement presents fairly, in all
material respects, the financial position of Archipelago
Learning, Inc. as of September 30, 2009, in conformity with
accounting principles generally accepted in the United States of
America.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
October 30, 2009
F-2
ARCHIPELAGO
LEARNING, INC.
|
|
|
|
|
ASSETS
|
Cash
|
|
$
|
1,000
|
|
|
|
|
|
|
STOCKHOLDER EQUITY
|
|
|
|
|
|
Common stock (par value $10.00 per share, 100 shares
authorized, issued and outstanding)
|
|
$
|
1,000
|
|
|
|
|
|
|
See notes to balance sheet.
F-3
ARCHIPELAGO
LEARNING, INC.
AS OF SEPTEMBER 30, 2009
Archipelago Learning, Inc. (the Company) was
incorporated as a Delaware corporation on August 4, 2009,
and has no material assets or any operations.
The Companys Balance Sheet has been prepared in accordance
with U.S. generally accepted accounting principles.
Separate Statements of Income, Changes in Stockholders
Equity and of Cash Flows have not been presented because this
entity has had no activity.
The Company has been capitalized with the issuance of
100 shares of Common Stock with a par value of $10.00 per
share for a total of $1,000.
F-4
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Managers and Stockholders of
Archipelago Learning Holdings, LLC
Dallas, Texas
We have audited the accompanying consolidated balance sheets of
Archipelago Learning Holdings, LLC and subsidiaries (the
Company) as of December 31, 2008 and 2007, and
the related consolidated statements of income, changes in
members equity and cash flows for each of the three years
in the period ended December 31, 2008. These financial
statements are the responsibility of the Companys
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. The Company is not required to
have, nor were we engaged to perform, an audit of its 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 Companys 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 audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Archipelago Learning Holdings, LLC and subsidiaries as of
December 31, 2008 and 2007, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States of
America.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
March 24, 2009 (September 2, 2009 as to earnings per
share described in Note 2, the fair value of financial
instruments described in Note 3, the investment described
in Note 7, and segment information described in
Note 15).
F-5
ARCHIPELAGO
LEARNING HOLDINGS, LLC
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
As of December 31,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009 (Note 2)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11,060
|
|
|
$
|
13,144
|
|
|
$
|
17,111
|
|
|
|
|
|
Accounts receivable net of allowance for doubtful
accounts
|
|
|
3,674
|
|
|
|
6,093
|
|
|
|
10,614
|
|
|
|
|
|
Short-term deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
469
|
|
|
|
357
|
|
|
|
2,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
15,203
|
|
|
|
19,594
|
|
|
|
29,812
|
|
|
|
|
|
PROPERTY AND EQUIPMENT Net
|
|
|
793
|
|
|
|
1,782
|
|
|
|
2,045
|
|
|
|
|
|
GOODWILL
|
|
|
94,373
|
|
|
|
103,267
|
|
|
|
103,267
|
|
|
|
|
|
INTANGIBLE ASSETS Net
|
|
|
15,551
|
|
|
|
16,106
|
|
|
|
14,578
|
|
|
|
|
|
INVESTMENT
|
|
|
|
|
|
|
|
|
|
|
2,734
|
|
|
|
|
|
NOTE RECEIVABLE
|
|
|
|
|
|
|
|
|
|
|
2,144
|
|
|
|
|
|
OTHER LONG-TERM ASSETS
|
|
|
1,671
|
|
|
|
1,276
|
|
|
|
1,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
127,591
|
|
|
$
|
142,025
|
|
|
$
|
155,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable trade
|
|
$
|
57
|
|
|
$
|
382
|
|
|
$
|
249
|
|
|
|
|
|
Wage and employee-related liabilities
|
|
|
1,640
|
|
|
|
1,918
|
|
|
|
1,474
|
|
|
|
|
|
Deferred revenue
|
|
|
15,819
|
|
|
|
24,632
|
|
|
|
31,964
|
|
|
|
|
|
Taxes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities
|
|
|
219
|
|
|
|
192
|
|
|
|
476
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
700
|
|
|
|
700
|
|
|
|
700
|
|
|
|
|
|
Interest payable
|
|
|
191
|
|
|
|
210
|
|
|
|
131
|
|
|
|
|
|
Interest rate swap
|
|
|
206
|
|
|
|
1,988
|
|
|
|
1,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
18,832
|
|
|
|
30,022
|
|
|
|
36,447
|
|
|
|
|
|
LONG-TERM DEBT Net of current portion
|
|
|
69,300
|
|
|
|
68,600
|
|
|
|
67,551
|
|
|
|
|
|
LONG-TERM DEFERRED REVENUE Net of current portion
|
|
|
1,112
|
|
|
|
2,290
|
|
|
|
4,505
|
|
|
|
|
|
LONG-TERM DEFERRED TAX LIABILITY
|
|
|
|
|
|
|
639
|
|
|
|
572
|
|
|
|
|
|
OTHER LONG-TERM LIABILITY (NOTE 10)
|
|
|
|
|
|
|
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
89,244
|
|
|
|
101,551
|
|
|
|
109,305
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (NOTE 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MEMBERS EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A shares (109,545,064 shares authorized, issued
and outstanding at December 31, 2007 and 2008 and
September 30, 2009)
|
|
|
34,792
|
|
|
|
34,792
|
|
|
|
34,792
|
|
|
|
|
|
Class A-2 shares
(no shares authorized, issued and outstanding at
December 31, 2007; 286,882 shares authorized, issued
and outstanding at December 31, 2008 and September 30,
2009)
|
|
|
|
|
|
|
750
|
|
|
|
750
|
|
|
|
|
|
Class B shares (6,085,837 shares authorized,
5,720,692 shares issued and outstanding at
December 31, 2007; 6,578,727 shares authorized,
5,355,440 shares issued and outstanding at
December 31, 2008; 6,578,727 shares authorized,
6,028,727 shares issued and outstanding at
September 30, 2009
|
|
|
345
|
|
|
|
684
|
|
|
|
941
|
|
|
|
|
|
Class C shares (6,085,837 shares authorized,
5,720,692 shares issued and outstanding at
December 31, 2007; 7,126,451 shares authorized,
5,903,164 shares issued and outstanding at
December 31, 2008; 7,126,451 shares authorized,
6,576,451 shares issued and outstanding at
September 30, 2009
|
|
|
286
|
|
|
|
302
|
|
|
|
343
|
|
|
|
|
|
Retained earnings
|
|
|
2,924
|
|
|
|
3,946
|
|
|
|
9,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
38,347
|
|
|
|
40,474
|
|
|
|
46,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock ($ par
value, shares
authorized, shares issued and
outstanding)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY
|
|
$
|
127,591
|
|
|
$
|
142,025
|
|
|
$
|
155,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-6
ARCHIPELAGO
LEARNING HOLDINGS, LLC
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2006
|
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(Predecessor)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
(Successor)
|
|
|
|
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERVICE REVENUE
|
|
$
|
10,065
|
|
|
|
$
|
18,250
|
|
|
$
|
32,068
|
|
|
$
|
22,319
|
|
|
$
|
32,685
|
|
COST OF REVENUE
|
|
|
343
|
|
|
|
|
750
|
|
|
|
2,178
|
|
|
|
1,253
|
|
|
|
2,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
9,722
|
|
|
|
|
17,500
|
|
|
|
29,890
|
|
|
|
21,066
|
|
|
|
29,962
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
2,793
|
|
|
|
|
7,669
|
|
|
|
13,193
|
|
|
|
9,516
|
|
|
|
10,630
|
|
Content development
|
|
|
712
|
|
|
|
|
1,206
|
|
|
|
2,162
|
|
|
|
1,496
|
|
|
|
2,586
|
|
General and administrative
|
|
|
2,581
|
|
|
|
|
5,010
|
|
|
|
6,644
|
|
|
|
4,632
|
|
|
|
7,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
6,086
|
|
|
|
|
13,885
|
|
|
|
21,999
|
|
|
|
15,644
|
|
|
|
20,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
3,636
|
|
|
|
|
3,615
|
|
|
|
7,891
|
|
|
|
5,422
|
|
|
|
9,687
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
(838
|
)
|
|
|
(5,161
|
)
|
|
|
(3,973
|
)
|
|
|
(2,092
|
)
|
Interest income
|
|
|
27
|
|
|
|
|
343
|
|
|
|
247
|
|
|
|
194
|
|
|
|
44
|
|
Derivative loss
|
|
|
|
|
|
|
|
(173
|
)
|
|
|
(2,119
|
)
|
|
|
(857
|
)
|
|
|
(415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
27
|
|
|
|
|
(668
|
)
|
|
|
(7,033
|
)
|
|
|
(4,636
|
)
|
|
|
(2,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
3,663
|
|
|
|
|
2,947
|
|
|
|
858
|
|
|
|
786
|
|
|
|
7,224
|
|
(Provision) benefit for income taxes
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
164
|
|
|
|
11
|
|
|
|
(348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
3,663
|
|
|
|
$
|
2,924
|
|
|
$
|
1,022
|
|
|
$
|
797
|
|
|
$
|
6,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per equity share attributable to members equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted (NOTE 2)
|
|
$
|
1,832
|
|
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average equity shares and equivalents outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted (NOTE 2)
|
|
|
2
|
|
|
|
|
109,545,064
|
|
|
|
109,545,064
|
|
|
|
109,545,064
|
|
|
|
109,545,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma provision for income taxes (NOTE 2)
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma net income (NOTE 2)
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma net income per common share (NOTE 2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma weighted-average common shares and
equivalents outstanding (NOTE 2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-7
ARCHIPELAGO
LEARNING HOLDINGS, LLC
CONSOLIDATED
STATEMENTS OF CHANGES IN MEMBERS EQUITY
(DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Study Island LP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class C
|
|
|
|
|
|
Members
|
|
|
|
Partner Capital
|
|
|
Class A Shares
|
|
|
Class A-2 Shares
|
|
|
Class B Shares
|
|
|
Shares
|
|
|
Retained
|
|
|
Equity
|
|
|
|
(Deficit)
|
|
|
Units
|
|
|
Value
|
|
|
Units
|
|
|
Value
|
|
|
Units
|
|
|
Value
|
|
|
Units
|
|
|
Value
|
|
|
Earnings
|
|
|
(Deficit)
|
|
|
|
(In thousands)
|
|
|
Predecessor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2005
|
|
$
|
(2,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
(6,354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
3,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2006
|
|
|
(5,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
|
(1,178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization due to change in ownership
|
|
|
6,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance Predecessor
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued
|
|
|
|
|
|
|
109,545
|
|
|
$
|
109,545
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
109,545
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
(74,753
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74,753
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,721
|
|
|
|
345
|
|
|
|
5,721
|
|
|
|
286
|
|
|
|
|
|
|
|
631
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,924
|
|
|
|
2,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2007
|
|
|
|
|
|
|
109,545
|
|
|
|
34,792
|
|
|
|
|
|
|
|
|
|
|
|
5,721
|
|
|
|
345
|
|
|
|
5,721
|
|
|
|
286
|
|
|
|
2,924
|
|
|
|
38,347
|
|
Shares issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
287
|
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
750
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
456
|
|
|
|
372
|
|
|
|
456
|
|
|
|
30
|
|
|
|
|
|
|
|
402
|
|
Forfeitures of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(822
|
)
|
|
|
(33
|
)
|
|
|
(274
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
(47
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,022
|
|
|
|
1,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2008
|
|
|
|
|
|
|
109,545
|
|
|
|
34,792
|
|
|
|
287
|
|
|
|
750
|
|
|
|
5,355
|
|
|
|
684
|
|
|
|
5,903
|
|
|
|
302
|
|
|
|
3,946
|
|
|
|
40,474
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,250
|
)
|
|
|
(1,250
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
674
|
|
|
|
257
|
|
|
|
673
|
|
|
|
41
|
|
|
|
|
|
|
|
298
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,876
|
|
|
|
6,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE September 30, 2009 (unaudited)
|
|
|
|
|
|
|
109,545
|
|
|
$
|
34,792
|
|
|
|
287
|
|
|
$
|
750
|
|
|
|
6,029
|
|
|
$
|
941
|
|
|
|
6,576
|
|
|
$
|
343
|
|
|
$
|
9,572
|
|
|
$
|
46,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-8
ARCHIPELAGO
LEARNING HOLDINGS, LLC
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2006
|
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(Predecessor)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
