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EX-32.1 - EX-32.1 - Archipelago Learning, Inc. | d82791exv32w1.htm |
EX-31.2 - EX-31.2 - Archipelago Learning, Inc. | d82791exv31w2.htm |
EX-31.1 - EX-31.1 - Archipelago Learning, Inc. | d82791exv31w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - Archipelago Learning, Inc. | Financial_Report.xls |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 001-34555
Archipelago Learning, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) |
27-0767387 (I.R.S. Employer Identification No.) |
|
3232 McKinney Avenue, Suite 400, Dallas, Texas (Address of Principal Executive Offices) |
75204 (Zip Code) |
(800) 419-3191
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No
o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12-b2 of the Act). Yes o No þ
As of August 4, 2011, the number of outstanding shares of the registrants Common Stock,
$0.001 par value, was 26,335,720.
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Certifications |
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EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
2
Table of Contents
Special Note Regarding Forward-Looking Statements
Certain disclosures and analyses in this Form 10-Q, including information incorporated herein
by reference, may include forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, or the Securities Act, Section 21E of the Securities Exchange
Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of
1995. All statements other than statements of historical fact are considered forward-looking
statements and reflect current expectations and projections relating to our financial condition,
results of operations, plans, objectives, future performance and business. Forward-looking
statements generally can be identified by use of phrases or terminology 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.
These forward-looking statements 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. These
statements are not guarantees of performance or results. They are subject to risks and
uncertainties which may be beyond our control, including those discussed below, in the Risk
Factors section in Item 1A of our Form 10-K, and elsewhere in this Form 10-Q and the documents
incorporated by reference herein. Although we believe that these forward-looking statements are
based on reasonable assumptions, many factors could cause actual results to vary materially from
those anticipated in such forward-looking statements.
Any forward-looking statement contained herein 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.
Archipelago Learning, Study Island, Northstar Learning, EducationCity, Reading Eggs,
ESL ReadingSmart and their respective logos are our trademarks. Solely for convenience, we refer
to our trademarks in this Form 10-Q 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 document are the property of their respective owners.
3
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ARCHIPELAGO LEARNING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
As of | As of | |||||||
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 36,307 | $ | 32,398 | ||||
Accounts receivable, net |
9,560 | 10,807 | ||||||
Deferred tax assets |
3,543 | 3,463 | ||||||
Prepaid expenses and other current assets |
2,399 | 3,560 | ||||||
Total |
51,809 | 50,228 | ||||||
Property and equipment, net |
4,536 | 3,760 | ||||||
Goodwill |
168,665 | 165,694 | ||||||
Intangible assets, net |
35,740 | 37,290 | ||||||
Investment |
6,446 | 6,446 | ||||||
Notes receivable |
2,041 | 1,934 | ||||||
Other long-term assets |
1,387 | 1,610 | ||||||
Total assets |
$ | 270,624 | $ | 266,962 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable trade |
$ | 773 | $ | 928 | ||||
Accrued employee-related expenses |
2,394 | 2,518 | ||||||
Other accrued expenses |
1,178 | 1,247 | ||||||
Taxes payable |
1,351 | 979 | ||||||
Deferred tax liabilities |
213 | 384 | ||||||
Deferred revenue |
41,522 | 44,733 | ||||||
Current portion of note payable to related party |
2,425 | 2,352 | ||||||
Current portion of long-term debt |
850 | 850 | ||||||
Other current liabilities |
640 | 463 | ||||||
Total |
51,346 | 54,454 | ||||||
Long-term deferred tax liabilities |
15,936 | 15,478 | ||||||
Long-term deferred revenue |
15,161 | 14,312 | ||||||
Long-term debt, net of current |
74,488 | 74,913 | ||||||
Other long-term liabilities |
882 | 488 | ||||||
Total liabilities |
157,813 | 159,645 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock ($0.001 par value, 10,000,000
shares authorized, none issued and outstanding
at June 30, 2011 and December 31, 2010) |
| | ||||||
Common stock ($0.001 par value, 200,000,000
shares authorized, 26,335,720 and 26,354,198
shares issued and outstanding at June 30, 2011
and December 31, 2010, respectively) |
26 | 26 | ||||||
Additional paid-in capital |
97,277 | 95,395 | ||||||
Accumulated other comprehensive income |
2,354 | 1,531 | ||||||
Retained earnings |
13,154 | 10,365 | ||||||
Total stockholders equity |
112,811 | 107,317 | ||||||
Total liabilities and stockholders equity |
$ | 270,624 | $ | 266,962 | ||||
See the accompanying notes to the unaudited condensed consolidated financial statements.
4
Table of Contents
ARCHIPELAGO LEARNING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share data)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share data)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue |
$ | 18,288 | $ | 13,597 | $ | 35,590 | $ | 26,146 | ||||||||
Cost of revenue |
1,362 | 1,029 | 3,069 | 1,942 | ||||||||||||
Gross profit |
16,926 | 12,568 | 32,521 | 24,204 | ||||||||||||
Operating Expense: |
||||||||||||||||
Sales and marketing |
5,505 | 4,146 | 11,426 | 7,968 | ||||||||||||
Content development |
1,703 | 1,226 | 3,410 | 2,267 | ||||||||||||
General and administrative |
5,708 | 6,591 | 11,161 | 9,380 | ||||||||||||
Total |
12,916 | 11,963 | 25,997 | 19,615 | ||||||||||||
Income from continuing operations |
4,010 | 605 | 6,524 | 4,589 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(1,105 | ) | (879 | ) | (2,197 | ) | (1,649 | ) | ||||||||
Interest income |
79 | 150 | 149 | 303 | ||||||||||||
Foreign currency loss |
(16 | ) | (99 | ) | (137 | ) | (99 | ) | ||||||||
Derivative gain (loss) |
| 27 | | (46 | ) | |||||||||||
Total |
(1,042 | ) | (801 | ) | (2,185 | ) | (1,491 | ) | ||||||||
Income (loss) before tax |
2,968 | (196 | ) | 4,339 | 3,098 | |||||||||||
Provision (benefit) for income tax |
1,169 | (51 | ) | 1,550 | 1,176 | |||||||||||
Net income (loss) |
$ | 1,799 | $ | (145 | ) | $ | 2,789 | $ | 1,922 | |||||||
Earnings (loss) per share: |
||||||||||||||||
Basic |
$ | 0.07 | $ | (0.01 | ) | $ | 0.11 | $ | 0.08 | |||||||
Diluted |
$ | 0.07 | $ | (0.01 | ) | $ | 0.10 | $ | 0.08 | |||||||
Weighted-average shares outstanding: |
||||||||||||||||
Basic |
25,406,664 | 24,181,680 | 25,393,977 | 24,019,902 | ||||||||||||
Diluted |
25,573,166 | 24,181,680 | 25,601,072 | 24,403,727 |
See the accompanying notes to the unaudited condensed consolidated financial statements.
5
Table of Contents
ARCHIPELAGO LEARNING, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (UNAUDITED)
(in thousands)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (UNAUDITED)
(in thousands)
Preferred | Common | Accumulated | ||||||||||||||||||||||||||||||
Stock | Stock | Additional | Other | |||||||||||||||||||||||||||||
Par | Par | Paid-in | Comprehensive | Retained | Total | |||||||||||||||||||||||||||
Shares | Value | Shares | Value | Capital | Income | Earnings | Equity | |||||||||||||||||||||||||
Balance at December 31, 2010 |
| $ | | 26,354 | $ | 26 | $ | 95,395 | $ | 1,531 | $ | 10,365 | $ | 107,317 | ||||||||||||||||||
Stock-based compensation expense |
| | | | 1,843 | | | 1,843 | ||||||||||||||||||||||||
Grants of common and restricted stock |
| | 24 | | | | | | ||||||||||||||||||||||||
Forfeiture of restricted stock |
| | (44 | ) | | | | | | |||||||||||||||||||||||
Purchase of shares from employee
stock purchase plan |
| | 2 | | 18 | | | 18 | ||||||||||||||||||||||||
Additional contributed capital |
| | | | 21 | | | 21 | ||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
| | | | | | 2,789 | 2,789 | ||||||||||||||||||||||||
Currency translation adjustment |
| | | | | 823 | | 823 | ||||||||||||||||||||||||
Total |
3,612 | |||||||||||||||||||||||||||||||
Balance at June 30, 2011 |
| $ | | 26,336 | $ | 26 | $ | 97,277 | $ | 2,354 | $ | 13,154 | $ | 112,811 | ||||||||||||||||||
See the accompanying notes to the unaudited condensed consolidated financial statements.
