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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2012

OR

 

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

For the transition period from            to            .

Commission File Number: 001-34575

 

 

Cambium Learning Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   27-0587428

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

17855 North Dallas Parkway,

Suite 400, Dallas, Texas

  75287
(Address of Principal Executive Offices)   (Zip Code)

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

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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  x    No  ¨

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

 

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

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

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of April 30, 2012 was 49,563,824.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  

PART I

 

FINANCIAL INFORMATION

  

    Item 1.

  Financial Statements      3   
 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) for the Three Months Ended March 31, 2012 and March 31, 2011

     3   
 

Condensed Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011

     4   
 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March  31, 2012 and March 31, 2011

     6   
 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

     7   

    Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      19   

    Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      28   

    Item 4.

  Controls and Procedures      28   

PART II

  OTHER INFORMATION      28   

    Item 1.

  Legal Proceedings      28   

    Item 1A.

  Risk Factors      29   

    Item 6.

  Exhibits      30   

SIGNATURE PAGE

     31   

EXHIBITS

     32   


Table of Contents

Part I. Financial Information

 

Item 1. Financial Statements.

Cambium Learning Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands, except per share data)

(Unaudited)

 

     Three Months Ended  
     March 31,
2012
    March 31,
2011
 
      

Net revenues

   $ 27,855      $ 30,695   

Cost of revenues:

    

Cost of revenues

     11,166        10,967   

Amortization expense

     6,370        6,618   
  

 

 

   

 

 

 

Total cost of revenues

     17,536        17,585   

Research and development expense

     3,332        2,379   

Sales and marketing expense

     11,896        10,903   

General and administrative expense

     5,745        5,812   

Shipping and handling costs

     327        334   

Depreciation and amortization expense

     1,659        1,736   

Embezzlement and related expense (recoveries)

     (85     (2,436

Impairment of long-lived assets

     2,791        —     
  

 

 

   

 

 

 

Total costs and expenses

     43,201        36,313   

Loss before interest, other income and income taxes

     (15,346     (5,618

Net interest expense

     (4,777     (4,405

Other income, net

     36        363   
  

 

 

   

 

 

 

Loss before income taxes

     (20,087     (9,660

Income tax expense

     (177     (97
  

 

 

   

 

 

 

Net loss

   $ (20,264   $ (9,757
  

 

 

   

 

 

 

Other comprehensive income (loss):

    

Amortization of net pension loss

     9        —     
  

 

 

   

 

 

 

Comprehensive income (loss)

   $ (20,255   $ (9,757
  

 

 

   

 

 

 

Net loss per common share:

    

Basic net loss per common share

   $ (0.41   $ (0.22

Diluted net loss per common share

   $ (0.41   $ (0.22

Average number of common shares and equivalents outstanding:

    

Basic

     49,947        44,353   

Diluted

     49,947        44,353   

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

 

3


Table of Contents

Cambium Learning Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

 

     March 31,
2012
    December 31,
2011
 
     (unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 41,768      $ 63,191   

Accounts receivable, net

     10,649        13,485   

Inventory

     22,081        21,561   

Deferred tax assets

     2,800        2,829   

Restricted assets, current

     1,387        1,393   

Assets held for sale

     2,727        2,727   

Other current assets

     4,623        4,735   
  

 

 

   

 

 

 

Total current assets

     86,035        109,921   

Property, equipment and software at cost

     42,425        42,878   

Accumulated depreciation and amortization

     (14,531     (12,968
  

 

 

   

 

 

 

Property, equipment and software, net

     27,894        29,910   
  

 

 

   

 

 

 

Goodwill

     114,297        114,297   

Acquired curriculum and technology intangibles, net

     24,653        26,996   

Acquired publishing rights, net

     24,544        26,861   

Other intangible assets, net

     17,246        18,111   

Pre-publication costs, net

     10,466        10,034   

Restricted assets, less current portion

     10,716        11,082   

Other assets

     22,142        22,468   
  

 

 

   

 

 

 

Total assets

   $ 337,993      $ 369,680   
  

 

 

   

 

 

 

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

 

4


Table of Contents

Cambium Learning Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

 

     March 31,
2012
    December 31,
2011
 
     (unaudited)        
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Current portion of capital lease obligations

   $ 821      $ 826   

Accounts payable

     4,304        3,024   

Accrued expenses

     15,887        21,203   

Deferred revenue, current

     32,216        38,984   
  

 

 

   

 

 

 

Total current liabilities

     53,228        64,037   
  

 

 

   

 

 

 

Long-term liabilities:

    