(Successor)
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOW FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,663
|
|
|
|
$
|
2,924
|
|
|
$
|
1,022
|
|
|
$
|
797
|
|
|
$
|
6,876
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt financing costs
|
|
|
|
|
|
|
|
36
|
|
|
|
179
|
|
|
|
130
|
|
|
|
154
|
|
Depreciation and amortization
|
|
|
71
|
|
|
|
|
1,670
|
|
|
|
2,183
|
|
|
|
1,541
|
|
|
|
2,314
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
631
|
|
|
|
355
|
|
|
|
272
|
|
|
|
298
|
|
Unrealized gain on investments
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for uncollectable accounts receivable
|
|
|
|
|
|
|
|
38
|
|
|
|
51
|
|
|
|
(20
|
)
|
|
|
63
|
|
Unrealized loss (gain) on interest rate swap
|
|
|
|
|
|
|
|
205
|
|
|
|
1,783
|
|
|
|
635
|
|
|
|
(535
|
)
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
(247
|
)
|
|
|
(74
|
)
|
|
|
(105
|
)
|
Changes in operating assets and liabilities, net of impact of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,129
|
)
|
|
|
|
(1,542
|
)
|
|
|
(2,270
|
)
|
|
|
(3,690
|
)
|
|
|
(4,585
|
)
|
Prepaid expenses and other
|
|
|
|
|
|
|
|
(469
|
)
|
|
|
176
|
|
|
|
169
|
|
|
|
(527
|
)
|
Accounts payable
|
|
|
|
|
|
|
|
55
|
|
|
|
276
|
|
|
|
224
|
|
|
|
(134
|
)
|
Accrued liabilities
|
|
|
428
|
|
|
|
|
1,557
|
|
|
|
252
|
|
|
|
(338
|
)
|
|
|
(237
|
)
|
Deferred revenues
|
|
|
4,439
|
|
|
|
|
7,613
|
|
|
|
9,791
|
|
|
|
8,884
|
|
|
|
9,546
|
|
Other long-term liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
7,451
|
|
|
|
|
12,718
|
|
|
|
13,551
|
|
|
|
8,530
|
|
|
|
13,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(211
|
)
|
|
|
|
(498
|
)
|
|
|
(1,324
|
)
|
|
|
(757
|
)
|
|
|
(1,049
|
)
|
Investment in Edline
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,734
|
)
|
Funding of note receivable from Edline
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,144
|
)
|
Business acquisition
|
|
|
|
|
|
|
|
(84,787
|
)
|
|
|
(9,658
|
)
|
|
|
(9,658
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(211
|
)
|
|
|
|
(85,285
|
)
|
|
|
(10,982
|
)
|
|
|
(10,415
|
)
|
|
|
(5,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to predecessor
|
|
|
(6,354
|
)
|
|
|
|
(846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of shares
|
|
|
|
|
|
|
|
89,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of Capital distributions to parent shareholders
|
|
|
|
|
|
|
|
(74,753
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance to shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax distribution to parent shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,250
|
)
|
Cost of debt financing
|
|
|
|
|
|
|
|
(1,706
|
)
|
|
|
215
|
|
|
|
215
|
|
|
|
|
|
Cost of stock offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,165
|
)
|
Proceeds from revolver
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
Payments on revolver
|
|
|
|
|
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
Proceeds from term note
|
|
|
|
|
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment on term note
|
|
|
|
|
|
|
|
|
|
|
|
(700
|
)
|
|
|
(525
|
)
|
|
|
(1,049
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(6,354
|
)
|
|
|
|
82,240
|
|
|
|
(485
|
)
|
|
|
9,690
|
|
|
|
(3,464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS:
|
|
|
886
|
|
|
|
|
9,673
|
|
|
|
2,084
|
|
|
|
7,805
|
|
|
|
3,967
|
|
Beginning of period
|
|
|
501
|
|
|
|
|
1,387
|
|
|
|
11,060
|
|
|
|
11,060
|
|
|
|
13,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
1,387
|
|
|
|
$
|
11,060
|
|
|
$
|
13,144
|
|
|
$
|
18,865
|
|
|
$
|
17,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
|
|
|
|
$
|
612
|
|
|
$
|
4,992
|
|
|
$
|
3,771
|
|
|
$
|
2,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
20
|
|
|
|
$
|
|
|
|
$
|
44
|
|
|
$
|
13
|
|
|
$
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued purchases of property and equipment
|
|
$
|
|
|
|
|
$
|
49
|
|
|
$
|
19
|
|
|
$
|
22
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash distribution to Predecessor (Note 12)
|
|
$
|
|
|
|
|
$
|
332
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares in business acquisitions (Note 1)
|
|
$
|
|
|
|
|
$
|
20,000
|
|
|
$
|
750
|
|
|
$
|
750
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-9
ARCHIPELAGO
LEARNING HOLDINGS, LLC
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006 (PREDECESSOR),
AS OF AND FOR THE YEARS ENDED 2007 AND 2008
AND AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND
2009 (SUCCESSOR)
Archipelago Learning Holdings, LLC (the Company) is
a leading subscription-based online education company. The
Company provides standards-based instruction, practice,
assessments and productivity tools that improve the performance
of educators and students via proprietary web-based platforms.
Study Island, our core product line, helps students in
Kindergarten through 12th grade, or K-12, master grade
level academic standards in a fun and engaging manner. As of
September 30, 2009, Study Island products were utilized by
approximately 8.9 million students in 21,000 schools in
50 states who answered over 2.8 billion practice
questions. The Company recently began offering online
postsecondary programs through their Northstar Learning product
line.
Archipelago Learning, Inc. was incorporated as a Delaware
corporation on August 4, 2009, and will act as a holding
company for the Companys business upon completion of the
offering. The Company initially capitalized Archipelago
Learning, Inc. with $1,000 for 100 shares of Archipelago
Learning, Inc. Archipelago Learning, Inc. has no operations.
On July 2, 2009, the Company changed its name from
Study Island Holdings, LLC to Archipelago
Learning Holdings, LLC. Study Island Holdings, LLC through
July 1, 2009 and Archipelago Learning Holdings, LLC from
July 2, 2009 are referred to herein as the
Company.
Purchase
Transaction
On January 10, 2007, substantially all of the assets of
Study Island, LP (the Predecessor), a Texas
partnership, were sold to a subsidiary of the Company. Periods
presented prior to January 10, 2007, represent the
operations of the Predecessor. The change of ownership was
approved by all of the managers of the Company. The transaction
was recorded as a business combination with the resulting assets
acquired and liabilities assumed being recorded at fair value
determined on the information available and assumptions as to
future operations. The partners of the Predecessor retained an
18.2% interest in the Company by exchanging $20,000,000 of their
interests in the Predecessor for Class A shares in the
Company, which was valued utilizing the purchase price of the
Company.
Intangible assets acquired included customer relationships,
developed technology, developed program content and the Study
Island trade name. Customer relationships were valued using
projected income streams on the existing customer base.
Developed technology and program content were valued based on
the replacement cost of these assets, less an adjustment due to
the changing nature of technology and state educational
standards. The Study Island trade name was valued using a relief
from royalty approach.
F-10
ARCHIPELAGO
LEARNING HOLDINGS, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The purchase price was comprised of the following (in thousands):
|
|
|
|
|
Net cash paid to sellers
|
|
$
|
80,226
|
|
Transaction costs
|
|
|
4,560
|
|
|
|
|
|
|
Total cash paid
|
|
|
84,786
|
|
Issuance of Class A shares
|
|
|
20,000
|
|
|
|
|
|
|
Total
|
|
|
104,786
|
|
|
|
|
|
|
Assets (liabilities) acquired:
|
|
|
|
|
Accounts receivable
|
|
|
2,319
|
|
Related party receivables
|
|
|
4,545
|
|
Accounts payable
|
|
|
(4,565
|
)
|
Deferred revenue
|
|
|
(9,352
|
)
|
Property and equipment
|
|
|
346
|
|
Intangible assets
|
|
|
17,120
|
|
|
|
|
|
|
Total
|
|
|
10,413
|
|
|
|
|
|
|
Remaining value, recorded to goodwill
|
|
$
|
94,373
|
|
|
|
|
|
|
Contained within the 2007 consolidated financial statements are
nine calendar days of operations and cash flows of the
Predecessor. Such amounts are not material to the overall 2007
consolidated financial statements taken as a whole. Further, the
consolidated financial position of the Predecessor immediately
prior to the January 10, 2007, transaction was not
materially different from that of December 31, 2006.
Accordingly, the Company has chosen January 1, 2007, as a
date of convenience in presenting successor operating results
and the financial statement information for the period from
January 1, 2007 through January 9, 2007 has not been
presented separately. All periods ending prior to
January 1, 2007 are referred to as Predecessor,
and all periods including and after such date are referred to as
Successor.
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
The accompanying consolidated financial statements include the
balances and results of operations of the Company and its wholly
owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation.
Unaudited Interim Financial Information The
accompanying unaudited interim consolidated balance sheet as of
September 30, 2009, the consolidated statements of income
and cash flows for the nine months ended September 30, 2008
and 2009, and the consolidated statement of changes in
members equity for the nine months ended
September 30, 2009 are unaudited. These unaudited interim
consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States. In the opinion of the Companys management,
the unaudited interim consolidated financial statements have
been prepared on the same basis as the audited consolidated
financial statements and include all adjustments necessary for
the fair presentation of the Companys balance sheet as of
September 30, 2009, statements of income and cash flows for
the nine months ended September 30, 2008 and 2009. The
results for the nine months ended September 30, 2009 are
not necessarily indicative of the results to be expected for the
year ending December 31, 2009. All references to
September 30, 2009 or to the nine months ended
September 30, 2008 and 2009 in the notes to the
consolidated financial statements are unaudited.
Unaudited Pro Forma Presentation The pro
forma balance sheet data as of September 30, 2009 and pro
forma income statement data for the year ended December 31,
2008 and the nine months ended September 30, 2009 reflect
the transactions that will occur in contemplation of the initial
public offering,
F-11
ARCHIPELAGO
LEARNING HOLDINGS, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
including the corporate reorganization, whereby the Company will
become a wholly owned subsidiary of Archipelago Learning, Inc.,
distributions to the members of the Company, and reflection of
tax expense (benefit) as if the Company were a taxable entity
during these periods, as if these transactions had occurred on
January 1, 2008. The transactions reflected include: cash
distributions of $8.0 million made on October 16, 2009
and $2.4 million to be made upon the corporate
reorganization; net short-term deferred tax asset of
$ and net long-term deferred tax
liability of $ , as of
September 30, 2009 and (provision) benefit for income taxes
of $ and
$ for the year ended
December 31, 2008 and the nine months ended
September 30, 2009, respectively; and the conversion of all
outstanding shares of the Companys Class A,
Class A-2,
Class B and Class C members equity into an
aggregate
of shares
of common stock, an aggregate
of shares
of restricted common stock subject to time-based vesting, an
aggregate
of shares
of restricted common stock subject to cash return vesting, an
aggregate
of restricted
stock unit awards subject to time-based vesting and aggregate
of shares
of restricted stock unit awards subject to cash return vesting.
Estimates Management uses estimates and
assumptions in preparing financial statements in accordance with
accounting principles generally accepted in the United States of
America. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent
assets and liabilities, and the reported sales and expenses.