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Table of Contents
ARCHIPELAGO LEARNING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 2,789 | $ | 1,922 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Amortization of debt financing costs |
223 | 149 | ||||||
Depreciation and amortization |
3,047 | 1,602 | ||||||
Stock-based compensation |
1,843 | 928 | ||||||
Unrealized gain on interest rate swap |
| (617 | ) | |||||
Deferred income taxes |
121 | 1,041 | ||||||
Deferred rent |
387 | | ||||||
Loss on disposal of assets |
11 | | ||||||
Changes in operating assets and liabilities, net of acquisitions: |
||||||||
Accounts receivable |
1,235 | 317 | ||||||
Prepaid expenses and other |
1,171 | (1,194 | ) | |||||
Accounts payable and accrued expenses |
(351 | ) | (136 | ) | ||||
Deferred revenue |
(2,766 | ) | 132 | |||||
Other long-term liabilities |
(184 | ) | 17 | |||||
Net cash provided by operating activities |
7,526 | 4,161 | ||||||
Cash flows from investing activities |
||||||||
Acquisitions, net of cash acquired |
(1,978 | ) | (61,300 | ) | ||||
Purchase of property and equipment |
(1,525 | ) | (424 | ) | ||||
Net cash used in investing activities |
(3,503 | ) | (61,724 | ) | ||||
Cash flows from financing activities |
||||||||
Proceeds from supplemental term note |
| 15,000 | ||||||
Proceeds from revolver |
| 10,000 | ||||||
Payment of debt financing costs |
| (804 | ) | |||||
Contribution from member in Reorganization |
21 | | ||||||
Purchase of common stock from ESPP |
18 | 3 | ||||||
Payment of offering costs |
| (1,460 | ) | |||||
Payments on term note |
(425 | ) | (388 | ) | ||||
Net cash (used in) provided by financing activities |
(386 | ) | 22,351 | |||||
Effect of foreign exchange on cash and cash equivalents |
272 | 225 | ||||||
Net change in cash and cash equivalents |
3,909 | (34,987 | ) | |||||
Beginning of period |
32,398 | 58,248 | ||||||
End of period |
$ | 36,307 | $ | 23,261 | ||||
Supplemental information |
||||||||
Cash paid for interest |
$ | 1,923 | $ | 1,495 | ||||
Cash paid for income taxes |
$ | 1,079 | $ | 1,254 | ||||
Non-cash investing and financing activities |
||||||||
Accrued purchases of property and equipment |
$ | 134 | $ | 252 | ||||
Issuance of common stock for purchase of EducationCity |
$ | | $ | 17,393 | ||||
Issuance of note payable for purchase of EducationCity |
$ | | $ | 4,687 |
See the accompanying notes to the unaudited condensed consolidated financial statements.
7
Table of Contents
ARCHIPELAGO LEARNING, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
The Company
Archipelago Learning, Inc. (the Company) is a leading subscription-based,
software-as-a-service (SaaS) provider of education products. The Company provides standards-based
instruction, practice, assessments and productivity tools that improve the performance of educators
and students at a low cost via proprietary web-based platforms.
Study Island, the Companys core product line, helps students in Kindergarten through 12th
grade (K-12), master grade level academic standards in a fun and engaging manner. In June 2010,
the Company acquired Educationcity Limited (EducationCity), an online preschool through sixth
grade (Pre-K-6) educational content and assessment program for schools in the United Kingdom
(U.K.) and United States (U.S.). In August 2010, the Company began selling Reading Eggs, an
online product focused on teaching young children to read. Reading Eggs is sold under a
distribution agreement with Blake Publishing, which requires the Company to pay a 35% royalty to
Blake Publishing for every sale. In June 2011, the Company acquired Alloy Multimedia, which
publishes ESL ReadingSmart, an online, standards-based program for English language learners
(ELL) targeted toward grades 4-12. The Company also offers online postsecondary programs through
its Northstar Learning product line.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP)
for interim financial information and with instructions for Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, the Companys unaudited condensed consolidated financial statements and footnotes
contained herein do not include all of the information and footnotes required by GAAP to be
considered complete financial statements. However, in the opinion of the Companys management,
the accompanying unaudited condensed consolidated financial statements and footnotes contain all
adjustments, including normal recurring adjustments, considered necessary for a fair presentation
of the Companys consolidated financial information as of, and for, the periods presented. The
condensed consolidated results of operations of the Company for an interim period are not
necessarily indicative of its consolidated results of operations to be expected for its fiscal
year. The December 31, 2010 consolidated balance sheet was included in the audited consolidated
financial statements in the Companys annual report on Form 10-K for the year ended December 31,
2010 (2010 Annual Report), which includes all disclosures required by GAAP. Therefore, these
unaudited condensed consolidated financial statements should be read in conjunction with the
consolidated financial statements of the Company included in the 2010 Annual Report.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. The Company evaluates estimates on an
ongoing basis, including those related to the allowance for doubtful accounts, intangible assets,
and income taxes. The Company bases these estimates on historical experience and on other relevant
assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results could differ from those estimates.
8
Table of Contents
Seasonality
In the United States, seasonal trends associated with school budget years and state testing
calendars also affect the timing of the Companys 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. The Companys fourth quarter has historically produced the second highest level of
new subscriptions and renewals, followed by the second and first quarters.
In the United Kingdom, seasonal trends associated with school budget years affect the timing
of sales of subscriptions to new and existing customers. As a result, there is a peak in new
subscriptions and renewals late in the first quarter because teachers and school administrators
often make purchases at the end of their fiscal year, which is usually April 5. The fourth quarter
is also typically strong, with some customers working to calendar year budget periods, while third
quarter is weakest due to the U.K. vacation period.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued updated guidance to
improve the comparability of fair value measurements and related disclosures between GAAP and
International Financial Reporting Standards. This update amends the accounting rules for fair value
measurements and disclosure. The amendments are of two types: (i) those that clarify FASBs intent
about the application of existing fair value measurement and disclosure requirements and (ii) those
that change a particular principle or requirement for measuring fair value or for disclosing
information about fair value measurements. The update is effective for the Company on January 1,
2012. The Company is currently evaluating the impact this standard will have on its consolidated
financial statements.
In June 2011, the FASB issued updated guidance on the presentation of other comprehensive
income in the financial statements. The standard eliminates the option of presenting other
comprehensive income as part of the statement of changes in stockholders equity and instead
requires the entity to present other comprehensive income as either a single, continuous statement
of comprehensive income or as two separate but consecutive statements. This amendment will be
effective for the Company for the first quarter 2012. The Company currently reports other
comprehensive income in the statement of stockholders equity and comprehensive income and will be
required to update the presentation of comprehensive income to be in compliance with the new
standard.
3. FAIR VALUE MEASUREMENTS
ASC 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between
market participants at the measurement date.
ASC 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to
measure fair value. This hierarchy requires entities to maximize the use of observable inputs and
minimize the use of unobservable inputs. The three levels of inputs to valuation techniques used in
fair value calculations 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. |
9
Table of Contents
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 June 30, 2011 |
||||||||||||||||
Assets cash equivalents |
$ | 31,136 | | | $ | 31,136 | ||||||||||
As of December 31, 2010 |
||||||||||||||||
Assets cash equivalents |
$ | 27,816 | | | $ | 27,816 |
The Companys cash equivalents consist of highly liquid money market funds. The fair values of
cash equivalents were determined based upon market prices.
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):
As of June 30, 2011 | As of December 31, 2010 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Cost investment |
$ | 6,446 | n/a | $ | 6,446 | n/a | ||||||||||
Notes receivable |
2,041 | 2,062 | 1,934 | 1,934 | ||||||||||||
Note payable to related party |
2,425 | 2,425 | 2,352 | 2,352 | ||||||||||||
Term loan |
75,338 | 75,338 | 75,763 | 75,763 |
The investment included in the table above is in Edline LLC (Edline), a company that offers
web-based technological solutions for schools and educators. Edline is not publicly traded and the
fair value of the investment is not readily determinable, however the Company believes the fair
value of this asset approximates or exceeds the carrying value.
As of June 30, 2011, the Company had two promissory notes receivable totaling $1.9 million
from Edline. Both of these notes bear interest at 12.5% per annum payable in kind. The interest
and principal amount on these notes receivable are due on June 30, 2016. The notes receivable were
estimated to approximate their carrying value as the notes were refinanced on April 21, 2011 at
market rates.
As of June 30, 2011, the Company had a note payable of $2.5 million related to the acquisition
of EducationCity in June 2010 (see Notes 4 and 10). The note payable was estimated to approximate
its carrying value as the final scheduled payment is within one year.
The fair value of long-term debt at June 30, 2011 was estimated to approximate its carrying
value based on (i) the Company having recently entered into, or amended, the credit facility, (ii)
the variable rate nature of the credit facility and (iii) the interest rate spreads charged on the
loans fluctuating with the total leverage ratio, which is a measurement of the Companys
creditworthiness.