Long-term debt

     174,206        174,165   

Capital lease obligations, less current portion

     11,903        12,294   

Deferred revenue, less current portion

     3,991        4,304   

Contingent value rights

     6,737        6,684   

Other liabilities

     17,813        18,126   
  

 

 

   

 

 

 

Total long-term liabilities

     214,650        215,573   
  

 

 

   

 

 

 

Commitments and contingencies (See Note 13)

    

Stockholders’ equity:

    

Preferred stock ($.001 par value, 15,000 shares authorized, zero shares issued and outstanding at March 31, 2012 and December 31, 2011)

     —          —     

Common stock ($.001 par value, 150,000 shares authorized, 51,208 and 51,162 shares issued, and 49,564 and 49,518 shares outstanding at March 31, 2012 and December 31, 2011, respectively)

     51        51   

Capital surplus

     281,540        281,240   

Accumulated deficit

     (204,923     (184,659

Treasury stock at cost (1,644 shares at March 31, 2012 and December 31, 2011)

     (4,931     (4,931

Other comprehensive income (loss):

    

Pension and postretirement plans

     (1,623     (1,632

Net unrealized gain on securities

     1        1   
  

 

 

   

 

 

 

Accumulated other comprehensive income (loss)

     (1,622     (1,631
  

 

 

   

 

 

 

Total stockholders’ equity

     70,115        90,070   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 337,993      $ 369,680   
  

 

 

   

 

 

 

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

 

5


Table of Contents

Cambium Learning Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

     Three Months Ended  
     March 31,
2012
    March 31,
2011
 
     (unaudited)  

Operating activities:

    

Net loss

   $ (20,264   $ (9,757

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization expense

     8,029        8,354   

Gain from recovery of property held for sale

     —          (2,649

Amortization of note discount and deferred financing costs

     435        203   

Impairment of long-lived assets

     2,791        —     

Change in fair value of contingent value rights obligation

     53        308   

Loss on disposal of assets

     81        —     

Stock-based compensation and expense

     225        290   

Changes in operating assets and liabilities:

    

Accounts receivable, net

     2,836        17,505   

Inventory

     (520     (4,450

Other current assets

     112        (867

Other assets

     (68     189   

Restricted assets

     372        1,177   

Accounts payable

     1,280        (1,742

Accrued expenses

     (5,316     (4,727

Deferred revenue

     (7,081     (6,777

Other long-term liabilities

     (200     (501
  

 

 

   

 

 

 

Net cash used in operating activities

     (17,235     (3,444
  

 

 

   

 

 

 

Investing activities:

    

Expenditures for property, equipment, software and pre-publication costs

     (3,792     (3,354
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,792     (3,354
  

 

 

   

 

 

 

Financing activities:

    

Proceeds from debt

     —          174,024   

Repayment of debt

     —          (152,130

Deferred financing costs

     —          (7,340

Principal payments under capital lease obligations

     (396     (93

Borrowings under revolving credit agreement

     —          10,000   

Payment of revolving credit facility

     —          (10,000
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (396     14,461   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (21,423     7,663   

Cash and cash equivalents, beginning of period

     63,191        11,831   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 41,768      $ 19,494   
  

 

 

   

 

 

 

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

 

6


Table of Contents

Cambium Learning Group, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Note 1 — Basis of Presentation

Presentation. The Condensed Consolidated Financial Statements include the accounts of Cambium Learning Group, Inc. and subsidiaries (the “Company”) and are unaudited. The condensed balance sheet as of December 31, 2011 has been derived from audited financial statements. All intercompany transactions are eliminated.

As permitted under the Securities and Exchange Commission (“SEC”) requirements for interim reporting, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted. The Company believes that these financial statements include all necessary and recurring adjustments for the fair presentation of the interim period results. These financial statements should be read in conjunction with the Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Due to seasonality, the results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the year ending December 31, 2012.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Subsequent actual results may differ from those estimates.

Nature of Operations. The Company operates as three reportable business segments with separate management teams and infrastructures: Voyager Learning, a comprehensive intervention business; Sopris Learning, a supplemental solutions education business; and Cambium Learning Technologies, a technology-based education business.

Note 2 — Accounts Receivable

Accounts receivable are stated net of allowances for doubtful accounts and estimated sales returns. The allowance for doubtful accounts and estimated sales returns totaled $0.7 million at March 31, 2012, compared to $0.9 million at December 31, 2011. The allowance for doubtful accounts is based on a review of the outstanding balances and historical collection experience. The reserve for sales returns is based on historical rates of return as well as other factors that in the Company’s judgment could reasonably be expected to cause sales returns to differ from historical experience.