Accordingly, actual results could differ from the estimates that
were used. The Companys most significant estimates and
assumptions include those relating to revenue recognition, stock
based compensation and valuations of goodwill and intangible
assets.
Revenue Recognition The Company generates
service revenue from: customer subscriptions to standards-based
instruction, practice, assessments and productivity tools;
training fees; and individual buys, which are individual
purchases for access to a product (one subject in a specific
state for a specific grade level). Subscription revenue results
from subscriptions sold to new and existing customers. For the
years 2006, 2007, and 2008, subscription revenue accounted for
97.3%, 98.0%, and 98.4% of the Companys service revenue,
respectively. For the nine months ended September 30, 2008
and 2009 (unaudited), subscription revenue accounted for 98.9%
and 98.8% of the Companys service revenue, respectively.
Service revenue is recognized when all of the following
conditions are satisfied: there is persuasive evidence of an
arrangement, the service has been provided to the customer, the
collection of the fees is reasonably assured, and the amount of
the fees to be paid by the customer is fixed or determinable.
The Companys arrangements do not contain general rights of
return.
Subscription revenue is recognized ratably over the subscription
term beginning on the commencement date of each subscription.
The traditional subscription term is 12 months, and all
subscriptions are on a noncancelable basis. When additional
months are offered as a promotional incentive, those months are
part of the subscription term. As part of their subscriptions,
customers generally benefit from new features and functionality
with each release at no additional cost.
Training sessions are offered to the Companys customers in
conjunction with the subscriptions to train the customers on
implementing, using, and administering the Study Island
programs. Training revenue is recognized ratably over the
subscription term for the related subscription. Customer support
is provided to customers following the sale at no additional
charge and at a minimal cost per call.
The Company defers the total amount of the sale of
subscriptions, training, and support as deferred revenue when
the customer is invoiced and recognizes the revenue on a
straight-line basis over the subscription term. The Company does
not incur significant up-front costs related to providing its
products and services and therefore has not deferred any
expenses.
Cost of Revenue Cost of revenue consists of
the direct and indirect costs to host and make available its
products and services to our customers. A significant portion of
the cost of revenue includes salaries, bonuses, stock-based
compensation and employee benefit costs and taxes related to
engineering personnel who maintain the
F-12
ARCHIPELAGO
LEARNING HOLDINGS, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys servers and technical equipment and work on our
web-based hosted platform. The employee benefits costs and taxes
are allocated based upon a percentage of total compensation
expense. Other direct and indirect costs include recruiting and
relocation fees associated with engineering employees,
contracted labor, facility costs for the Companys web
platform servers and routers, including backup servers that are
maintained in colocation facilities in Dallas, Texas,
depreciation expense on those servers and routers, network
monitoring costs and amortization of Study Islands
technical development intangible assets.
Operating Expenses Operating expenses consist
of sales and marketing, content development and general and
administrative expenses. Sales and marketing expense consists
primarily of salaries, commissions, benefits and stock-based
compensation for sales and marketing personnel for the
Companys inside and outside sales team, marketing,
customer service, training and account management. Sales and
marketing also includes direct marketing costs, travel and
entertainment and amortization of customer relationship
intangible assets. Content development expense consists
primarily of salaries, benefits and stock-based compensation for
employees who are responsible for writing the questions for the
Companys products and amortization of content intangible
asset. General and administrative expense consists primarily of
salaries, benefits and
stock-based
compensation for general and administrative employees that
includes executives, finance and accounting, human resources,
customer relations and order management. General and
administrative also includes accounting and legal professional
services fee, rent, insurance, travel and entertainment expense,
depreciation and other corporate expenses.
Software Development Costs Software
development costs are accounted for as software to be sold,
leased, or otherwise marketed as a separate product or as part
of a product or process, whether internally developed or
purchased. The fair-value of the core web-based delivery
technology was recognized as an intangible asset upon the
Companys acquisition and is amortized over 10 years
as an intangible asset. The Company is continually improving,
upgrading, and enhancing the software used to deliver the
Companys content and, as such, these costs are being
expensed as incurred.
Content Development Costs The fair-value of
the content existing was recognized as an intangible asset upon
the Companys acquisition and is amortized over
10 years. The Company is continually improving and
upgrading the content delivered to customers, including planned
enhancements and upgrades such as assessment products for
teachers, embedded professional development, lesson plans and
lessons, video content, special needs support, writing utility,
digital lockers and new and more sophisticated games, as well as
tailoring products to new markets. Such costs are expensed as
incurred.
Cash and Cash Equivalents Cash and cash
equivalents include highly liquid short-term investments
purchased with original maturities of three months or less.
Accounts Receivable Accounts receivable
represents amounts billed to customers for service revenue. The
Company carries its accounts receivable at cost, less an
allowance for doubtful accounts, which is based on
managements assessment of the collectability of accounts
receivable. The Company extends unsecured credit to its
customers in the ordinary course of business, but mitigates the
associated credit risk by performing ongoing credit evaluations
of its customers. The vast majority of the Companys
customers are public schools, which receive their funding from
the local, state and federal government. The Company evaluates
the adequacy of the allowance for doubtful accounts based on a
specific customer review of the outstanding accounts receivables.
F-13
ARCHIPELAGO
LEARNING HOLDINGS, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the changes in the Companys
allowance for doubtful accounts for the respective periods (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
38
|
|
Charged to costs and expenses
|
|
|
2
|
|
|
|
38
|
|
|
|
71
|
|
Deductions accounts written off
|
|
|
(2
|
)
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
|
|
|
$
|
38
|
|
|
$
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allowance for doubtful account as of September 30, 2009
(unaudited) is $152,000.
Property and Equipment Property and equipment
are recorded at cost, less accumulated depreciation.
Depreciation on property and equipment is provided in amounts
sufficient to relate the cost of the assets to operations over
their estimated service lives using the straight-line method.
|
|
|
|
|
Useful Lives
|
|
Furniture and fixtures
|
|
Seven years
|
Office equipment
|
|
Five years
|
Computer equipment
|
|
Three to five years
|
Computer software
|
|
Three years
|
Leasehold improvements
|
|
Shorter of the estimated useful life or the lease term
|
Major repairs or replacements of property and equipment are
capitalized. Maintenance repairs and minor replacements are
charged to operations as incurred. Equipment retirements are
removed from the records at their cost and related accumulated
depreciation and any resulting gain or loss is included in
earnings.
Goodwill, Intangible Assets and Long-Lived
Assets Goodwill represents the excess of the
cost of an acquisition over the fair value of net assets
acquired. Goodwill is assessed for impairment at the reporting
unit level at least annually or more frequently when events and
circumstances occur indicating that the recorded goodwill may be
impaired. The goodwill impairment test involves a two-step test.
The first step of the impairment test requires the
identification of the reporting units, and comparison of the
fair value of each of these reporting units to the respective
carrying value. The Company currently has two reporting units,
which are one level below our operating segment. The fair value
of each reporting unit is determined based on valuation
techniques using the best information that is available,
including data from open marketplace transactions and discounted
cash flow projections. If the carrying value is less than the
fair value, no impairment exists and the second step is not
performed. If the carrying value is higher than the fair value,
there is an indication that impairment may exist and the second
step must be performed to compute the amount of the impairment.
In the second step, the impairment is computed by comparing the
implied fair value of reporting unit goodwill with the carrying
amount of that goodwill.
Managements judgment is a significant factor in
determining whether an indicator of impairment has occurred.
Management relies on estimates in determining the fair value of
each reporting unit for step one, which include the following
factors:
|
|
|
|
|
Data from actual open marketplace transactions. The
Company may utilize such information if available, where those
transactions may involve assets or equity, to assist management
in evaluating goodwill impairment.
|
F-14
ARCHIPELAGO
LEARNING HOLDINGS, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Anticipated future cash flows and terminal value for each
reporting unit. The determination of discontinued cash flows
relies on the timing and estimates of future cash flows,
including an estimate of terminal value. The projections use
managements estimates of economic and market conditions
over the projected period including growth rates in service
revenue, customer attrition and estimates of any expected
changes in operating margins.
|
|
|
|
Selection of an appropriate discount rate. The
determination of discontinued cash flows requires the selection
of an appropriate discount rate, which is based on a
weighted-average cost of capital analysis. The discount rate is
affected by changes in short-term interest rates and long-term
yield as well as variances in the typical capital structure of
marketplace participants.
|
In the impairment test performed in the fourth quarter of 2007,
the fair value of the Companys Study Island reporting unit
significantly exceeded the carrying value by a margin in excess
of 20%. For the test performed in 2008, the fair value of the
Study Island unit exceeded the carrying value by an even greater
margin. In the 2008 testing for TeacherWeb, due to the proximity
of the testing to the acquisition date and because there had
been no significant changes in operations of the reporting unit,
the fair value and carrying value remained consistent with the
values upon acquisition. Based upon the Companys results
of impairment testing and events that have occurred
subsequently, management does not believe either of the
reporting units to be at risk of failing step one of impairment
testing for the foreseeable future.
The Company performs impairment tests in the fourth quarter of
each year. No goodwill impairment was identified for any of the
periods presented.
Intangible assets and other long-lived assets are reviewed for
impairment when events or changes in circumstances indicate the
carrying amount may not be recoverable. If impairment indicators
exist, an assessment of undiscounted future cash flows to be
generated by such assets is made. If the results of the analysis
indicate impairment, the assets are adjusted to fair market
value. Intangible assets with finite lives are amortized using
the straight-line method over their estimated useful lives. No
impairment loss was identified for intangible or long-lived
assets in any of the years presented.
Deferred Financing Costs Deferred financing
costs are incurred to obtain long-term financing and are
amortized using the effective interest method over the term of
the related debt. The amortization of deferred financing costs,
classified in interest expense in the statements of income, was
$0, $36,000 and $179,000 for the years ended December 31,
2006, 2007 and 2008, respectively, and $130,000 and $154,000 for
the nine months ended September 30, 2008 and 2009
(unaudited), respectively.
Income Taxes The Company is treated as a
partnership and, is not a taxpaying entity for federal income
tax purposes. As a result, the Companys income is taxed to
its members in their individual federal income tax returns. No
federal income tax expense was recognized in 2006 or 2007. The
Companys wholly owned subsidiary, TeacherWeb, Inc.
(TeacherWeb) is a taxpaying entity for federal
income tax purposes. A net long-term tax liability of $853,000
was recorded when TeacherWeb was acquired in June 2008. As a
result of TeacherWebs operations since the acquisition,
the Company recorded $247,000 of federal and state income tax
benefit in 2008. TeacherWeb had approximately $364,000 of net
operating loss carryforwards for federal and state income tax
purposes as of December 31, 2008. The Company is also
subject to sales, use, franchise and state margin taxes and, as
such, has recorded these expenses in the accompanying financial
statements.
Concentrations of Credit Risk Financial
instruments that are subject to concentrations of credit risk
are cash and cash equivalents and accounts receivable.
Management believes its contract acceptance, billing and
collection policies are adequate to minimize potential credit
risk. The Company continuously evaluates the credit worthiness
of its customers financial condition and generally does
not require collateral.
F-15
ARCHIPELAGO
LEARNING HOLDINGS, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company maintains deposits with major financial institutions
which exceed federally insured limits. Management periodically
assesses the financial condition of the institution and believes
that any possible credit risk is minimal. The Company has not
experienced any loss from such risk.
Stock-Based Compensation Expense The Company
recognizes compensation expense based on the grant-date fair
value of the awards over the required service or performance
periods. The estimated fair values of the shares awarded were
determined using a market approach to develop an overall
enterprise value. The market approach the Company utilized
included the use of pricing multiples derived from transactions
of companies within the Companys same industry and the
Companys past transactions. The companies selected for
comparison are all engaged in a technology-based
education-related business. The multiples selected were applied
to an estimate of the Companys future earnings to arrive
at an estimated enterprise value for its equity. This equity
value was then allocated to the different classes of stock using
discounted cash flows, based on the respective rights of the
classes to distributions from future earnings. The share-based
awards include members interest in Class B and C
shares.