4. ACQUISITIONS
Alloy Multimedia
On June 24, 2011, pursuant to a Stock Purchase Agreement, the Company purchased 100% of the
equity of Alloy Multimedia (Alloy), the publisher of ESL ReadingSmart, an online standards-based
program for English language learners (ELL) for $2.0 million in cash. In addition to the cash
paid at the time of the acquisition, the Company is obligated to make contingent payments of up to
$1.0 million based upon the achievement of certain sales objectives. The fair values of these
payments were estimated to be $0.5 million and were included as a cost of the acquisition.
As part of the acquisition, the Company incurred $0.2 million in transaction costs, including
legal and professional fees, which are recorded in general and administrative expense on the
condensed consolidated statement of operations for the three and six months ended June 30, 2011.
Between the acquisition date and June 30, 2011, Alloys revenues and expenses were not
significant, and therefore, have not been included in the condensed consolidated statements of
operations for the three and six months ended June 30, 2011.
10
Table of Contents
The initial accounting for the acquisition of Alloy is incomplete, as the Company is currently
evaluating the fair values of each asset and liability acquired and has not yet received the final
valuation report on such assets and liabilities. Provisional amounts for assets and liabilities
acquired have been recorded based on managements best estimate of the values based on preliminary
analysis performed. The following table presents the composition of the purchase price and the
provisional amounts recorded in the Companys balance sheet as of June 24, 2011 for assets and
liabilities acquired (in thousands):
Purchase price: |
||||
Cash paid to seller, net of cash received |
$ | 1,978 | ||
Estimated fair values of future contingent payments |
547 | |||
Total purchase price |
$ | 2,525 | ||
Assets (liabilities) acquired: |
||||
Accounts receivable |
$ | 34 | ||
Deferred tax assets |
93 | |||
Fixed assets |
5 | |||
Accounts payable and accrued expenses |
(12 | ) | ||
Deferred revenue |
(142 | ) | ||
Total |
$ | (22 | ) | |
Remaining value, allocated to goodwill & intangibles |
$ | 2,547 | ||
The goodwill acquired is not expected to be deductible for tax purposes.
Pro-forma results of operations, assuming this acquisition was made at the beginning of the
earliest period presented, have not been presented because the effect of this acquisition is not
material to the Companys results.
EducationCity
On June 9, 2010, the Company acquired EducationCity pursuant to a Share Purchase Agreement
with Matthew Drakard, Simon Booley and Tom Morgan. The Company purchased 100% of the equity of
EducationCity for a purchase price of: (i) $65.1 million in cash; (ii) 1,242,408 shares of common
stock of the Company; and (iii) $5.0 million in additional deferred cash consideration, of which
$2.5 million was paid by the Company on December 31, 2010 and an additional $2.5 million will be
paid on December 31, 2011. The acquisition was financed with cash on hand and the proceeds of a new
$15.0 million supplemental term loan and $10.0 million in revolving loan commitments.
5. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill during the six months ended June 30, 2011 are
as follows (in thousands):
Balance as of December 31, 2010 |
$ | 165,694 | ||
Acquisition of Alloy Multimedia |
2,547 | |||
Adjustment due to foreign currency |
424 | |||
Balance as of June 30, 2011 |
$ | 168,665 | ||
The changes in the carrying amount of intangible assets during the six months ended June 30,
2011 are as follows (in thousands):
Balance as of December 31, 2010 |
$ | 37,290 | ||
Amortization |
(2,093 | ) | ||
Adjustment due to foreign currency |
543 | |||
Balance as of June 30, 2011 |
$ | 35,740 | ||
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6. COMMITMENTS AND CONTINGENCIES
The Company is obligated, as lessee, under non-cancelable operating leases for office space in
Dallas, Texas; Naperville, Illinois; Rutland, United Kingdom; and Houston, Texas expiring through
2020. As of June 30, 2011, the future minimum payments required under all operating leases with
terms in excess of one year are as follows (in thousands):
Remainder of 2011 |
$ | 563 | ||
2012 |
970 | |||
2013 |
1,056 | |||
2014 |
958 | |||
2015 |
931 | |||
Thereafter |
4,454 | |||
$ | 8,932 | |||
The Company also has a distribution agreement with a supplier that includes annual minimum royalty
payments to keep the contract in effect, which are not included in the table above. The
aggregate of those annual minimum requirements through December 31, 2020 under the contract total $12.5 million.
7. EARNINGS PER SHARE
Earnings per share is computed using the two-class method, considering the restricted common
shares, due to their participation rights in dividends of the Company. Under this method, the
Companys net income is reduced by the portion of net income attributable to the restricted common
shares, and this amount is divided by the weighted average shares of common stock outstanding.
The components of earnings per share are as follows for the three months ended June 30 (in
thousands):
2011 | 2010 | |||||||||||||||
Net Income | Shares | Net Income | Shares | |||||||||||||
Net income (loss) |
$ | 1,799 | 26,333 | $ | (145 | ) | 25,409 | |||||||||
Less: Income attributable to restricted shares |
(64 | ) | (926 | ) | | (1,227 | ) | |||||||||
Net income (loss) available to common stockholders |
1,735 | 25,407 | (145 | ) | 24,182 | |||||||||||
Basic earnings (loss) per share |
$ | 0.07 | $ | (0.01 | ) | |||||||||||
Dilutive effect of restricted common stock |
166 | | ||||||||||||||
Diluted earnings (loss) per share |
$ | 0.07 | 25,573 | $ | (0.01 | ) | 24,182 | |||||||||
The components of earnings per share are as follows for the six months ended June 30 (in
thousands):
2011 | 2010 | |||||||||||||||
Net Income | Shares | Net Income | Shares | |||||||||||||
Net income |
$ | 2,789 | 26,335 | $ | 1,922 | 25,258 | ||||||||||
Less: Income attributable to restricted shares |
(102 | ) | (941 | ) | (94 | ) | (1,238 | ) | ||||||||
Net income available to common stockholders |
2,687 | 25,394 | $ | 1,828 | 24,020 | |||||||||||
Basic earnings per share |
$ | 0.11 | $ | 0.08 | ||||||||||||
Dilutive effect of restricted common stock |
207 | 384 | ||||||||||||||
Diluted earnings per share |
$ | 0.10 | 25,601 | $ | 0.08 | 24,404 | ||||||||||
For the three months and six months ended June 30, 2011, the impact of 977 and 2,339 shares of
restricted common stock, respectively, and options to purchase 1,037,094 and 979,972
weighted-average shares of common stock, respectively, were excluded from the diluted earnings per
share calculation. For the three months and six months ended June 30, 2010, the impact of 417,618
and 176 shares of restricted common stock, respectively, and
options to purchase 673,231 and 631,036 weighted-average shares of common stock, respectively,
were excluded from the diluted earnings per share calculation, as their effect was antidilutive.
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8. STOCK-BASED COMPENSATION
During the six months ended June 30, 2011, the Company issued stock options in the amounts and
for the periods shown in the following table. The fair value of each option was estimated on the
date of grant using the Black-Scholes option pricing model with the following assumptions:
Six Months | ||||
Ended June 30, | ||||
2011 | ||||
Number of options granted |
559,976 | |||
Weighted average exercise
price of options granted |
$ | 10.15 | ||
Weighted average grant date
fair value of options granted |
$ | 4.97 | ||
Expected term (in years) (1) |
6.25 | |||
Volatility (2) |
47.6 | % | ||
Risk free interest rate (3) |
2.4 | % | ||
Expected annual dividends |
None |
(1) | The expected term was calculated as the average between the vesting term and the contractual term. We used the simplified method due to the limited period of time the Companys common stock has been publicly traded which provides insufficient historical exercise data.. | |
(2) | Expected volatility was based on the historical volatility of guideline companies over a preceding period equal to the expected term of the award. | |
(3) | The risk free rate is based on the U.S. Treasury yield curve at the time of grant for periods consistent with the expected term of the options. |
The Company recognized $0.6 million and $1.8 million in share-based compensation expense
related to stock options and restricted stock awards during the three and six months ended June 30,
2011, respectively. The Company recognized $0.5 million and $0.9 million in share-based
compensation expense related to stock options and restricted stock awards during the three and six
months ended June 30, 2010, respectively. As of June 30, 2011, there was approximately $5.4 million
of unrecognized stock-based compensation expense related to unvested restricted common stock and
options for common stock that is expected to be recognized over a weighted average period of 3.2
years.
Effective on January 31, 2011 Mr. James Walburg retired from his position as the Companys
Chief Financial Officer. Mr. Walburgs separation agreement allowed for the acceleration of his
restricted stock as follows: 50% of his restricted common stock subject to time-based vesting
vested on January 10, 2011, 50% of his restricted common stock subject to time-based vesting will
vest on January 10, 2012, and all of his restricted common stock subject to vesting based on
performance measures vested on January 10, 2011. This accelerated vesting resulted in compensation
expense of $0.7 million being recorded during the six months ended June 30, 2011.