Note 3 — Stock-Based Compensation and Expense

The total amount of pre-tax expense for stock-based compensation recognized in the three months ended March 31, 2012 and 2011 was $0.2 million and $0.3 million, respectively. The stock-based compensation expense recorded was allocated as follows:

 

(in thousands)    Three Months Ended March 31,  
     2012      2011  

Cost of revenues

   $ 12       $ 15   

Research and development expense

     30         32   

Sales and marketing expense

     30         38   

General and administrative expense

     153         205   
  

 

 

    

 

 

 

Total

   $ 225       $ 290   
  

 

 

    

 

 

 

 

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Table of Contents

On February 8, 2012, the Company granted 195,000 options under the Cambium Learning Group, Inc. 2009 Equity Incentive Plan (the “Plan”) with a total grant date fair value, net of forecasted forfeitures, of $0.1 million. These options have a per-share exercise price equal to $4.50 and vest equally over a four year service period. The term of the options is ten years from the date of grant. The following assumptions were used in the Black-Scholes option-pricing model to estimate the fair value of these awards:

 

     Three Months Ended March 31,  
     2012     2011  

Expected stock volatility

     35.00     35.00

Risk-free interest rate

     1.17     2.50

Expected years until exercise

     6.25        6.25   

Dividend yield

     0.00     0.00

Due to a lack of exercise history or other means to reasonably estimate future exercise behavior, the Company used the simplified method as described in applicable accounting guidance for stock-based compensation to estimate the expected years until exercise on new awards.

During the quarter ended March 31, 2012, 105,258 of the options granted on January 27, 2010 and 12,239 of the options granted on February 1, 2011 were forfeited.

Restricted common stock awards of 46,295 shares were issued during the quarter ended March 31, 2012, in connection with the Company’s Board of Directors compensation program. The restrictions on the common stock awards will lapse on the one-year anniversary of the grant date or upon a change in control of the Company. These awards were valued based on the Company’s closing stock price on the date of grant, February 8, 2012.

During the quarter ended March 31, 2012, the related restrictions lapsed on restricted common stock awards of 36,084 shares.

Note 4 — Net Loss per Common Share

Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period, including the potential dilution that could occur if all of the Company’s outstanding stock awards that are in-the-money were exercised, using the treasury stock method. A reconciliation of the weighted-average number of common shares and equivalents outstanding used in the calculation of basic and diluted net loss per common share is shown in the table below for the periods indicated:

 

(in thousands)    Three Months Ended March 31,  
     2012      2011  

Basic

     49,947         44,353   

Dilutive effect of awards

     —           —     
  

 

 

    

 

 

 

Diluted

     49,947         44,353   
  

 

 

    

 

 

 

Antidilutive securities:

     

Options

     4,145         3,946   

Warrants

     187         141   

Restricted Stock

     59         38   

Subscription rights

     —           6,419   

Note 5 — Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability (exit price), in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques are based on observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy:

 

   

Level 1 — Quoted prices for identical instruments in active markets.

 

   

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant value drivers are observable.

 

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Table of Contents
   

Level 3 — Valuations derived from valuation techniques in which significant value drivers are unobservable.

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

As of March 31, 2012, financial instruments include $41.8 million of cash and cash equivalents, restricted assets of $12.1 million, collateral investments of $2.0 million, $174.2 million of senior secured notes, $0.5 million of warrants, assets held for sale of $2.7 million, and $6.7 million in contingent value rights (“CVRs”). As of December 31, 2011, financial instruments include $63.2 million of cash and cash equivalents, restricted assets of $12.5 million, collateral investments of $2.0 million, $174.2 million of senior secured notes, $0.5 million of warrants, assets held for sale of $2.7 million, and $6.7 million in CVRs. The fair market values of cash equivalents and restricted assets are equal to their carrying value, as these investments are recorded based on quoted market prices and/or other market data for the same or comparable instruments and transactions as of the end of the reporting period. The fair values of the properties held for sale were determined by an independent appraisal conducted by a licensed realtor based on the values of similar properties in the area. These properties were acquired by the Company as a result of its recovery efforts in connection with the employee embezzlement matter described in Note 16.

As of March 31, 2012, the fair value of the senior secured notes was $169.5 million based on quoted market prices in active markets for these debt instruments when traded as assets.