Accounting for Derivatives and Hedging
Activities The Companys overall risk
management strategy includes utilizing an interest rate swap
agreement. The Company managed its exposure to rate variability
on the floating interest rate paid on its borrowing by entering
into an interest rate swap agreement with a notional amount
totaling $45,500,000, of which $45,500,000 and $40,500,000
remained in effect as of December 31, 2008 and
September 30, 2009, respectively. Beginning in 2009, the
notional amount of the interest rate swap began decreasing in
periodic amounts, and will decrease to a notional amount of
$30,500,000 at the December 2010 termination date. The Company
swapped a floating rate payment based on three month London
InterBank Offered Rate (LIBOR) for a fixed rate of 4.035% in
order to minimize the variability in expected future cash flows
due to interest rate movements on its LIBOR-based variable rate
debt.
The Company has not designated the swap as a hedge. The fair
value of the interest rate swap is recorded in its consolidated
balance sheet as interest rate swap and changes in
the fair value of the swap in its consolidated statements of
income as derivative loss.
Net Income per Share Basic income per share
is computed using net income and the weighted average number of
shares outstanding. Diluted earnings per share reflect the
weighted average number of shares outstanding plus any
potentially dilutive securities outstanding during the period.
Class A,
Class A-2,
Class B, and Class C shares are entitled to earnings
based on a priority established in the Companys LLC
agreement. The Class A shares are entitled to a return of
capital and a preferred return before any other class of share
is entitled to earnings. Class A and
Class A-2
shares are entitled to 100% of the earnings for the years ended
December 31, 2007 and 2008, and the nine months ended
September 30, 2009, to the extent such shares were issued.
For the years ended December 31, 2006, 2007, and 2008, and
for the nine months ended September 30, 2009, there were no
potential dilutive securities to the Class A shares. Prior
to the purchase transaction, the Predecessor was a limited
partnership containing two equal partners and the Predecessor
reported earnings per partner by dividing net income for the
year ended December 31, 2006 by two.
|
|
3.
|
FAIR
VALUE MEASUREMENTS
|
In the first quarter of 2008, the Company adopted the provisions
of Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) Topic 820,
Fair Value Measurements and Disclosures (FASB ASC
820), for financial assets and liabilities. FASB
ASC 820 became effective for financial assets and
liabilities on January 1, 2008. FASB ASC 820 defines
fair value, thereby eliminating inconsistencies in guidance
found in various prior accounting pronouncements and increases
disclosures surrounding fair value calculations.
F-16
ARCHIPELAGO
LEARNING HOLDINGS, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FASB ASC 820 establishes a three-tiered fair value hierarchy
that prioritizes inputs to valuation techniques used in fair
value calculations. The three levels of input are defined as
follows:
|
|
|
|
|
Level 1 Unadjusted quoted market prices for
identical assets or liabilities in active markets that the
Company has the ability to access.
|
|
|
|
Level 2 Quoted prices for similar assets or
liabilities in active markets; quoted prices for identical or
similar assets or liabilities in inactive markets; or valuations
based on models where the significant inputs are observable
(interest rates, yield curves, prepayment speeds, default rates,
loss severities, etc.) or can be corroborated by observable
market data.
|
|
|
|
Level 3 Valuations based on models where
significant inputs are not observable. The unobservable inputs
reflect the Companys own assumptions about the assumptions
that market participants would use.
|
FASB ASC 820 requires the Company to maximize the use of
observable inputs and minimize the use of unobservable inputs.
If a financial instrument uses inputs that fall in different
levels of the hierarchy, the instrument will be categorized
based upon the lowest level of input that is significant to the
fair value calculation.
The Companys interest rate swap is valued in the market
using discounted cash flow techniques. These techniques
incorporate Level 1 and Level 2 inputs such as
interest rates. These market inputs are utilized in the
discounted cash flow calculation considering the
instruments term, notional amount, discount rate, and
credit risk. Significant inputs to the derivative valuation for
interest rate swap are observable in the active markets and are
classified as Level 2 in the hierarchy.
The following table summarizes assets and liabilities measured
at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets cash equivalents
|
|
$
|
12,206
|
|
|
|
|
|
|
|
|
|
|
$
|
12,206
|
|
Liabilities interest rate swap
|
|
|
|
|
|
$
|
1,988
|
|
|
|
|
|
|
$
|
1,988
|
|
As of September 30, 2009 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets cash equivalents
|
|
$
|
14,218
|
|
|
|
|
|
|
|
|
|
|
$
|
14,218
|
|
Liabilities interest rate swap
|
|
|
|
|
|
$
|
1,453
|
|
|
|
|
|
|
$
|
1,453
|
|
The fair value of the Companys long-term debt is estimated
based on the quoted market prices for the same or similar issues
or on the current rates offered to the Company for debt of the
same remaining maturities.
The carrying amounts and estimated fair values of the
Companys financial instruments that are not reflected in
the financial statements at fair value are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2007
|
|
December 31, 2008
|
|
(Unaudited)
|
|
|
Carrying
|
|
|
|
Carrying
|
|
|
|
Carrying
|
|
|
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
|
Cost investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,734
|
|
|
|
n/a
|
|
Note receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,144
|
|
|
$
|
2,165
|
|
Term loan
|
|
$
|
70,000
|
|
|
$
|
70,000
|
|
|
$
|
69,300
|
|
|
$
|
70,047
|
|
|
$
|
68,251
|
|
|
$
|
67,846
|
|
F-17
ARCHIPELAGO
LEARNING HOLDINGS, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The cost investment included in the table above is in a company
that is not publicly traded and the fair value is not readily
determinable, however, the Company believes the carrying value
approximates or is less than the fair value.
|
|
4.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
In December 2007, the FASB amended FASB ASC Topic 805,
Business Combinations, (FASB ASC 805) (formerly
FASB Statement No. 141(R), Business Combinations),
which establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree, and the goodwill
acquired in an acquisition. FASB ASC 805 also establishes
disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. FASB ASC 805
is effective for acquisitions in fiscal years beginning after
December 15, 2008, and early adoption is prohibited. We
will apply the provisions of this topic to any future
acquisitions.
In February 2008, the FASB issued an amendment to FASB ASC Topic
820, Fair Value Measurements and Disclosures (FASB
ASC 820) (formerly FASB Staff Position (FSP)
FAS No. 157-2,
Effective Date for FASB Statement No. 157). This
amendment permitted the delayed application of FASB ASC 820 for
all nonrecurring fair value measurements of nonfinancial assets
and nonfinancial liabilities until fiscal years beginning after
November 15, 2008. The adoption did not have a material
impact on the Companys consolidated financial condition or
results of operations or cash flows.
In March 2008, the FASB issued an amendment to FASB ASC Topic
815, Derivatives and Hedging (FASB ASC 815)
(formerly FASB Statement No. 161, Disclosures about
Derivative Instruments and Hedging Activities an
amendment of FASB Statement 133). FASB ASC 815 requires
enhanced disclosures about a companys derivative and
hedging activities. These enhanced disclosures will discuss
(a) how and why a company uses derivative instruments,
(b) how derivative instruments and related hedged items are
accounted for and (c) how derivative instruments and
related hedged items affect a companys financial position,
results of operations, and cash flows. This amendment is
effective for fiscal years beginning on or after
November 15, 2008, with earlier adoption allowed. The
implementation of this amendment did not have a material effect
on the Companys consolidated financial condition or
results of operations or cash flows.
In April 2008, the FASB issued an amendment to FASB ASC Topic
350, Intangibles Goodwill and Other
(FASB ASC 350) (formerly FSP
No. 142-3,
Determination of the Useful Life of Intangible Assets).
This amendment modifies the factors that should be considered in
developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under FASB ASC
350. This amendment is effective for fiscal years beginning
after December 15, 2008. The implementation of this topic
did not have a material effect on the Companys
consolidated financial condition or results of operations or
cash flows.
In April 2009, the FASB issued an amendment to FASB ASC Topic
825, Financial Instruments (FASB ASC 825)
(formerly FSP
No. FAS 107-1
and APB
28-1,
Interim Disclosures about Fair Value of Financial
Instruments). This amendment requires disclosures about fair
value of financial instruments in interim as well as in annual
financial statements. This amendment also requires those
disclosures in all interim financial statements. This amendment
was effective for interim and annual periods ending after
June 15, 2009. The implementation of this amendment did not
have a material effect on the Companys consolidated
financial condition or results of operations or cash flows.
In May 2009, the FASB issued an amendment to FASB ASC Topic 855,
Subsequent Events (FASB ASC 855) (formerly
FASB Statement No. 165, Subsequent Events).
FASB ASC 855 provides general standards for the accounting and
reporting of subsequent events that occur between the balance
sheet date and issuance of financial statements. The topic
requires the issuer to recognize the effects, if material, of
F-18
ARCHIPELAGO
LEARNING HOLDINGS, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
subsequent events in the financial statements if the subsequent
event provides additional evidence about conditions that existed
as of the balance sheet date. The issuer must also disclose the
date through which subsequent events have been evaluated and the
nature of any non-recognized subsequent events. Non-recognized
subsequent events include events that provide evidence about
conditions that did not exist as of the balance sheet date, but
which are of such a nature that they must be disclosed to keep
the financial statements from being misleading. The topic is
effective for interim and annual periods ending after
June 15, 2009. The implementation of this topic did not
have a material impact on our financial position, results of
operations or cash flows.
In June 2009, the FASB issued FASB ASC Topic 105,
Generally Accepted Accounting Principles (FASB
ASC 105) (formerly FASB Statement No. 168,
The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting
Principles a replacement of FASB Statement
No. 162). FASB ASC 105 provides for the FASB
Accounting Standards Codification (the Codification)
to become the single official source of authoritative,
nongovernmental U.S. generally accepted accounting
principles (GAAP). FASB ASC 105 is effective for interim
and annual periods ending after September 15, 2009. This
topic has no impact on the Companys financial position,
results of operations or cash flows.
|
|
5.
|
PROPERTY
AND EQUIPMENT
|
Property and equipment as of December 31, 2007, 2008 and
September 30, 2009, consisted of the following (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Computer equipment
|
|
$
|
650
|
|
|
$
|
1,534
|
|
|
$
|
2,076
|
|
Furniture and fixtures
|
|
|
129
|
|
|
|
284
|
|
|
|
302
|
|
Office equipment
|
|
|
6
|
|
|
|
13
|
|
|
|
168
|
|
Computer software
|
|
|
109
|
|
|
|
363
|
|
|
|
684
|
|
Leasehold improvements
|
|
|
|
|
|
|
47
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
894
|
|
|
|
2,241
|
|
|
|
3,290
|
|
Accumulated depreciation
|
|
|
(101
|
)
|
|
|
(459
|
)
|
|
|
(1,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
793
|
|
|
$
|
1,782
|
|
|
$
|
2,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $71,000, $101,000, and $358,000 for the
periods ending December 31, 2006, 2007 and 2008,
respectively. For the nine months ended September 30, 2008
and 2009 (unaudited), depreciation expense was $226,000 and
$786,000, respectively.
On June 30, 2008, the Company purchased 100% of the capital
stock of TeacherWeb. TeacherWeb provides web-based templates for
educators to quickly and easily create classroom, school and
district websites. The transaction was recorded as a business
combination with the resulting assets acquired and liabilities
assumed being recorded at fair value determined on the
information available and assumptions as to future operations.
Intangible assets acquired included customer relationships and
trademarks. Customer relationships were valued using projected
income streams on the existing customer base. Trademarks were
valued using a relief from royalty approach.