9. BUSINESS SEGMENT DATA AND GEOGRAPHICAL INFORMATION
The Company has three operating segments, Study Island, Educationcity Limited (a United
Kingdom company), and Educationcity Inc. (an Illinois company). The Company aggregates the three
operating segments to one reportable segment based on the similar nature of the products, content
and technical production processes, types of customers, methods used to distribute the products,
and similar rates of profitability.
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The three operating segments offer subscription-based online products that provide
instruction, practice, assessment and productivity tools for teachers and students. The content and
engineering teams operate in a similar manner to enhance and maintain the products. The primary
customer bases for all three operating segments are schools. The markets for the U.S. and U.K. are
both English-speaking, which is important from a product marketing and development perspective. The
operating segments have similar rates of profitability.
Geographical areas are North America (which includes operations of the United States and
Canada) and United Kingdom. The following geographical area information includes revenues based on
the physical location of the operations (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue: |
||||||||||||||||
North America |
$ | 16,545 | $ | 13,264 | $ | 32,379 | $ | 25,813 | ||||||||
United Kingdom |
1,743 | 333 | 3,211 | 333 | ||||||||||||
$ | 18,288 | $ | 13,597 | $ | 35,590 | $ | 26,146 | |||||||||
The following geographical area information includes total long-lived assets (which consist of all
non-current assets, other than goodwill, indefinite-lived intangible assets and deferred tax
assets) based on physical location (in thousands):
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Assets: |
||||||||
North America |
$ | 32,358 | $ | 33,134 | ||||
United Kingdom |
13,622 | 13,791 | ||||||
$ | 45,980 | $ | 46,925 | |||||
10. RELATED-PARTY TRANSACTIONS
Providence Equity Partners beneficially owns 47% of the Companys outstanding shares of common
stock. The Company purchases equipment from an affiliate of Providence Equity Partners. Equipment
purchases with this supplier totaled $0.2 million and $0.5 million for the three and six months
ended June 30, 2011, respectively, and totaled $0.1 million and $0.3 million for the three and six
months ended June 30, 2010, respectively.
As part of the sale of TeacherWeb to Edline, the Company signed a transition services
agreement with Edline whereby the Company performs certain accounting and administrative functions
related to TeacherWeb for a period that has been subsequently extended until October 31, 2010.
During the transition period, certain costs are paid by the Company on behalf of TeacherWeb, which
are billed to and reimbursed by Edline. The Company receives no fee for the performance of these
services. For the three and six months ended June 30, 2011, the Company paid $0.1 million to
TeacherWeb vendors on behalf of Edline. For the three and six months ended June 30, 2010, the
Company paid $0.4 million and $0.7 million, respectively, to TeacherWeb vendors on behalf of
Edline, of which a total of $0.2 million was receivable from Edline as of June 30, 2010, and was
recorded in other assets in the condensed consolidated balance sheet.
EducationCity U.K. leases office space in Rutland, U.K. which is owned by the pension funds of
two officers and stockholders of the Company. The Company made payments under this lease for $0.05
million and $0.1 million for the three and six months ended June 30, 2011, respectively. The
Company made no payments under this lease for the three and six months ended June 30, 2010. The
Company concluded during purchase accounting that this lease is a market based lease.
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In connection with the purchase of EducationCity, the Company incurred a $5.0 million note payable
to the sellers, payable in equal installments on December 31, 2010 and 2011. Upon the purchase, the
sellers became officers of the Company and stockholders. As of June 30, 2011, the remaining
balance to be paid under that note payable was $2.5 million.
11. SUBSEQUENT EVENTS
On August 5, 2011, the Company and Tim McEwen, Chief Executive Officer, entered into
an amendment to Mr. McEwens restricted stock agreements related to his
performance-based vesting restricted stock (the restricted stock). Pursuant to
the amendment, (i) if Mr. McEwen terminates or is terminated for any reason other than a termination
by the Company for Cause prior to September 1, 2011, he forfeits all unvested
restricted stock on the one year anniversary of his termination date; (ii) if Mr.
McEwen terminates or is terminated prior to September 1, 2012: (x) he forfeits 50% of his unvested
restricted stock on the one year anniversary of his termination date; but (y) gets
to keep the remainder, which remains subject to vesting; and (iii) if Mr. McEwen
terminates or is terminated after September 1, 2012, he gets to keep all of his unvested restricted
stock, which remains subject to vesting.
The restricted stock remains subject to the same performance hurdles outlined in the
original Restricted Stock Agreements for Mr. McEwen. The performance hurdles,
include Providence Equity Partners achievement of a return on their investment
through distributions or sales. The achievement of the performance hurdles are not
currently considered to be probable and cannot be estimated at this time.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion is intended to assist in the understanding of our consolidated
financial position and our results of operations. This discussion should be read in conjunction
with our unaudited condensed consolidated financial statements and the related notes in Item 1 of
this report.
Overview
Archipelago Learning, Inc. (the Company, we, us, or our) is a leading
subscription-based, software-as-a-service (SaaS) provider of education products. We provide
standards-based instruction, practice, assessments, reporting and productivity tools that support
educators efforts to reach students in innovative ways and enhance the performance of students at
a low cost via proprietary web-based platforms. As of June 30, 2011, our product lines, which
include Study Island, EducationCity, Reading Eggs, Northstar Learning, and ESL ReadingSmart, were
utilized by over 14.1 million students in approximately 38,700 schools in all 50 states,
Washington, D.C., Canada, and the United Kingdom (U.K.).
We were founded in 2000. In 2001, we launched our first Study Island products in two states.
By 2009, we had developed Study Island products for all 50 states, in the subject areas of reading,
writing, mathematics, social studies and science, and have grown from serving 57 schools in 2001 to
38,700 schools as of June 30, 2011with our five product lines. Study Island helps students in K-12
master grade level academic standards in a fun and engaging manner. 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.
In June 2010, we entered the U.K. market with the acquisition of Educationcity Limited
(EducationCity), a leading developer and publisher of EducationCity.com, an online preschool
through sixth grade (Pre-K-6) educational content and assessment program for schools in the
United Kingdom and United States. Similar to Study Island, EducationCity maps to standards,
combines rigorous content and interactive animations, fun games, and motivational rewards to drive
academic success in a fun and engaging manner. Unlike Study Island, EducationCity core classroom
and individualized instruction is geared toward the initial teaching phases of academic content.
EducationCity helps students learn basic skills and concepts while Study Island helps assess,
reinforce and master this knowledge. When used in conjunction with one another, EducationCity and
Study Island provide a powerful comprehensive teaching and reinforcement solution to enhance
student learning and teacher performance.
In August 2010, we began selling Reading Eggs, an online product focusing on teaching young
children to read. Reading Eggs is sold under a distribution agreement with Blake Publishing, which
requires us to pay a 35% royalty to Blake Publishing for every sale. Beginning in 2011, the Company
has been required to pay a minimum royalty each year of the agreement.
In June 2011, through the acquisition of Alloy Multimedia (Alloy), publisher of ESL
ReadingSmart, we entered into the English language learners market. ESL ReadingSmart is an online,
standards-based program for English language learners targeted toward grades 4-12. The product
offers individualized, content-based instruction to develop English language proficiency with
emphasis on literacy and academic language development for newcomers, beginners, intermediate,
early advanced, and advanced English learners.
We operate as three operating segments, Study Island (including the Study Island, Northstar
Learning, Reading Eggs, and ESL ReadingSmart product lines), Educationcity Limited (a U.K. company)
and Educationcity Inc. (an Illinois company). We aggregate the three operating segments into one
reportable segment based on the similar nature of the products, content and technical production
processes, types of customers, methods used to distribute the products, and similar rates of
profitability. See Note 9 in our condensed consolidated financial statements for further
information on segments and geographic area disclosures.
Subscriptions to our Study Island and EducationCity products generate the majority of our
revenue. Our products are sold as subscriptions through purchase orders. The average subscription
period for our products is 16 months, and we occasionally sell multi-year subscriptions. 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
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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.
Key Legislative Developments that May Impact Our Business and Operations
In the United States, the increased focus on higher academic standards and assessments as a means to measure
educator accountability is largely reflected in legislative efforts such as No Child Left Behind, or NCLB, the common name for the 2001 reauthorization of the Elementary and Secondary Education Act, or ESEA.
ESEA required all states to have academic standards in place for K-12 students in reading, math and science, and to assess student achievement annually with end of school year assessments.
The ESEA legislation was initially scheduled for reauthorization in October 2008, but has been continually extended. In 2010, the federal administration recommended significant changes to ESEA. While many politicians believe that the nations primary education law needs to be revised, the timing of reauthorization continues to be uncertain.
In August 2011, the Secretary of Education announced plans to grant waivers for parts of the NCLB law, if
Congress does not reauthorize ESEA for the start of the 2011-2012 school year. Even before this announcement,
several states already requested these waivers as a means of getting around the rising performance requirements of NCLB.