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

 

(in thousands)           Fair Value at Reporting Date Using         

Description

   As of March 31,
2012
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
     Year-to-Date
Total Gains
(Losses)
 

Restricted Assets:

              

Money Market

   $ 12,103       $ 12,103       $ —         $ —         $ —     

Collateral Investments:

              

Money Market

     902         902         —           —           —     

Certificate of Deposit

     1,066         1,066         —           —           —     

Warrant

     493         —           493         —           75   

Assets held for sale

     2,727         —           2,727         —           —     

CVRs

     6,737         —           —           6,737         (53

 

(in thousands)           Fair Value at Reporting Date Using         

Description

   As of December 31,
2011
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
     Year-to-Date
Total Gains
(Losses)
 

Restricted Assets:

              

Money Market

   $ 12,475       $ 12,475       $ —         $ —         $ —     

Collateral Investments:

              

Money Market

     902         902         —           —           —     

Certificate of Deposit

     1,065         1,065         —           —           —     

Warrant

     456         —           456         —           70   

Assets held for sale

     2,727         —           2,727         —           —     

CVRs

     6,684         —           —           6,684         (1,308

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

In accordance with applicable accounting guidance, goodwill and other indefinite-lived intangible assets are not amortized but are instead reviewed for impairment at least annually and if a triggering event is determined to have occurred in an interim period. The Company’s annual impairment testing is performed as of December 1 of each year. During the quarter ended March 31, 2012, the Company did not identify any triggering events that would have required an additional impairment analysis.

 

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The fair value of the liability for the CVRs is determined using a probability weighted cash flow analysis which takes into consideration the likelihood, amount and timing of cash flows of each element of the pool of assets and liabilities included in the CVR. The determination of fair value of the CVRs involves significant assumptions and estimates, which are reviewed at each quarterly reporting date. As of March 31, 2012, a fair value of $6.7 million has been recorded as a liability for the remaining CVR payments.

During the quarter ended March 31, 2012, a loss of $0.1 million was recorded in general and administrative expense to reflect an increase in the estimated fair value of the CVR liability. The ultimate value of the remaining CVR payments is not known at this time; however, it could range from zero to a maximum possible value of approximately $7.4 million. Future changes in the estimate of the fair value of the CVRs will impact results of operations and could be material.

The first and second CVR payment dates were in September 2010 and June 2011, with $1.1 million and $2.0 million, respectively, distributed to the escrow agent at those times for distribution to holders of the CVRs. The next scheduled distribution, if any, will be made no later than April 2013 and relates to a potential tax indemnity obligation. Additionally, as described in Note 13, any amounts due to CVR holders as a result of refunds received related to the Michigan tax payment will be distributed upon the final resolution of this agreed contingency.

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

 

     Fair Value Measurements Using Significant Unobservable Inputs  (Level 3)
CVRs
 
     (In thousands)  
     Estimated Fair Value
as of December 31, 2011
    Loss (Gain) for
Changes in Estimated
CVR Liability
     Estimated Fair  Value
as of March 31, 2012
 
         

Components of CVR Liability:

       

Tax refunds received before closing of the merger

   $ 1,583      $ —         $ 1,583   

Other specified tax refunds

     4,797        —           4,797   

Tax indemnity obligation

     1,717        —           1,717   

Legal receivable

     2,400        —           2,400   

Michigan state tax liability

     (252     53         (199

Other specified tax related liabilities

     (53     —           (53

Costs incurred to collect tax refunds and by stockholders’ representative

     (409     —           (409
  

 

 

   

 

 

    

 

 

 

Estimated fair value of CVR liability

     9,783        53         9,836   

Payments to holders of CVRs

          3,099   
       

 

 

 

Remaining estimated CVR liability

        $ 6,737   
       

 

 

 

As of March 31, 2012, restricted assets in an escrow account for the benefit of the CVRs were $3.0 million for a potential tax indemnity obligation, which, if such obligation is not triggered, will benefit the CVRs by $1.9 million with the remainder reverting back to general cash of the Company.

Note 6 — Other Current Assets

Other current assets at March 31, 2012 and December 31, 2011 consisted of the following:

 

     As of  
     March 31,
2012
     December 31,
2011
 
(in thousands)      

Prepaid expenses

   $ 2,396       $ 1,503   

Deferred costs

     2,193         2,714   

Other current assets

     34         518   
  

 

 

    

 

 

 

Total

   $ 4,623       $ 4,735   
  

 

 

    

 

 

 

 

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Note 7 — Other Assets

Other assets at March 31, 2012 and December 31, 2011 consisted of the following:

 

     As of  
(in thousands)    March 31,
2012
     December 31,
2011
 

Tax receivables

   $ 11,156       $ 11,039   

Deferred financing costs

     7,312         7,706   

Collateral investments

     1,967         1,967   

Other

     1,707         1,756   
  

 

 

    

 

 

 

Total

   $ 22,142       $ 22,468   
  

 

 

    

 

 

 

Tax receivables include the $11.2 million receivable from the state of Michigan as discussed in Note 13 to the Condensed Consolidated Financial Statements. The deferred financing costs represent costs incurred in connection with the issuance of the $175 million aggregate principal amount of 9.75% senior secured notes as described in Note 14 to the Condensed Consolidated Financial Statements.