F-19
ARCHIPELAGO
LEARNING HOLDINGS, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The purchase price was comprised of the following (in thousands):
|
|
|
|
|
Net cash paid to sellers
|
|
$
|
9,408
|
|
Transaction costs
|
|
|
250
|
|
|
|
|
|
|
Total cash paid
|
|
|
9,658
|
|
Issuance of
Class A-2 shares
|
|
|
750
|
|
|
|
|
|
|
Total
|
|
|
10,408
|
|
|
|
|
|
|
Assets (liabilities) acquired:
|
|
|
|
|
Accounts receivable
|
|
|
199
|
|
Other assets
|
|
|
32
|
|
Accounts payable
|
|
|
(49
|
)
|
Deferred revenue
|
|
|
(199
|
)
|
Net long-term deferred tax liability
|
|
|
(853
|
)
|
Property and equipment
|
|
|
4
|
|
Intangible assets
|
|
|
2,380
|
|
|
|
|
|
|
Total
|
|
|
1,514
|
|
|
|
|
|
|
Remaining value, recorded to goodwill
|
|
$
|
8,894
|
|
|
|
|
|
|
The fair value of the 286,882
Class A-2 shares
issued during the third quarter of 2008 in connection with the
TeacherWeb acquisition was determined based on managements
estimated average enterprise value of the Company at the time of
the acquisition and its impact on its existing participation
shares distribution thresholds.
On August 14, 2009, the Company and two related parties
entered into a unit purchase agreement with Edline Holdings,
Inc. (Edline), a company that offers web-based
technological solutions for schools and educators. The Company
purchased 285,601 Series A shares of Edline for
$2.7 million, which represents 6.9% of Edlines
outstanding Series A shares. Edline also borrowed
$2.1 million from the Company pursuant to a five-year
promissory note, which bears interest at 9.5% per annum and
requires semi-annual interest-only payments.
F-20
ARCHIPELAGO
LEARNING HOLDINGS, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
INTANGIBLE
ASSETS AND GOODWILL
|
The Company has recorded intangible assets in connection with
the purchase transaction on January 10, 2007. Intangible
assets are amortized on a straight-line basis over their
estimated useful lives. Intangible assets as of
December 31, 2007, are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
(Months)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Study Island customer relationships
|
|
|
120
|
|
|
$
|
13,620
|
|
|
$
|
(1,325
|
)
|
|
$
|
12,295
|
|
Study Island technical development/program content
|
|
|
120
|
|
|
|
2,500
|
|
|
|
(244
|
)
|
|
|
2,256
|
|
Indefinite-lived intangible assets Study Island
trade name
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
17,120
|
|
|
$
|
(1,569
|
)
|
|
$
|
15,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the year ended December 31, 2007,
was $1,569,000, of which $82,000, $1,325,000 and $162,000 were
included in cost of revenue, sales and marketing and content
development expense, respectively.
In addition, the Company has recorded intangible assets in
connection with its June 30, 2008, acquisition of
TeacherWeb. Intangible assets as of December 31, 2008, are
as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
(Months)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Study Island customer relationships
|
|
|
120
|
|
|
$
|
13,620
|
|
|
$
|
(2,687
|
)
|
|
$
|
10,933
|
|
Study Island technical development/program content
|
|
|
120
|
|
|
|
2,500
|
|
|
|
(494
|
)
|
|
|
2,006
|
|
TeacherWeb customer relationships
|
|
|
60
|
|
|
|
2,130
|
|
|
|
(213
|
)
|
|
|
1,917
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Study Island trade name
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
1,000
|
|
TeacherWeb trade name
|
|
|
|
|
|
|
250
|
|
|
|
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
19,500
|
|
|
$
|
(3,394
|
)
|
|
$
|
16,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the year ended December 31, 2008
was $1,825,000, of which $84,000, $1,575,000 and $166,000 were
included in cost of revenue, sales and marketing and content
development expense, respectively.
F-21
ARCHIPELAGO
LEARNING HOLDINGS, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangible assets as of September 30, 2009 (unaudited), are
as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
(Months)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Study Island customer relationships
|
|
|
120
|
|
|
$
|
13,620
|
|
|
$
|
(3,709
|
)
|
|
$
|
9,911
|
|
Study Island technical development/program content
|
|
|
120
|
|
|
|
2,500
|
|
|
|
(681
|
)
|
|
|
1,819
|
|
TeacherWeb customer relationships
|
|
|
60
|
|
|
|
2,130
|
|
|
|
(532
|
)
|
|
|
1,598
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Study Island trade name
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
1,000
|
|
TeacherWeb trade name
|
|
|
|
|
|
|
250
|
|
|
|
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
19,500
|
|
|
$
|
(4,922
|
)
|
|
$
|
14,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the nine months ended
September 30, 2008 (unaudited) was $1,315,000, of which
$63,000, $1,128,000 and $124,000 were included in cost of
revenue, sales and marketing and content development expense,
respectively. Amortization expense for the nine months ended
September 30, 2009 (unaudited) was $1,528,000, of which
$63,000, $1,341,000 and $124,000 were included in cost of
revenue, sales and marketing and content development expense,
respectively.
The estimated amortization expense for each of the five
succeeding years and thereafter is as follows (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
December 31, 2008
|
|
|
September 30, 2009
|
|
|
|
|
|
|
(Unaudited)
|
|
|
2009
|
|
$
|
2,038
|
|
|
$
|
509
|
|
2010
|
|
|
2,038
|
|
|
|
2,038
|
|
2011
|
|
|
2,038
|
|
|
|
2,038
|
|
2012
|
|
|
2,038
|
|
|
|
2,038
|
|
2013
|
|
|
1,825
|
|
|
|
1,825
|
|
Thereafter
|
|
|
4,879
|
|
|
|
4,880
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,856
|
|
|
$
|
13,328
|
|
|
|
|
|
|
|
|
|
|
The weighted-average remaining useful lives of the finite
intangibles assets as of December 31, 2008 and
September 30, 2009 (unaudited) is 8.42 and 7.71 years,
respectively.
The changes in the carrying amount of goodwill are as follows
(amounts in thousands):
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
|
|
Goodwill acquired during year
|
|
|
94,373
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
94,373
|
|
Goodwill acquired during year
|
|
|
8,894
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
103,267
|
|
|
|
|
|
|
There was no change in goodwill during the nine months ended
September 30, 2009 (unaudited).
F-22
ARCHIPELAGO
LEARNING HOLDINGS, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On November 16, 2007, the Company entered into an
$80,000,000 credit facility with General Electric Capital
Corporation, as agent, composed of a $70,000,000 term loan and a
$10,000,000 revolving credit facility, which expires in November
2013. The proceeds of the term loan and $4,929,000 in cash were
used to pay a distribution of $73,223,000 to the Class A
shareholders and debt financing costs of $1,706,000. The term
loan bears interest at rates based upon either a base rate or
LIBOR plus an applicable margin (3.25% as of September 30,
2009 and December 31, 2008, and 4.00% as of
December 31, 2007, in each case for a LIBOR-based term
loan) determined based on the Companys leverage ratio.
Amounts under the revolving credit facility can be borrowed and
repaid, from time to time, at the Companys option, subject
to the pro forma compliance with certain financial covenants.
Subsequently, the Company received a refund of $215,000 in 2008
of the amount previously paid.
The term loan and revolving credit facility require us to
maintain certain financial ratios, including a leverage ratio
(based on the ratio of consolidated indebtedness, net of cash
and cash equivalents, to consolidated EBITDA, defined in the
credit facility as consolidated net income adjusted by adding
back interest expense, taxes, depreciation expenses,
amortization expenses and certain other non-recurring or
otherwise permitted fees and charges), an interest coverage
ratio (based on the ratio of consolidated EBITDA to consolidated
interest expense, as defined in the credit facility) and a fixed
charge coverage ratio (based on the ratio of consolidated EBITDA
to fixed charges).
The term loan and the revolving credit facility contain certain
affirmative and restrictive covenants that, among other things,
add limitations for the incurrence of additional indebtedness,
liens on property, sale and leaseback transactions, investments,
loans and advances, merger or consolidation, asset sales,
acquisitions, dividends, transactions with affiliates,
prepayments of any other indebtedness, modifications of our
organizational documents and restrictions on our subsidiaries.
The credit facility contains events of default that are
customary for similar facilities and transactions, including a
cross-default provision with respect to any other indebtedness
and an event of default that would be triggered by a change of
control, as defined in the credit facility, and which is not
expected to be triggered by this offering. As of
September 30, 2009, December 31, 2008 and
December 31, 2007, we were in compliance with all
covenants. The credit facility is secured on a
first-priority
basis by security interests (subject to permitted liens) in
substantially all of the assets of the Company.
The Company has the right to optionally prepay its borrowings
under the term loan or the revolving credit facility, subject to
the procedures set forth in the credit facility. The Company may
be required to make prepayments on its borrowings under the term
loan or the revolving credit facility if it receives proceeds as
a result of any asset sales, additional debt issuances, events
of loss or if we have excess cash flow. A mandatory prepayment
of the term loan is required within five business days after the
earlier of the actual or required delivery date of the
compliance certificate each fiscal year, in an amount equal to
(i) 75% of excess cash flows (as defined by the credit
agreement) if the leverage ratio as of the last day of the
fiscal year is greater than 4:00 to 1:0, (ii) 50% of excess
cash flows if the leverage ratio as of the last day of the
fiscal year is less than or equal to 4:00 to 1:0 but greater
than 3:25 to 1:0, or (iii) 25% of excess cash flow if the
leverage ratio as of the last day of the fiscal year is less
than or equal to 3.25 to 1.0. No mandatory prepayment is
required if the leverage ratio is less than or equal to 2.50 to
1.0 on the last day of the fiscal year. No mandatory prepayments
were required for the third quarter ended September 30,
2009 and the year ended December 31, 2007. The Company did
make a mandatory prepayment of $524,000 during the second
quarter of 2009 related to the excess cash flow generated for
the year ended December 31, 2008.
F-23
ARCHIPELAGO
LEARNING HOLDINGS, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Principal payments on our term loan due over the next five years
and beyond as of December 31, 2008 and September 30,
2009, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Calendar Year
|
|
As of December 31, 2008
|
|
|
As of September 30, 2009
|
|
|
|
|
|
|
(unaudited)
|
|
|
2009
|
|
$
|
700
|
|
|
$
|
175
|
|
2010
|
|
|
700
|
|
|
|
700
|
|
2011
|
|
|
700
|
|
|
|
700
|
|
2012
|
|
|
700
|
|
|
|
700
|
|
2013
|
|
|
66,500
|
|
|
|
65,976
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
69,300
|
|
|
|
68,251
|
|
Less: current maturities
|
|
|
(700)
|
|
|
|
(700)
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
68,600
|
|
|
$
|
67,551
|
|
|
|
|
|
|
|
|
|
|
The Financial Accounting Standards Board issued an amendment to
FASB ASC 740, Income Taxes
(FASB ASC 740) (formerly FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes - an Interpretation of FASB Statement
No. 109) which clarifies the accounting and disclosure
for uncertainty in tax positions, as defined. The Company
adopted the provisions of FASB ASC 740, as amended, as of
January 1, 2007, and has analyzed filing positions in all
of the federal and state jurisdictions where the Company is
required to file income tax returns, as well as all open tax
years in these jurisdictions. The Company is not a taxpaying
entity for federal income tax purposes and in certain state tax
jurisdictions due to the Companys partnership status. As a
partnership, income of the Company is taxed to the partners on
their individual federal income tax returns. The Companys
policy is to recognize interest accrued related to unrecognized
tax benefits and penalties as income tax expense.
Upon adoption, the Company did not identify uncertain tax
positions that resulted in a material effect on the
Companys financial condition, results of operations, or
cash flow. The Company did not record a cumulative effect
adjustment related to the adoption of this amendment. In
addition, no material reserves for uncertain income tax
positions were identified or recorded as of December 31,
2007 and December 31, 2008.