Still other states informed the Department of Education that they intend to ignore parts of the NCLB.
While uncertainty continues to surround the substance and timing of ESEA reauthorization, we believe that higher standards,
more rigorous assessments and accountability will remain key components of the revised legislation.
In addition, most of our U.S. 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 have become more limited as
many states or districts face budget cuts due to decreases in their tax bases and rates.
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 and 2009 tax years has decreased, which has put pressure on state and federal budgets.
However, according to the Nelson A. Rockefeller Institute of Government,
state tax revenues grew by 9% in the first quarter of 2011, representing the fifth consecutive quarter that states reported growth in collections on a year-over-year basis.
Preliminary figures collected by the Rockefeller Institute for April-May of 2011 indicate that most states continue seeing strong growth in revenues. However, despite five consecutive quarters of growth, state tax revenues were still 1% lower in the first quarter of 2011 than in the same quarter in 2008.
While state tax revenues have steadily improved, local tax revenues have declined an average of 0.6% over the last four quarters, compared to a 0.4% decline for the preceding year and 3.0% growth of two years ago.
The 2011 U.S. federal budget took effect on October 1, 2010. However, Congress could not agree on a budget, and as a result, a series of continuing resolutions were passed with K-12 public education funding held constant with prior year.
Congress eventually passed and the President signed the 2011 budget in April 2011.
The budget provides $68.5 billion for education compared to $69.8 billion in the prior year, including flat funding for the two largest programs: Title I ($14.5 billion) and IDEA ($12.5 billion).
The 2012 U.S. federal budget takes effect on October 1, 2011, however given the current macroeconomic environment, the federal budget deficit, the debt ceiling debate and congressional polarization on discretionary program spending, the final outcome for next years education budget is uncertain at this time.
Currently, the Obama administration has proposed spending $77.4 billion on education next year. The budget calls for funding changes to a wide variety of programs, including sizable increases to special
education, science and technology, career and college readiness, and adult education. However, the Presidents proposed budget faces an uncertain future in Congress, in particular the Republican-led House, which is expected to seek significant cuts in all discretionary spending areas, including education funding.
In August 2011, the federal administration reached an agreement to raise the debt ceiling in order to avoid financial default, while slashing more than $2 trillion in federal spending over the next decade. While the details of the spending cuts to states remain unclear,
lawmakers from both parties have discussed the need to cut or impose caps on discretionary spending over the next decade,
which could mean additional cuts in federal aid to states, which
could shift more costs to states that already are having trouble balancing their budgets. A decrease in the federal
budget could mean less money for the non-government vendors that provide technology, textbooks and after-school
tutoring for students. School districts spent about $49 billion on such outside services during the 2007-08
school year, according to the latest data from the Department of Education. For now, however, we believe producers of K-12
print-based curriculum and instructional materials are struggling while companies that are focused on technology-based
instruction and tools for data collection and analysis are doing much better, according to industry sources.
Budget and regulatory uncertainty has continued at the state level through the second quarter with many state legislatures deadlocked over how to close budget shortfalls and pay for education and other services leaving schools and districts uncertain as to their funding levels for next year.
Over 40 states faced budget shortfalls and, as of late June, approximately 15 states had yet to approve budgets for fiscal years starting (in most cases) in July. As of June, 34 states had cut funding to K-12 education, while a few held K-12 spending constant, and a few others increased K-12 funding.
In 2010, the U.S. Department of Education implemented its highly publicized Race to the Top (RttT) competition whereby 11 winning states and the District of Columbia were awarded funds totaling $3.4 billion in aggregate for agreeing to implement bold educational reforms.
The funds were awarded to states based on the quality of plans
designed to implement bold educational reform initiatives and likelihood of actually being able to follow-through and execute. However, every state but Georgia has now amended its RttT plan in some way, usually scaling back the timeline or scaling back an initiative.
In 2011, an additional $700 million will be awarded to states as a part of RttT.
A requirement for RttT applicants was to signal their intent to officially adopt the Common Core Standards for K-12 in reading and mathematics, released in June 2010. As of June 30, 2011, 44 states, the District of Columbia, American Samoa Islands, Guam, Northern Mariana Islands, Puerto Rico and the U.S. Virgin Islands had officially adopted the new standards,
although adoption of the standards does not bring immediate change in the classroom. We believe that implementation of the Common Core Standards will be a long-term process, as states rethink their teacher training, curriculum, instructional materials and testing. We continue to believe that Common Core Standards implementation will evolve in different ways across the adopting states and will raise the overall rigor of curriculum and assessments,
but we increasingly believe that the federal government will not mandate national standards and assessments. Furthermore, there is now a growing movement in some states to oppose the Common Core Standards in order to prevent unwanted federal control over education. For instance, legislation has recently been introduced in four states to disallow adoption of the Common Core Standards, and several other states are considering similar legislation.
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Study Island products are specifically built from the varying academic and assessment standards in all 50 states, which we believe differentiates them from the products offered by our competitors. However, given the uncertainty regarding the implementation of Common Core Standards,
we have invested both in development of new Common Core products for the 44 adopting states and the District of Columbia as well as continued development of new products and enhancements for existing state standards.
While the federal legislative efforts and budgetary challenges in schools could present challenges to our future sales, we believe that we are positioned to perform well in the current environment for various reasons: (1) we are well aligned with educational reform policies and initiatives, including the Common Core Standards,
(2) we make innovation easy as schools shift from print-based solutions to online digital content, instruction, assessment and data reporting, (3) we have a proven model and track record for engaging and improving learning outcomes, (4) we are affordable compared to other educational product offerings and (5) we still have relatively low overall school penetration with room for growth.
The U.K. market and industry trends are also of importance to our business due to our
EducationCity product. While the global economic recession has impacted the United Kingdom, the new
government under British Prime Minister, David Cameron, has attempted to protect education, with
the Department for Education budget rising from £35.4 billion to £39 billion over the next four
years. This is the money that goes directly to schools. In addition, we believe that teachers will
be given greater freedom from bureaucratic burdens to use their professional judgment to meet the
needs of their pupils. As a result, we believe that head teachers will have increased flexibility
over their budgets, including through simpler, fairer and more transparent funding streams.
Results of Operations
Comparison of the Three Months Ended June 30, 2011 and 2010
The following table summarizes our consolidated operating results for the three months ended
June 30 (dollars in thousands):
Change | ||||||||||||||||
2011 | 2010 | Dollars | Percentage | |||||||||||||
Revenue |
$ | 18,288 | $ | 13,597 | $ | 4,691 | 34.5 | % | ||||||||
Cost of revenue |
1,362 | 1,029 | 333 | 32.4 | % | |||||||||||
Gross profit |
16,926 | 12,568 | 4,358 | 34.7 | % | |||||||||||
Operating expense: |
||||||||||||||||
Sales and marketing |
5,505 | 4,146 | 1,359 | 32.8 | % | |||||||||||
Content development |
1,703 | 1,226 | 477 | 38.9 | % | |||||||||||
General and administrative |
5,708 | 6,591 | (883 | ) | (13.4 | %) | ||||||||||
Total |
12,916 | 11,963 | 953 | 8.0 | % | |||||||||||
Income from continuing operations |
4,010 | 605 | 3,405 | 562.8 | % | |||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(1,105 | ) | (879 | ) | (226 | ) | (25.7 | %) | ||||||||
Interest income |
79 | 150 | (71 | ) | (47.3 | %) | ||||||||||
Foreign currency loss |
(16 | ) | (99 | ) | 83 | 83.8 | % | |||||||||
Derivative gain |
| 27 | (27 | ) | * | * | ||||||||||
Total |
(1,042 | ) | (801 | ) | (241 | ) | (30.1 | %) | ||||||||
Income (loss) before tax |
2,968 | (196 | ) | 3,164 | * | * | ||||||||||
Provision (benefit) for income tax |
1,169 | (51 | ) | 1,220 | * | * | ||||||||||
Net income (loss) |
$ | 1,799 | $ | (145 | ) | $ | 1,944 | * | * | |||||||
** | Percentage not meaningful for analysis. |
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Revenue.
We generate revenue from: customer subscriptions to standards-based instruction, practice,
assessments and productivity tools; training fees, for onsite or online training sessions that are
primarily provided to new Study
Island customers; and individual buys, which are individual purchases for access to a product
(one subject in a specific state for a specific grade level). Customer subscriptions provide the
vast majority of our revenue.
Our subscription purchases are generally evidenced by a purchase order or other evidence of an
arrangement. We recognize an invoiced sale in the period in which the purchase order or other
evidence of an arrangement is received and the invoice is issued, which may be at a different time
than the commencement of the subscription. Revenue for invoiced sales is deferred and recognized
ratably over the subscription term beginning on the commencement date of the applicable
subscription.
Factors affecting our 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 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.