In the nine months ended September 30, 2009 (unaudited),
the Company recorded $425,000 of unrecognized tax benefits,
including approximately $7,000 of accrued gross interest expense
related to a state tax filing position, of which $195,000 is
recorded in Other accrued liabilities and $230,000 is recorded
in Other long-term liability on the consolidated balance sheet
as of September 30, 2009. The Company is not currently
under examination in any federal or state income tax
jurisdiction. The Company does not expect that unrecognized tax
benefits will significantly change in the following
12 month period.
|
|
11.
|
COMMITMENTS
AND CONTINGENCIES
|
The Company is obligated, as lessee, under noncancelable
operating leases for office space expiring on February 28,
2010, and May 31, 2012. In addition, the Company is
obligated, as lessee, under a noncancelable operating lease for
office equipment in July 2011. As of December 31, 2008 and
September 30,
F-24
ARCHIPELAGO
LEARNING HOLDINGS, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2009, the future minimum payments required under all operating
leases with terms in excess of one year are as follows (amounts
in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
December 31, 2008
|
|
|
September 30, 2009
|
|
|
|
|
|
|
(Unaudited)
|
|
|
2009
|
|
$
|
462
|
|
|
$
|
145
|
|
2010
|
|
|
415
|
|
|
|
434
|
|
2011
|
|
|
414
|
|
|
|
424
|
|
2012
|
|
|
176
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,467
|
|
|
$
|
1,179
|
|
|
|
|
|
|
|
|
|
|
Rent expense for the years ended December 31, 2006, 2007
and 2008, was $86,000, $248,000, and $424,000, respectively.
Rent expense was $313,000 and $407,000 for the nine months ended
September 30, 2008 and 2009 (unaudited), respectively.
Archipelago Learning Holdings, LLCs capital structure
consists of Class A Shares,
Class A-2 Shares,
Class B Shares and Class C Shares. The terms of the
shares are governed by the Amended and Restated Limited
Liability Company (the LLC Agreement), as amended.
On January 10, 2007, 109,545,064 Class A Shares were
issued to the Companys private-equity sponsor and other
investors. Class B Shares and Class C Shares are held
by employees of the Company.
In February 2007 the Board of Managers of Archipelago Learning
Holdings, LLC adopted the 2007 Equity Compensation Plan (the
Plan). Under the terms of the Plan, eligible
participants, as determined by the Board, may receive grants of
equity interests of the Archipelago Learning Holdings, LLC in
the form of Class B Shares and Class C Shares, which
together are defined as the Participation Shares. The purpose of
the Plan is to compensate employees and consultants of the
Company. Under the terms and provisions of the LLC Agreement the
Participation Shares are to be considered profits interests in
the Company and each holder of a share is considered a member of
the Company.
Holders of Class B Shares and Class C Shares may not
sell, transfer, assign, pledge or otherwise dispose of their
shares other than as permitted pursuant to the Participation
Stock Agreement. In the event of a planned sale of shares by the
Companys private-equity sponsor, holders of vested
Participation Shares must participate in the planned sale.
A separate capital account must be maintained for each member.
No member can be required to pay the Company or another member
if their capital accounts are negative.
Distributions
All members shall be entitled to receive distributions,
including distributions in connection with the liquidation,
dissolution or winding up of the Company, when and as determined
by the Board of Managers. Distributions under the plan are
determined by the Board and are subject to various thresholds
outlined in the LLC Agreement. No holder of a Participation
Share is eligible to receive distributions under the LLC
Agreement until the holders of the Class A and
Class A-2 Shares have received distributions equal to 100%
of their capital contributions and the holders of Class A
Shares have also received a preferred return of 12% per annum on
the Class A capital contributions. Once these distributions
have been made, the Class A Shareholders and holders of
Class A-2
and vested Participant Shares become eligible to receive
distributions subject to cumulative percent limitations. No
distribution can be made on account of a Class B Share that
has not yet vested. Amounts that would otherwise be paid on
account of these shares are credited to the members
F-25
ARCHIPELAGO
LEARNING HOLDINGS, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
capital accounts and will be distributed once these shares have
vested. The Class C Shares are not entitled to any portion
of any distributions until the holders of the Class A and
Class A-2 Shares
have received certain multiples of cash-based returns on their
respective investment in the Class A and
Class A-2 Shares.
If any unvested shares are forfeited such amounts will be
distributed to the Class A and
Class A-2
Members, pro rata, in proportion to the number of shares held by
Class A and
Class A-2
Members.
Voting
Rights
All holders of Class A and
A-2 Shares
are entitled to one vote for each Class A and
A-2 Shares
outstanding and the holders of the Participation Shares do not
have any voting rights.
During 2006, the Predecessor withdrew $6,354,000 from the
business as a return of capital, and during 2007 withdrew
$846,000 prior to the change in control to the Successor.
During 2007, the Predecessor received a distribution of
$1,178,000 representing a return of capital. The Company also
made a $74,753,000 distribution to Class A members as a
return of capital that was primarily funded from the proceeds of
the term loan. The Company did not make any tax distributions to
the members as the Company was in a tax loss position for the
years ended December 31, 2007 and December 31, 2008.
During the nine months ended September 30, 2009
(unaudited), the Company made a tax distribution of $1,250,000
to its members.
During 2007, 5,720,692 Class B and 5,720,692 Class C
shares were issued to employees of the Company. During 2008,
456,336 Class B and Class C shares were issued to
employees of the Company. In addition, during 2008, 821,588
Class B shares and 273,864 Class C shares were
forfeited. In January 2009, 673,287 shares of Class B
shares and 673,287 shares of Class C shares were
issued to employees of the Company.
During 2008, 286,882 of
Class A-2 shares
were issued for $750,000 in connection with the TeacherWeb, Inc.
acquisition (see Note 6).
|
|
13.
|
STOCK-BASED
COMPENSATION
|
Awards under the Plan to eligible participants are based upon
the terms and conditions determined by the Board as set forth by
the Board in a grant instrument. These terms may include such
factors as the number of shares awarded and the dates and events
on which any or all of the awards vest or become non-forfeitable.
For the awards granted in 2007, 2008 and 2009, each Class B
Share vests 20% on each anniversary as specified in the
Participation Stock Agreement. The Class C shares are
subject to performance hurdles and holders of Class C
shares are entitled to distributions after holders of
Class A and
Class A-2 shares
receive certain threshold multiples of cash-based returns on
their respective Class A and
Class A-2 shares,
subject to such Class C share holders continued
employment by or service to the Company. For each Class B
Share granted to a participant, the participant also received
one Class C Share.
All Class C shares and any unvested Class B shares
will be forfeited if any participant is no longer an employee of
the Company. All Class B and Class C shares will be
forfeited if the participants employment is terminated by
the Company for cause or by the participant without good reason.
The assumptions used in calculating the fair value of
equity-based payment awards represent managements best
estimates. As with all estimates, these estimates involve
inherent uncertainties and the application of management
judgment.
The Company recognizes compensation expense for the grant-date
fair value of the awards over the service period of the awards,
which is generally the vesting period. The Company did not apply
a forfeiture rate to the Class B shares as these awards are
only granted to a few key executives. The grant-date fair value
for the Class C Shares was $0.05, $0.07 and $0.06 for the
grants in 2007, 2008 and 2009, respectively.
F-26
ARCHIPELAGO
LEARNING HOLDINGS, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the status of the Companys
unvested Class B Participation Shares for the periods
indicated (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
Unvested Shares
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested December 31, 2006
|
|
|
|
|
|
|
|
|
Granted
|
|
|
5,721
|
|
|
$
|
0.31
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested December 31, 2007
|
|
|
5,721
|
|
|
|
0.31
|
|
Granted
|
|
|
456
|
|
|
|
0.29
|
|
Vested
|
|
|
(1,089
|
)
|
|
|
0.31
|
|
Forfeited
|
|
|
(822
|
)
|
|
|
0.31
|
|
|
|
|
|
|
|
|
|
|
Unvested December 31, 2008
|
|
|
4,266
|
|
|
$
|
0.31
|
|
Granted
|
|
|
673
|
|
|
|
0.26
|
|
Vested
|
|
|
(1,180
|
)
|
|
|
0.31
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested September 30, 2009 (unaudited)
|
|
|
3,759
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the stock-based compensation
expense included in the related statements of income line items
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31, 2006
|
|
|
December 31, 2007
|
|
|
December 31, 2008
|
|
|
September 30, 2008
|
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(Predecessor)
|
|
|
(Successor)
|
|
|
|
|
|
Cost of revenue
|
|
$
|
|
|
|
$
|
17
|
|
|
$
|
7
|
|
|
$
|
6
|
|
|
$
|
62
|
|
Sales and marketing
|
|
|
|
|
|
|
81
|
|
|
|
32
|
|
|
|
27
|
|
|
|
38
|
|
General and administrative
|
|
|
|
|
|
|
513
|
|
|
|
298
|
|
|
|
225
|
|
|
|
187
|
|
Content development
|
|
|
|
|
|
|
20
|
|
|
|
18
|
|
|
|
14
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
631
|
|
|
$
|
355
|
|
|
$
|
272
|
|
|
$
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 and 2008 and September 30,
2009 (unaudited), there was approximately $1,428,000, $967,000
and $886,000, respectively of unrecognized stock-based
compensation expense related to unvested Participation Shares
that is expected to be recognized over a weighted average period
of 4.03, 3.18 and 2.72 years, respectively.
|
|
14.
|
EMPLOYEE
BENEFIT PLANS
|
The Company provides a 401(k) defined contribution retirement
plan for all eligible employees who meet certain eligibility
requirements, including performing three months of service. The
Company matches 100% up to 3% of employee contributions, plus
50% of the amount of the participants deferred
compensation that exceeds 3% of the participants
compensation, but not in excess of 5% of the participants
compensation.
Participants are 100% vested in the portion of the plan
representing employee and employer safe harbor match
contributions. Other employer-match contributions vest over five
years. For the years ended December 31, 2006, 2007, and
2008, the Company made contributions of $56,000, $114,000, and
$238,000, respectively, under this plan. For the nine months
ended September 30, 2008 and 2009 (unaudited), the Company
made contributions of $163,000 and $288,000, respectively, under
this plan.
F-27
ARCHIPELAGO
LEARNING HOLDINGS, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company operates as one operating segment as the principal
business activity relates to providing subscription-based online
educational services. The chief operating decision maker, the
Chief Executive Officer, evaluates the performance of the
Company based upon consolidated results of operations.
|
|
16.
|
RELATED-PARTY
TRANSACTIONS
|
The Company has made the following payments to certain related
parties who are significant shareholders or businesses that are
controlled by significant shareholders as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
September 30, 2008
|
|
|
September 30, 2009
|
|
|
|
(Predecessor)
|
|
|
|
|
|
|
|
|
(Successor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Management or advisory services
|
|
|
|
|
|
|
|
|
|
$
|
342
|
|
|
$
|
74
|
|
|
$
|
8
|
|
Purchases of property and equipment
|
|
|
|
|
|
|
|
|
|
$
|
344
|
|
|
$
|
1
|
|
|
$
|
290
|
|
|
|
17.
|
SUBSEQUENT
EVENTS (Unaudited)
|
On October 16, 2009, the Company made a special
distribution of $8.0 million to its equity holders
representing a return on such holders investment in the
Company, which was paid in accordance with the terms of the
Companys LLC Agreement.
In November 2009, the Company expects to complete the sale of
the operations of TeacherWeb to Edline for an aggregate purchase
price of $13 million, consisting of $6.5 million in
cash (to be reduced by approximately $0.7 million of cash
remaining on TeacherWebs balance sheet), Series A
shares of Edline valued at $3.7 million and
$2.8 million of five-year debt securities that bear
interest at 9.5% per annum and require semi-annual
interest-only
payments. The sale will be completed upon the Company finalizing
an amendment to its credit facility permitting the sale as
described below. In addition, the Company intends to make an
approximately $1.5 million distribution to its equity
holders upon the Corporate Reorganization to enable them to meet
certain tax obligations associated with the TeacherWeb sale.
Upon the completion of the sale, the Company will hold 11.2% of
Edlines outstanding Series A shares and
$4.9 million of Edlines senior debt.
The Company expects to amend the credit agreement governing the
term loan and the revolving credit facility in November 2009 to
permit the sale of TeacherWeb. This amendment further modifies
certain terms of the credit agreement, including adding a LIBOR
floor of 1.25% to the calculation of the Companys interest
rates and reducing the letter of credit sublimit available to
the Company under the credit agreement from $2.0 million to
$1.0 million. In addition, the Company will prepay an
aggregate amount of $6.5 million upon the consummation of
the sale of TeacherWeb, which the Company expects to complete in
November 2009 upon finalizing the amendment.
The Company has considered subsequent events through
November 2, 2009 related to these financial statements.
******
F-28
Through and
including ,
2009 (the
25th day
after the date of this prospectus), all dealers effecting
transactions in these securities, whether or not participating
in this offering, may be required to deliver a prospectus. This
is in addition to the dealers obligation to deliver a
prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
Shares
Archipelago Learning,
Inc.
Common Stock
PROSPECTUS
, 2009
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
ITEM 13.
|
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION.
|
The expenses, other than underwriting commissions, expected to
be incurred by Archipelago Learning, Inc. (the
Registrant) in connection with the issuance and
distribution of the securities being registered under this
Registration Statement are estimated to be as follows:
|
|
|
|
|
Securities and Exchange Commission Registration Fee
|
|
$
|
4,185
|
|
Financial Industry Regulatory Authority, Inc. Filing Fee
|
|
|
8,000
|
|
Nasdaq Listing Fee
|
|
|
100,000
|
|
Printing and Engraving
|
|
|
|
|
Legal Fees and Expenses
|
|
|
|
|
Accounting Fees and Expenses
|
|
|
|
|
Blue Sky Fees and Expenses
|
|
|
|
|
Transfer Agent and Registrar Fees
|
|
|
|
|
Miscellaneous
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
|
|
|
|
|
|
ITEM 14.
|
INDEMNIFICATION
OF DIRECTORS AND OFFICERS.
|
Section 145 of the Delaware General Corporation Law, or
DGCL, provides that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding
whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation by reason
of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys fees)),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit
or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his
conduct was unlawful. Section 145 further provides that a
corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses
(including attorneys fees) actually and reasonably
incurred in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification
shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware
Court of Chancery or such other court in which such action or
suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all of the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court
of Chancery or such other court shall deem proper.
The Registrants Bylaws authorize the indemnification of
our officers and directors, consistent with Section 145 of
the Delaware General Corporation Law, as amended. The Registrant
intends to enter into indemnification agreements with each of
its directors and executive officers. These agreements, among
other things, will require the Registrant to indemnify each
director and executive officer to the fullest extent permitted
by Delaware law, including indemnification of expenses such as
attorneys fees, judgments, fines
II-1
and settlement amounts incurred by the director or executive
officer in any action or proceeding, including any action or
proceeding by or in right of us, arising out of the
persons services as a director or executive officer.
Reference is made to Section 102(b)(7) of the Delaware
General Corporation Law, or DGCL, which enables a corporation in
its original certificate of incorporation or an amendment
thereto to eliminate or limit the personal liability of a
director for violations of the directors fiduciary duty,
except (i) for any breach of the directors duty of
loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) pursuant to
Section 174 of the DGCL, which provides for liability of
directors for unlawful payments of dividends of unlawful stock
purchase or redemptions or (iv) for any transaction from
which a director derived an improper personal benefit.
Reference is also made to Section 145 of the DGCL, which
provides that a corporation may indemnify any person, including
an officer or director, who is, or is threatened to be made,
party to any threatened, pending or completed legal action, suit
or proceeding, whether civil, criminal, administrative or
investigative, other than an action by or in the right of such
corporation, by reason of the fact that such person was an
officer, director, employee or agent of such corporation or is
or was serving at the request of such corporation as a director,
officer, employee or agent of another corporation or enterprise.
The indemnity may include expenses (including attorneys
fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by such person in connection with such
action, suit or proceeding, provided such officer, director,
employee or agent acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the
corporations best interest and, for criminal proceedings,
had no reasonable cause to believe that his conduct was
unlawful. A Delaware corporation may indemnify any officer or
director in an action by or in the right of the corporation
under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director
is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense
of any action referred to above, the corporation must indemnify
him against the expenses that such officer or director actually
and reasonably incurred.
The Registrant expects to maintain standard policies of
insurance that provide coverage (i) to its directors and
officers against loss rising from claims made by reason of
breach of duty or other wrongful act and (ii) to the
Registrant with respect to indemnification payments that it may
make to such directors and officers.
The proposed form of Underwriting Agreement to be filed as
Exhibit 1.1 to this Registration Statement provides for
indemnification to the Registrants directors and officers
by the underwriters against certain liabilities.
|
|
ITEM 15.
|
RECENT
SALES OF UNREGISTERED SECURITIES.
|
On August 4, 2009, Archipelago Learning, Inc., a Delaware
corporation was formed. Archipelago Learning Holdings, LLC
purchased 100 shares of common stock of Archipelago
Learning, Inc. for $1,000 in a transaction exempt from
registration pursuant to Section 4(2) of the Securities Act
of 1933, as it was a transaction by an issuer that did not
involve a public offering of securities.
In connection with the corporate reorganization to be completed
prior to the consummation of this offering, and in accordance
with the limited liability company agreement of Archipelago
Learning Holdings, LLC, the holders of shares of Archipelago
Learning Holdings, LLC, and certain of their affiliates, will
enter into the following transactions as a result of which they
will receive shares of Archipelago Learning, Inc.s common
stock, par value $0.001 per share. The issuance of the shares of
common stock of Archipelago Learning, Inc. in the corporate
reorganization will be exempt from the registration requirements
of the Securities Act pursuant to Section 4(2) thereof, as
it will be a transaction by the issuer not involving a public
offering of securities. The following share numbers of
Archipelago Learning, Inc.s common stock are based upon an
assumed initial public offering price
of per share:
(1) The direct or indirect holders
of
Class A shares
and
Class A-2 shares
of Archipelago Learning Holdings, LLC (other than Providence
Equity Partners V-A Study Island L.L.C. and its subsidiaries)
will, directly or indirectly, contribute all such Class A
and
Class A-2 shares
of Archipelago
II-2
Learning Holdings, LLC held by such parties to Archipelago
Learning, Inc. in exchange for an aggregate
of shares
of common stock, par value $0.001 per share.
(2) Providence Equity Partners V-A Study Island L.L.C.,
which will not have any assets other
than
Class A shares of Archipelago Learning Holdings, LLC, will
merge with and into Archipelago Learning, Inc. and as a result
of such merger, the members of Providence Equity Partners V-A
Study Island L.L.C. will receive an aggregate
of shares
of Archipelago Learning, Inc.s common stock, par value
$0.001 per share.
(3) The officers, directors and employees who hold an
aggregate
of
vested Class B shares of Archipelago Learning Holdings, LLC
will contribute their vested Class B shares of Archipelago
Learning Holdings, LLC to Archipelago Learning, Inc. in exchange
for an aggregate
of shares
of common stock, par value $0.001 per share.
(4) The officers, directors and employees who hold an
aggregate
of
unvested Class B shares of Archipelago Learning Holdings,
LLC will contribute their unvested Class B shares of
Archipelago Learning Holdings, LLC to Archipelago Learning, Inc.
in exchange for an aggregate
of shares
of restricted common stock, par value $0.001.
(5) The officers, directors and employees (other than the
chief executive officer, chief financial officer, chief
technology officer and co-founders) who hold an aggregate
of
Class C shares of Archipelago Learning Holdings, LLC will
contribute such Class C shares to Archipelago Learning,
Inc. in exchange for an aggregate
of shares
of common stock, par value $0.001 per share, and an aggregate
of
restricted stock unit awards.
(6) The chief executive officer, chief financial officer,
chief technology officer and co-founders will contribute their
aggregate amount
of
Class C shares of Archipelago Learning Holdings, LLC to
Archipelago Learning, Inc. in exchange for an aggregate
of shares
of restricted common stock, par value $0.001 per share, and an
aggregate
of
restricted stock unit awards.
II-3
|
|
ITEM 16.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES.
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibits
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement.
|
|
3
|
.1*
|
|
Form of Certificate of Incorporation of Archipelago Learning,
Inc.
|
|
3
|
.2*
|
|
Form of Bylaws of Archipelago Learning, Inc.
|
|
3
|
.3
|
|
Second Amended and Restated Limited Liability Company Agreement
of Study Island Holdings, LLC.
|
|
4
|
.1*
|
|
Form of Common Stock Certificate.
|
|
4
|
.2*
|
|
Form of Shareholders Agreement.
|
|
4
|
.3*
|
|
Form of Registration Rights Agreement.
|
|
4
|
.4
|
|
Form of Time Vesting Restricted Stock Award Agreement.
|
|
4
|
.5
|
|
Form of Cash Return Vesting Restricted Stock Award Agreement.
|
|
4
|
.6
|
|
Form of Cash Return Vesting Restricted Stock Unit Award
Agreement.
|
|
4
|
.7
|
|
Form of Equity Value Vesting Restricted Stock Unit Award
Agreement.
|
|
5
|
.1*
|
|
Opinion of Weil, Gotshal & Manges LLP.
|
|
10
|
.1
|
|
2007 Equity Compensation Plan.
|
|
10
|
.2
|
|
Form of Participation Share Agreement.
|
|
10
|
.3*
|
|
Form of Indemnification Agreement between Archipelago Holdings,
Inc. and each of its directors and executive officers.
|
|
10
|
.4
|
|
Form of Archipelago Learning, Inc. 2009 Omnibus Incentive Plan.
|
|
10
|
.5
|
|
Employment Agreement, dated as of January 10, 2007, between
Study Island, LLC and Cameron Chalmers.
|
|
10
|
.6
|
|
First Amendment to Employment Agreement, dated as of November
21, 2008, between Study Island, LLC and Cameron Chalmers.
|
|
10
|
.7
|
|
Second Amendment to Employment Agreement, dated as of December
31, 2008, between Study Island, LLC and Cameron Chalmers.
|
|
10
|
.8
|
|
Employment Agreement, dated as of January 10, 2007, between
Study Island, LLC and David Muzzo.
|
|
10
|
.9
|
|
First Amendment to Employment Agreement, dated as of November
21, 2008, between Study Island, LLC and David Muzzo.
|
|
10
|
.10
|
|
Second Amendment to Employment Agreement, dated as of December
31, 2008, between Study Island, LLC and David Muzzo.
|
|
10
|
.11
|
|
Employment Agreement, dated as of January 28, 2007, between
Study Island, LLC and Timothy McEwen.
|
|
10
|
.12
|
|
First Amendment to Employment Agreement, dated as of March 16,
2007, between Study Island, LLC and Timothy McEwen.
|
|
10
|
.13
|
|
Second Amendment to Employment Agreement, dated as of December
31, 2008, between Study Island, LLC and Timothy McEwen.
|
|
10
|
.14
|
|
Employment Agreement, dated as of August 31, 2009, between
Archipelago Learning, LLC and Timothy McEwen.
|
|
10
|
.15
|
|
Employment Agreement, dated as of May 22, 2007, between Study
Island, LLC and James Walburg.
|
|
10
|
.16
|
|
First Amendment to Employment Agreement, dated as of December
31, 2008, between Study Island, LLC and James Walburg.
|
|
10
|
.17
|
|
Employment Agreement, dated as of August 31, 2009, between
Archipelago Learning, LLC and James Walburg.
|
|
10
|
.18
|
|
Employment Agreement, dated as of August 28, 2009, between
Archipelago Learning, LLC and Julie Huston.
|
|
10
|
.19
|
|
Employment Agreement, dated as of September 15, 2008, between
Study Island, LLC and Ray Lowrey.