In the United States, 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. Our fourth quarter has historically produced the
second highest level of new subscriptions and renewals, followed by our second and first quarters.
In the United Kingdom, seasonal trends associated with school budget years affect the timing
of our sales of subscriptions to new and existing customers. As a result, there is a peak in new
subscriptions and renewals late in the first quarter because teachers and school administrators
often make purchases at the end of their fiscal year, which is usually April 5. The fourth quarter
is also typically strong, with some customers working to calendar year budget periods, while third
quarter is weakest due to the U.K. vacation period.
Because revenue from customer subscriptions 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 revenue to fluctuate significantly, but does impact our cash
flow.
Revenue for the three months ended June 30, 2011 was $18.3 million, representing an increase
of $4.7 million, or 34.5%, as compared to revenue of $13.6 million for the three months ended June
30, 2010. Of this increase, $2.5 million was attributable to EducationCity, which was acquired on
June 9, 2010. In addition, subscription and training revenue is recognized over the term of the
subscription, which averages 16 months. Consequently, our revenue in any month is impacted by
invoiced sales from subscriptions purchased or renewed during the current and prior periods. The
remaining increase in revenue during the period is due to Study Islands increased products in our
more mature states leading to additional sales to existing customers, our increased focus on
existing customers and renewal efforts, and our planned increases in our sales force.
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. For EducationCity,
schools and/or districts (local authorities) pay a fixed annual subscription fee for each subject.
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The following table sets forth information regarding our invoiced sales as well as other
metrics that impact our revenue for the three months ended June 30 (dollars in thousands):
2011 | 2010 | |||||||
Invoiced sales: |
||||||||
New customers |
$ | 3,809 | $ | 4,079 | ||||
Existing customers |
13,330 | 11,368 | ||||||
Other sales |
396 | 260 | ||||||
Total |
17,535 | 15,707 | ||||||
Royalties on invoiced sales |
(165 | ) | | |||||
Change in deferred revenue |
918 | (2,110 | ) | |||||
Revenue |
$ | 18,288 | $ | 13,597 | ||||
Other metrics: |
||||||||
U.S. schools using our products |
29,600 | 27,361 | ||||||
U.K. schools using our products |
9,100 | 8,539 | ||||||
U.S. products available |
2,240 | 2,167 | ||||||
U.K. products available |
83 | 66 | ||||||
States with schools utilizing our products |
50 | 50 |
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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 effects of revenue deferral and 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, 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 revenue with the associated cost of
revenue. Reconciliation is provided in the table above between invoiced sales and revenue, the
closest GAAP measure to invoiced sales.
Due to purchase accounting for the acquisition of EducationCity and Alloy, we do not recognize
the full amounts paid by customers for acquired subscriptions prior to the acquisition.
Consequently for EducationCity, the deferred revenue balance at the date of acquisition was reduced
from $15.6 million to $9.9 million. The purchase accounting adjustment reduced our revenues by $0.6
million for the three months ended June 30, 2011. For Alloy, the deferred revenue balance at the
date of acquisition was reduced from $0.2 million to $0.1 million.
As of June 30, 2011, approximately 29,600 schools used our U.S. products and approximately
9,100 schools used our U.K. products. A school is considered to be using our products if it has an
active subscription for any or all of the products available to it. The number of schools using our
products will increase for sales to new schools and will decrease if 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. If the
school subsequently purchases a subscription to our products after this renewal period, we consider
it to be a new subscription.
Cost of Revenue.
Cost of revenue consists of the costs to host and make available our products and services to
our customers. A significant portion of the cost of revenue includes salaries and related expense
for our engineering employees and contractors who maintain our servers and technical equipment and
who work on our web-based hosted platform. Other costs include facility costs for our web platform
servers and routers, network monitoring costs and amortization of our technical development
intangible assets.
Cost of revenue for the three months ended June 30, 2011 increased by $0.4 million, or 32.4%,
to $1.4 million from $1.0 million for the three months ended June 30, 2010. This increase in cost
of revenue was primarily attributable to additional salaries and benefits costs at EducationCity,
which was acquired on June 9, 2010.
Sales and Marketing Expense.
Our sales and marketing expense consists primarily of salaries, commissions and related
expense for personnel in our inside and field sales teams, our new customer implementation and
retention team, marketing, customer service, training and account management. Commissions are
earned when sales are invoiced to customers. Other costs include marketing costs, travel and
amortization of our customer relationship intangible assets. Marketing expense consists of direct
mail, email prospecting, pay per click advertising, search engine optimization, printed material,
marketing research, and trade shows. 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 for the three months ended June 30, 2011 increased by $1.4
million, or 32.8%, to $5.5 million from $4.1 million for the three months ended June 30, 2010. This
increase was primarily attributable to $0.6 million of additional salaries & benefits costs, $0.3
million in amortization expense, $0.2 million in contract labor costs, and $0.2 million in
marketing costs for EducationCity, which was acquired on June 9, 2010.
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Content Development Expense.
Our content development expense primarily consists of salaries and related expense for our
content development employees, who are responsible for writing the questions, lessons, activities
and games content for our Study Island, Northstar Learning and EducationCity products, outsourced
content writing costs, and amortization of our program content intangible assets.
Content development expense for the three months ended June 30, 2011 increased by $0.5
million, or 38.9%, to $1.7 million from $1.2 million for the three months ended June 30, 2010. This
increase was primarily attributable to $0.2 million in additional salaries and benefits costs and
$0.2 million in professional services related to content development for EducationCity, which was
acquired on June 9, 2010.
General and Administrative Expense.
Our general and administrative expense includes salaries and related expense for our
executive, accounting, and other administrative employees, professional services, rent, insurance,
travel and other corporate expense.
General and administrative expense for the three months ended June 30, 2011 decreased by $0.9
million, or 13.4%, to $5.7 million from $6.6 million for the three months ended June 30, 2010. This
decrease was primarily attributable to $3.3 million in transaction costs related to the 2010
acquisition of EducationCity which were not incurred in 2011 compared to $0.2 million in
transaction costs from the acquisition of Alloy in June 2011. This was partially offset by the
addition of $1.2 million of costs related to EducationCity that was acquired on June 9, 2010,
including an additional $0.7 million in salaries and benefits costs, $0.2 million in office rent,
$0.1 million in amortization of intangible assets, and $0.1 million in depreciation expense. In
addition, Study Island incurred an additional $0.5 million in salaries and benefits expense due to
increased headcount and an additional $0.3 million in severance expense related to the
retirement of our former chief financial officer.
Other Income (Expense).
Our other income (expense) includes interest expense, interest income and derivative and
foreign currency losses.
Other income (expense) totaled $1.0 million of net expense for the three months ended June 30,
2011, which was an increase of expense of $0.2 million, or 30.1%, compared to net expense of $0.8
million for the three months ended June 30, 2010. The increase was primarily due to increased
interest expense of $0.2 million during the period due to our additional term loan of $15.0 million
in connection with the acquisition of EducationCity and amended credit agreement.
Interest expense includes interest on our $70.0 million term loan and $10.0 million revolving
credit facility entered into in November 2007, interest on our $15.0 million supplemental term loan
and $10.0 million supplemental revolving credit facility entered into in June 2010, and
amortization of debt financing costs. We had $10.0 million outstanding under the revolving credit
facility as of June 30 2010, which was drawn on June 9, in connection with the acquisition of
EducationCity. No amounts were outstanding under the revolving credit facility during the three
months ended June 30, 2011. The amounts borrowed under our term loan bear interest at rates based
upon either a base rate or LIBOR, plus an applicable margin.
Interest income includes income on our cash and cash equivalent investments and from our note
receivable from Edline.
Derivative loss includes changes in the fair value and realized interest income and expense on
our interest rate swap, which is required by the terms of our credit facility and is 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 2010, the notional amount of the interest rate
swap decreased to $40.5 million and continued to decrease in periodic amounts to a notional amount
of $30.5 million at the December 31, 2010 termination date. We did not hold any derivative
positions at June 30, 2011.
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The foreign currency loss was primarily related to payments of intercompany transactions
between EducationCity in the United States and the United Kingdom and U.S. dollar cash accounts
held at EducationCity UK.
Provision for Income Tax.
Our provision for income tax is comprised of federal, foreign, state and local taxes based on
our income in the appropriate jurisdictions. Upon our acquisition of EducationCity, we became a
taxpayer in the United Kingdom for the taxable income of Educationcity Limited. We recognized tax
expense using an effective rate of 39.4% for the three months ended June 30, 2011 as compared to
26.0% for the three months ended June 30, 2010. The effective tax rate for June 30, 2011 increased
due to a loss being recorded in the second quarter of 2010 compared to a profit in 2011. Permanent
addbacks cause the tax rate to be lower in a loss quarter and higher in a profitable quarter.