|
II-4
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibits
|
|
|
10
|
.20
|
|
First Amendment to Employment Agreement, dated as of December
31, 2008, between Study Island, LLC and Ray Lowrey.
|
|
10
|
.21
|
|
Credit Agreement, dated as of November 16, 2007, by and among
Study Island, LLC, the other persons designated as credit
parties from time to time, General Electric Capital Corporation,
as a lender and as agent for all lenders, NewStar Financial,
Inc., as syndication agent, the other parties thereto as lenders
and GE Capital Markets, Inc. and NewStar Financial, Inc., as
joint lead arrangers and joint bookrunners.
|
|
10
|
.22
|
|
Amendment No. 1 to Credit Agreement, dated as of May 21, 2008.
|
|
10
|
.23
|
|
Amendment No. 2 to Credit Agreement, dated as of February 18,
2009.
|
|
10
|
.24
|
|
Amendment No. 3 to Credit Agreement, dated as of April 30, 2009.
|
|
10
|
.25
|
|
Amendment No. 4 to Credit Agreement, dated as of May 15, 2009.
|
|
10
|
.26
|
|
Amendment No. 5 to Credit Agreement, dated as of
September 2, 2009.
|
|
10
|
.27
|
|
Guaranty and Security Agreement, dated as of November 16, 2007,
by and among Study Island, LLC, General Electric Capital
Corporation and the other grantors party thereto.
|
|
10
|
.28
|
|
Office Building Lease, by and between 3400 Carlisle, Ltd. and
Study Island, LLC.
|
|
10
|
.29
|
|
First Amendment to Lease, by and between 3400 Carlisle, Ltd. and
Study Island, LLC.
|
|
10
|
.30
|
|
Second Amendment to Lease, by and between 3400 Carlisle, Ltd.
and Study Island, LLC.
|
|
10
|
.31
|
|
Office Building Lease, dated as of January 12, 2007, by and
between Turtle Creek Limon, LP and Study Island, LLC.
|
|
10
|
.32
|
|
First Amendment to Lease, dated as of January 17, 2008 by and
between Turtle Creek Limon, LP and Study Island LLC.
|
|
10
|
.33
|
|
Second Amendment to Lease, dated as of September 30, 2008 by and
between Turtle Creek Limon, LP and Study Island LLC.
|
|
10
|
.34
|
|
Employment Agreement, dated as of October 12, 2009, between
Archipelago Learning, LLC and Martijn Tel.
|
|
10
|
.35
|
|
Third Amendment to Lease, dated as of October 23, 2009, by
and between Turtle Creek Limon, LP and Archipelago Learning, LLC.
|
|
10
|
.36*
|
|
Archipelago Learning, Inc. Employee Stock Purchase Plan.
|
|
21
|
.1
|
|
List of Subsidiaries of Archipelago Learning, Inc.
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP, Independent Registered
Public Accounting Firm relating to Archipelago Learning, Inc.
|
|
23
|
.2
|
|
Consent of Deloitte & Touche LLP, Independent Registered
Public Accounting Firm, relating to Archipelago Learning
Holdings, LLC.
|
|
23
|
.3*
|
|
Consent of Weil, Gotshal & Manges LLP (included in the
opinion filed as Exhibit 5.1 hereto).
|
|
23
|
.4
|
|
Consent of Brian H. Hall.
|
|
24
|
.1
|
|
Power of Attorney.
|
|
99
|
.1
|
|
Consent of Outsell, Inc.
|
|
|
|
* |
|
To be filed by amendment. |
|
|
|
Previously filed. |
|
|
|
|
(b)
|
Financial Statement Schedules
|
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreements, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the provisions referenced in Item 14 of
II-5
this registration statement, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered hereunder, the registrant will,
unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment no. 2 to the
registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on the 2nd day of November, 2009.
ARCHIPELAGO LEARNING, INC.
Name: Tim McEwen
|
|
|
|
Title:
|
President and Chief Executive Officer
|
POWER OF
ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
amendment no. 2 to the registration statement has been
signed by the following persons in the capacities on the 2nd day
of November, 2009.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Tim
McEwen
Tim
McEwen
|
|
President, Chief Executive Officer and Director
(Principal Executive Officer)
|
|
|
|
/s/ James
Walburg
James
Walburg
|
|
Executive Vice President, Chief Financial
Officer and Secretary
(Principal Financial and Accounting Officer)
|
|
|
|
*
Cameron
Chalmers
|
|
Vice President and Director
|
|
|
|
*
David
Muzzo
|
|
Vice President and Director
|
|
|
|
*
David
Phillips
|
|
Director
|
|
|
|
*
Michael
Powell
|
|
Director
|
|
|
|
*
Peter
Wilde
|
|
Chairman
|
|
|
|
|
|
*By:
|
|
/s/ James
Walburg
|
|
|
James Walburg
Attorney-in-fact
|
|
|
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibits
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement.
|
|
3
|
.1*
|
|
Form of Certificate of Incorporation of Archipelago Learning,
Inc.
|
|
3
|
.2*
|
|
Form of Bylaws of Archipelago Learning, Inc.
|
|
3
|
.3
|
|
Second Amended and Restated Limited Liability Company Agreement
of Study Island Holdings, LLC.
|
|
4
|
.1*
|
|
Form of Common Stock Certificate.
|
|
4
|
.2*
|
|
Form of Shareholders Agreement.
|
|
4
|
.3*
|
|
Form of Registration Rights Agreement.
|
|
4
|
.4
|
|
Form of Time Vesting Restricted Stock Award Agreement.
|
|
4
|
.5
|
|
Form of Cash Return Vesting Restricted Stock Award Agreement.
|
|
4
|
.6
|
|
Form of Cash Return Vesting Restricted Stock Unit Award
Agreement.
|
|
4
|
.7
|
|
Form of Equity Value Vesting Restricted Stock Unit Award
Agreement.
|
|
5
|
.1*
|
|
Opinion of Weil, Gotshal & Manges LLP.
|
|
10
|
.1
|
|
2007 Equity Compensation Plan.
|
|
10
|
.2
|
|
Form of Participation Share Agreement.
|
|
10
|
.3*
|
|
Form of Indemnification Agreement between Archipelago Holdings,
Inc. and each of its directors and executive officers.
|
|
10
|
.4
|
|
Form of Archipelago Learning, Inc. 2009 Omnibus Incentive Plan.
|
|
10
|
.5
|
|
Employment Agreement, dated as of January 10, 2007, between
Study Island, LLC and Cameron Chalmers.
|
|
10
|
.6
|
|
First Amendment to Employment Agreement, dated as of November
21, 2008, between Study Island, LLC and Cameron Chalmers.
|
|
10
|
.7
|
|
Second Amendment to Employment Agreement, dated as of December
31, 2008, between Study Island, LLC and Cameron Chalmers.
|
|
10
|
.8
|
|
Employment Agreement, dated as of January 10, 2007, between
Study Island, LLC and David Muzzo.
|
|
10
|
.9
|
|
First Amendment to Employment Agreement, dated as of November
21, 2008, between Study Island, LLC and David Muzzo.
|
|
10
|
.10
|
|
Second Amendment to Employment Agreement, dated as of December
31, 2008, between Study Island, LLC and David Muzzo.
|
|
10
|
.11
|
|
Employment Agreement, dated as of January 28, 2007, between
Study Island, LLC and Timothy McEwen.
|
|
10
|
.12
|
|
First Amendment to Employment Agreement, dated as of March 16,
2007, between Study Island, LLC and Timothy McEwen.
|
|
10
|
.13
|
|
Second Amendment to Employment Agreement, dated as of December
31, 2008, between Study Island, LLC and Timothy McEwen.
|
|
10
|
.14
|
|
Employment Agreement, dated as of August 31, 2009, between
Archipelago Learning, LLC and Timothy McEwen.
|
|
10
|
.15
|
|
Employment Agreement, dated as of May 22, 2007, between Study
Island, LLC and James Walburg.
|
|
10
|
.16
|
|
First Amendment to Employment Agreement, dated as of December
31, 2008, between Study Island, LLC and James Walburg.
|
|
10
|
.17
|
|
Employment Agreement, dated as of August 31, 2009, between
Archipelago Learning, LLC and James Walburg.
|
|
10
|
.18
|
|
Employment Agreement, dated as of August 28, 2009, between
Archipelago Learning, LLC and Julie Huston.
|
|
10
|
.19
|
|
Employment Agreement, dated as of September 15, 2008, between
Study Island, LLC and Ray Lowrey.
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibits
|
|
|
10
|
.20
|
|
First Amendment to Employment Agreement, dated as of December
31, 2008, between Study Island, LLC and Ray Lowrey.
|
|
10
|
.21
|
|
Credit Agreement, dated as of November 16, 2007, by and among
Study Island, LLC, the other persons designated as credit
parties from time to time, General Electric Capital Corporation,
as a lender and as agent for all lenders, NewStar Financial,
Inc., as syndication agent, the other parties thereto as lenders
and GE Capital Markets, Inc. and NewStar Financial, Inc., as
joint lead arrangers and joint bookrunners.
|
|
10
|
.22
|
|
Amendment No. 1 to Credit Agreement, dated as of May 21, 2008.
|
|
10
|
.23
|
|
Amendment No. 2 to Credit Agreement, dated as of February 18,
2009.
|
|
10
|
.24
|
|
Amendment No. 3 to Credit Agreement, dated as of April 30, 2009.
|
|
10
|
.25
|
|
Amendment No. 4 to Credit Agreement, dated as of May 15, 2009.
|
|
10
|
.26
|
|
Amendment No. 5 to Credit Agreement, dated as of
September 2, 2009.
|
|
10
|
.27
|
|
Guaranty and Security Agreement, dated as of November 16, 2007,
by and among Study Island, LLC, General Electric Capital
Corporation and the other grantors party thereto.
|
|
10
|
.28
|
|
Office Building Lease, by and between 3400 Carlisle, Ltd. and
Study Island, LLC.
|
|
10
|
.29
|
|
First Amendment to Lease, by and between 3400 Carlisle, Ltd. and
Study Island, LLC.
|
|
10
|
.30
|
|
Second Amendment to Lease, by and between 3400 Carlisle, Ltd.
and Study Island, LLC.
|
|
10
|
.31
|
|
Office Building Lease, dated as of January 12, 2007, by and
between Turtle Creek Limon, LP and Study Island, LLC.
|
|
10
|
.32
|
|
First Amendment to Lease dated, as of January 17, 2008 by and
between Turtle Creek Limon, LP and Study Island LLC.
|
|
10
|
.33
|
|
Second Amendment to Lease dated, as of September 30, 2008 by and
between Turtle Creek Limon, LP and Study Island LLC.
|
|
10
|
.34
|
|
Employment Agreement, dated as of October 12, 2009, between
Archipelago Learning, LLC and Martijn Tel.
|
|
10
|
.35
|
|
Third Amendment to Lease, dated as of October 23, 2009, by
and between Turtle Creek Limon, LP and Archipelago Learning, LLC.
|
|
10
|
.36*
|
|
Archipelago Learning, Inc. Employee Stock Purchase Plan.
|
|
21
|
.1
|
|
List of Subsidiaries of Archipelago Learning, Inc.
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP, Independent Registered
Public Accounting Firm, relating to Archipelago Learning, Inc.
|
|
23
|
.2
|
|
Consent of Deloitte & Touche LLP, Independent Registered
Public Accounting Firm, relating to Archipelago Learning
Holdings, LLC.
|
|
23
|
.3*
|
|
Consent of Weil, Gotshal & Manges LLP (included in the
opinion filed as Exhibit 5.1 hereto).
|
|
23
|
.4
|
|
Consent of Brian H. Hall.
|
|
24
|
.1
|
|
Power of Attorney.
|
|
99
|
.1
|
|
Consent of Outsell, Inc.
|
|
|
|
* |
|
To be filed by amendment. |
|
|
|
Previously filed. |