Comparison of the Six Months Ended June 30, 2011 and 2010
The following table summarizes our consolidated operating results for the six months ended
June 30 (dollars in thousands):
Change | ||||||||||||||||
2011 | 2010 | Dollars | Percentage | |||||||||||||
Revenue |
$ | 35,590 | $ | 26,146 | $ | 9,444 | 36.1 | % | ||||||||
Cost of revenue |
3,069 | 1,942 | 1,127 | 58.0 | % | |||||||||||
Gross profit |
32,521 | 24,204 | 8,317 | 34.4 | % | |||||||||||
Operating expense: |
||||||||||||||||
Sales and marketing |
11,426 | 7,968 | 3,458 | 43.4 | % | |||||||||||
Content development |
3,410 | 2,267 | 1,143 | 50.8 | % | |||||||||||
General and administrative |
11,161 | 9,380 | 1,781 | 19.0 | % | |||||||||||
Total |
25,997 | 19,615 | 6,382 | 32.5 | % | |||||||||||
Income from continuing operations |
6,524 | 4,589 | 1,935 | 42.2 | % | |||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(2,197 | ) | (1,649 | ) | (548 | ) | (33.2 | %) | ||||||||
Interest income |
149 | 303 | (154 | ) | (50.8 | %) | ||||||||||
Foreign currency loss |
(137 | ) | (99 | ) | (38 | ) | (38.4 | %) | ||||||||
Derivative loss |
| (46 | ) | (46 | ) | * | * | |||||||||
Total |
(2,185 | ) | (1,491 | ) | (694 | ) | (46.5 | %) | ||||||||
Net income before tax |
4,339 | 3,098 | 1,241 | 40.1 | % | |||||||||||
Provision for income tax |
1,550 | 1,176 | 374 | 31.8 | % | |||||||||||
Net income |
$ | 2,789 | $ | 1,922 | $ | 867 | 45.1 | % | ||||||||
** | Percentage not meaningful for analysis. |
Revenue.
Revenue for the six months ended June 30, 2011 was $35.6 million, representing an increase of
$9.4 million, or 36.1%, as compared to revenue of $26.1 million for the six months ended June 30,
2010. Of this increase, $5.1 million was due to the acquisition of EducationCity on June 9, 2010.
In addition, subscription and training revenue is recognized over the term of the subscription,
which averages 16 months. Consequently, our revenue in any month is impacted by invoiced sales from
subscriptions purchased or renewed during the current and prior periods. The remaining increase in
revenue during the period is due to Study Islands increased products in our more mature states
leading to additional sales to existing customers, our increased focus on existing customers and
renewal efforts, and our sales force expansion.
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The following table sets forth information regarding our invoiced sales as well as other
metrics that impact our revenue for the six months ended June 30 (dollars in thousands):
2011 | 2010 | |||||||
Invoiced sales: |
||||||||
New customers |
$ | 7,727 | $ | 7,576 | ||||
Existing customers |
24,332 | 18,102 | ||||||
Other sales |
875 | 600 | ||||||
Total |
32,934 | 26,278 | ||||||
Royalties on invoiced sales |
(276 | ) | | |||||
Change in deferred revenue |
2,932 | (132 | ) | |||||
Revenue |
$ | 35,590 | $ | 26,146 | ||||
Other metrics: |
||||||||
U.S. schools using our products |
29,600 | 27,361 | ||||||
U.K. schools using our products |
9,100 | 8,539 | ||||||
U.S. products available |
2,240 | 2,167 | ||||||
U.K. products available |
83 | 66 | ||||||
States with schools utilizing our products |
50 | 50 |
Due to purchase accounting for the acquisition of EducationCity and Alloy, we do not recognize
the full amounts paid by customers for acquired subscriptions prior to the acquisition.
Consequently for EducationCity, the deferred revenue balance at the date of acquisition was reduced
from $15.6 million to $9.9 million. The purchase accounting adjustment reduced our revenues by $1.4
million for the six months ended June 30, 2011. For Alloy, the deferred revenue balance at the
date of acquisition was reduced from $0.2 million to $0.1 million.
Cost of Revenue.
Cost of revenue for the six months ended June 30, 2011 increased by $1.2 million, or 58.0%, to
$3.1 million from $1.9 million for the six months ended June 30, 2010. Of this increase, $0.7
million was due to the acquisition of EducationCity on June 9, 2010, including additional salaries
and benefits costs of $0.4 million, colocation costs of $0.2 million, and amortization expense on
intangible assets of $0.1 million. The remainder of the increase in cost of revenue was primarily
attributable to increased costs for our disaster recovery site.
Sales and Marketing Expense.
Sales and marketing expense for the six months ended June 30, 2011 increased by $3.4 million,
or 43.4%, to $11.4 million from $8.0 million for the six months ended June 30, 2010. Of this
increase, $3.1 million was due to the acquisition of EducationCity on June 9, 2010, including $1.3
million in additional salaries and benefits costs, $0.7 million in amortization expense on
intangible assets, $0.6 million in marketing costs, $0.5 million in contract labor costs,. The
remainder of the increase was primarily attributable to increases in salaries and related costs
resulting from increased headcount and annual salary increases.
Content Development Expense.
Content development expense for the six months ended June 30, 2011 increased by $1.1 million,
or 50.8%, to $3.4 million from $2.3 million for the six months ended June 30, 2010. Of this
increase, $0.8 million was attributable to the acquisition of EducationCity on June 9, 2010,
including additional salaries and benefits costs of $0.5 million, professional services costs of
$0.3 million, and amortization expense on intangible assets of $0.1 million. The remainder of this
increase was primarily attributable to increases in salaries and related costs of $0.2 million
related to increased headcount and annual salary increases, primarily related to development of our
new SAT and ACT products and to Northstar Learning.
General and Administrative Expense.
General and administrative expense for the six months ended June 30, 2011 increased by
$1.8 million, or 19.0%, to $11.2 million from $9.4 million for the six months ended June 30, 2010.
Of this increase, $2.3 million was related to the acquisition of EducationCity on June 9, 2010,
including $1.1 million in additional salaries and benefits costs, $0.3 million in office rent
expense, $0.2 million in amortization expense on intangible assets, $0.1 million in contract labor
costs, $0.1 million in depreciation expense, and $0.5 million in other corporate costs. The
remainder of the increase was primarily due to a $0.9 million increase in salary expense due to
increased headcount and a $1.1 million increase in severance expense and stock-based
compensation expense primarily from the accelerated vesting of our former chief financial officers
restricted stock (see Note 7). The increases are offset by a reduction in
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acquisition costs of $3.1 million related to the $3.3 million in transaction costs from the
EducationCity acquisition in June 2010 compared to $0.2 million in transaction costs from the
acquisition of Alloy in June 2011.
Other Income (Expense).
Other income (expense) totaled $2.2 million of net expense for the six months ended June 30,
2011, which was an increase in expense of $0.7 million from a net expense of $1.5 million for the
six months ended June 30, 2010. Interest expense increased $0.5 million during the period due to
our additional term loan of $15.0 million in connection with the acquisition of EducationCity and
amended credit agreement, which was offset by a decrease of $0.2 million of interest income from
our note receivable from Edline.
Provision for Income Tax.
Our provision for income tax is comprised of federal, foreign, state and local taxes based on our
income in the appropriate jurisdictions. Upon our acquisition of EducationCity, we became a
taxpayer in the United Kingdom for the taxable income of Educationcity Limited. We recognized tax
expense using an effective rate of 35.7% for the six months ended June 30, 2011 as compared to
38.0% for the six months ended June 30, 2010. The effective tax rate for June 30, 2011 decreased
due to a one-time tax benefit related to the decrease in the statutory tax rate in the United
Kingdom.
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 do not anticipate paying any dividends
on our capital stock for the foreseeable future. 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. Several factors outside
of our control may impact our cash flow. For example, we believe that there is substantial
uncertainty around the substance and timing of the ESEA reauthorization. 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 standards, assessments and
accountability, or introduces national standards or assessments that would make it easier for
competitors to enter our markets, demand for our products may materially decrease, and we may
experience lower cash flows, 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 flows.
Our primary sources of liquidity are our cash and cash equivalent balances as well as
availability under our revolving credit facility. As of June 30, 2011, we had cash and cash
equivalents of $36.3 million and $20.0 million of availability under our revolving credit facility.
Our total indebtedness was $75.3 million at June 30, 2011, including our additional term loan of
$15.0 million in connection with the acquisition of EducationCity and amended credit agreement. We
believe that our cash and cash equivalent balance, consistent cash flow and our $20.0 million
availability under our revolving credit facility, combined with our low capital expenditure costs
will provide us with sufficient capital to continue to organically grow our business. 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.
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Cash Flow
Our net consolidated cash flows consist of the following, for the six months ended June 30 (in
thousands):
2011 | 2010 | |||||||
Provided by (used in): |
||||||||
Operating activities |
$ | 7,526 | $ | 4,161 | ||||
Investing activities |
(3,503 | ) | (61,724 | ) | ||||
Financing activities |
(386 | ) | 22,351 |
Cash Flow from Operating Activities
Net cash provided by operating activities was $7.5 million for the six months ended June 30,
2011, compared to $4.2 million during the six months ended June 30, 2010. This $3.3 million
increase was primarily due to payments for transaction costs related to the acquisition of
EducationCity of $3.2 million, partially offset by cash generated from net income, excluding
transaction costs.
Cash Flow from Investing Activities
Net cash used for investing activities for the six months ended June 30, 2011 included $2.0
million for the purchase of Alloy and $1.5 million for the purchase of property and equipment. Net
cash used for investing activities for the six months ended June 30, 2010 was $61.3 million for the
purchase of EducationCity and $0.4 million for the purchase of property and equipment.
Cash Flow from Financing Activities
Net cash used in financing activities in the six months ended June 30, 2011 primarily related
to $0.4 million in principal payments on our term loan. Net cash provided by financing activities
in the six months ended June 30, 2010 included $15.0 million of additional term note, $10.0 million
drawn on our revolver, less $0.8 million paid in additional financing costs in order to finance the
acquisition of EducationCity, $1.5 million for the payment of offering costs accrued at December
31, 2009 and $0.4 million in principal payments on our term loan.
Credit Facility
The Companys wholly-owned subsidiary, Study Island, LLC (the Borrower) is the borrower
under a 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 and the Companys wholly owned
subsidiary, AL Midco, LLC (AL Midco), is the guarantor under such credit facility. The term loan
bears interest rates based upon either a base rate or LIBOR (with a floor of 1.25%) plus an
applicable margin (3.75% as of June 30, 2011 and 2010, in each case for a LIBOR-based term loan)
determined based on the Borrowers leverage ratio. Amounts under the revolving credit facility can
be borrowed and repaid, from time to time, at the Borrowers option, subject to the pro forma
compliance with certain financial covenants. If amounts are borrowed against the revolving credit
facility in the future, those amounts would bear interest based upon either a base rate or LIBOR
(with a floor of 1.25%) plus an applicable margin determined based on the Borrowers leverage
ratio. The credit facility also provides for a letter of credit sublimit of $2.0 million.
The Credit Agreement has been amended from time to time, most recently in June 2010, to permit
the acquisition of EducationCity and to add a $15.0 million supplemental term loan and an
additional $10.0 million to the revolving credit facility, both of which were drawn in order to
finance the acquisition. The Borrower subsequently repaid the $10.0 million revolving credit
facility during the quarter ended September 30, 2010.
The Credit Agreement is secured on a first-priority basis by security interests (subject to
permitted liens) in substantially all tangible and intangible assets owned by the Borrower and AL
Midco. In addition, any future domestic subsidiaries of the Borrower will be required (subject to
certain exceptions) to guarantee the Credit Agreement and grant liens on substantially all of its
assets to secure such guarantee.
The Credit Agreement requires the Borrower 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 Agreement as
consolidated net income adjusted by adding back interest
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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 Agreement) and a
fixed charge coverage ratio (based on the ratio of consolidated EBITDA to consolidated fixed
charges, as defined in the Credit Agreement).
The Credit Agreement contains certain affirmative and negative covenants applicable to AL
Midco, the Borrower and the Borrowers subsidiaries that, among other things, limit 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 subordinated indebtedness, modifications of the Borrowers
organizational documents and restrictions on the Borrowers subsidiaries. The Credit Agreement
contains events of default that are customary for similar credit facilities, 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 Agreement. As of June 30, 2011, the
Borrower was in compliance with all covenants. The Credit Agreement is secured on a first-priority
basis by security interests (subject to permitted liens) in substantially all of the assets of the
Borrower and AL Midco.
The Borrower has the right to optionally prepay its borrowings under the Credit Agreement,
subject to the procedures set forth in the Credit Agreement. The Borrower may be required to make
prepayments on its borrowings under the Credit Agreement if it receives proceeds as a result of
certain asset sales, additional debt issuances, or events of loss. In addition, a mandatory
prepayment of borrowings under the Credit Agreement is required each fiscal year in an amount equal
to (i) 75% of excess cash flow (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 1.00, (ii) 50% of excess cash flow if the
leverage ratio as of the last day of the fiscal year is less than or equal to 4.00 to 1.00 but
greater than 3.25 to 1.00, 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 1.00. No mandatory prepayment is required
if the leverage ratio is less than or equal to 2.50 to 1.00 on the last day of the fiscal year. The
Borrower was not required to make a mandatory prepayment related to the year ended December 31,
2010.
As of June 30, 2011, $75.3 million of borrowings were outstanding under the term loans and no
amounts were outstanding under the revolving credit facility. As of December 31, 2010, $75.8
million of borrowings were outstanding under the term loans and no amounts were outstanding under
the revolving credit facility. For the three months ended June 30, 2011 and 2010, the weighted
average interest rate under the term loans was 5.0% and 4.70%, respectively, and for the six months
ended June 30, 2011 and 2010, the weighted average interest rate under the term loans was 5.0% and
4.63%, before giving effect to the Borrowers interest rate swap. The rate on the interest rate
swap is the difference between the Borrowers fixed rate of 4.035% and the floating rate of
three-month LIBOR.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
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 in our annual report on Form 10-K. We have not adopted any changes to such policies
during the three months ended June 30, 2011.
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Recently Issued Accounting Standards
In May 2011, the Financial Accounting Standards Board (FASB) issued updated guidance to
improve the comparability of fair value measurements and related disclosures between GAAP and
International Financial Reporting Standards. This update amends the accounting rules for fair value
measurements and disclosure. The amendments are of two types: (i) those that clarify FASBs intent
about the application of existing fair value measurement and disclosure requirements and (ii) those
that change a particular principle or requirement for measuring fair value or for disclosing
information about fair value measurements. The update is effective for the Company on January 1,
2012. The Company is currently evaluating the impact this standard will have on its consolidated
financial statements.
In June 2011, the FASB issued updated guidance on the presentation of other comprehensive
income in the financial statements. The standard eliminates the option of presenting other
comprehensive income as part of the statement of changes in stockholders equity and instead
requires the entity to present other comprehensive income as either a single, continuous statement
of comprehensive income or as two separate but consecutive statements. This amendment will be
effective for the Company for the first quarter 2012. The Company currently reports other
comprehensive income in the statement of stockholders equity and comprehensive income and will be
required to update the presentation of comprehensive income to be in compliance with the new
standard.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks in the normal course of business due to changes in interest
rates and foreign currency exchange rates. Our exposures to market risk have not changed materially
since December 31, 2010. For quantitative and qualitative disclosures about market risk, see item
7A, Quantitative and Qualitative Disclosures about Market Risk, of our annual report on Form 10-K
for the year ended December 31, 2010.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act),
as of the end of the period covered by this quarterly report, we have evaluated, with the
participation of our principal executive officer and principal financial officer, the effectiveness
of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Exchange Act). Based on their evaluation of these disclosure controls and procedures,
our chief executive officer and chief financial officer have concluded that the disclosure controls
and procedures were effective as of the date of such evaluation.
Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2011, there have been no changes in our internal control
over financial reporting identified in connection with the evaluation required by paragraph (d) of
Rule 13a-15 or Rule 15d-15 under the Exchange Act that has materially affected, or is reasonably
likely to materially affect our internal control over financial reporting.
28
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
We currently are not subject to any material litigation or regulatory proceedings.
Item 1A. Risk Factors
There have been no material changes from the Risk Factors disclosed in Part I, Item 1A of our
Annual Report on Form 10K for the year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We have not sold any unregistered securities or purchased any of our equity securities during
the three months ended June 30, 2011.
Item 3. Defaults Upon Senior Securities
None.
Item 5. Other Information
None.
Item 6. Exhibits
See Index to Exhibits following the signature page of this Quarterly Report on Form 10-Q.
29
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Dallas, State of Texas, on the 8th day of August, 2011.
ARCHIPELAGO LEARNING, INC. |
||||
By: | /s/ Tim McEwen | |||
Tim McEwen | ||||
President and Chief Executive Officer | ||||
By: | /s/ Mark S. Dubrow | |||
Mark S. Dubrow | ||||
Executive Vice President, Chief Financial Officer and Secretary |
||||
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EXHIBIT INDEX
Exhibit | ||
Number | Description of Exhibits | |
11.1*
|
Statement re computation of per share earnings (incorporated by reference to Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report). | |
31.1*
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2*
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1*
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.INS**
|
XBRL Instance Document | |
101.SCH**
|
XBRL Taxonomy Extension Schema Document | |
101.CAL**
|
XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB**
|
XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE**
|
XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF**
|
XBRL Taxonomy Extension Definition Linkbase Document |
* | Filed herewith. | |
** | Furnished herewith. |