Note 8 — Accrued Expenses

Accrued expenses at March 31, 2012 and December 31, 2011 consisted of the following:

 

     As of  
(in thousands)    March 31,
2012
     December 31,
2011
 

Salaries, bonuses and benefits

   $ 7,241       $ 7,688   

Accrued interest

     2,215         6,503   

Accrued royalties

     1,257         1,689   

Pension and post-retirement medical benefits

     1,221         1,221   

Deferred compensation

     56         98   

Other

     3,897         4,004   
  

 

 

    

 

 

 

Total

   $ 15,887       $ 21,203   
  

 

 

    

 

 

 

Accrued interest at March 31, 2012 primarily relates to our 9.75% senior secured notes. The notes require semi-annual interest payments in arrears on each February 15 and August 15 over the life of the notes.

Note 9 — Other Liabilities

Other liabilities at March 31, 2012 and December 31, 2011 consisted of the following:

 

     As of  
(in thousands)    March 31,
2012
     December 31,
2011
 

Pension and post-retirement medical benefits, long-term portion

   $ 10,935       $ 11,110   

Long-term deferred tax liability

     3,092         3,121   

Long-term income tax payable

     815         803   

Long-term deferred compensation

     492         544   

Other

     2,479         2,548   
  

 

 

    

 

 

 

Total

   $ 17,813       $ 18,126   
  

 

 

    

 

 

 

Note 10 — Pension Plan

The net pension costs of the Company’s defined benefit pension plan for the three months ended March 31, 2012 and 2011 were comprised primarily of interest costs and totaled $0.1 million in each period. The net pension costs for the three months ended March 31, 2012, also included accumulated net loss amortization of $9 thousand.

 

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Note 11 — Reengineering and Restructuring

In late 2011, the Company launched a reengineering and restructuring initiative to align its organizational and cost structure to its strategic goals. The financial goal of these actions is to provide savings to both improve earnings and to fund re-investment in growth areas of the business. The majority of these costs are expected to be incurred by the end of 2012. Reengineering and restructuring activities will be assessed and enacted throughout 2012 and are expected to include:

 

   

Obtaining new leadership and employee skill sets that support the transformation of the Company to focus more heavily on technology solutions and services and other strategic objectives;

 

   

Outsourcing warehouse operations to a third party logistics provider, which will allow the Company to take advantage of a lower and more variable cost structure for its print based products, as well as locate operations closer to the geographic center of its nationwide customer base;

 

   

Rationalizing facilities space by consolidating facilities and subleasing entire or partial facilities where feasible;

 

   

Assessing and implementing projects to improve cost efficiencies and enhance the customer experience throughout the order to cash and service delivery processes; and

 

   

Other reductions as needed to improve the Company’s cost structure.

The total expense for all reengineering and restructuring initiatives from the fourth quarter of 2011 through the end of 2012 is expected to be approximately $6.3 million, including both cash and non-cash items, and capital expenditures are expected to be between $0.4 and $0.5 million. The following table summarizes the amounts incurred and expected to be incurred in connection with the reengineering and restructuring initiative:

 

(in thousands)    Total Amount
Expected to
be Incurred
     Total Incurred
as of March 31,
2012
     Incurred in Three
Months Ended
March 31, 2012
     Incurred in Year
Ended December 31,
2011
 

One-time termination benefits

   $ 2,221       $ 1,871       $ 682       $ 1,189   

Impairment of long-lived assets

     2,791         2,791         2,791         —     

Warehouse transition costs

     550         231         231         —     

Facility rationalization costs

     480         —           —           —     

Process reengineering costs

     270         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,312       $ 4,893       $ 3,704       $ 1,189   
  

 

 

    

 

 

    

 

 

    

 

 

 

The change in the reengineering and restructuring accrual for the three months ended March 31, 2012 is as follows:

 

(in thousands)    One-time
Termination
Benefits
    Warehouse
Outsourcing
Costs
    Facility
Rationalization
Costs
     Process
Reengineering
Costs
 

Balance as of December 31, 2011

   $ 1,133      $ —        $ —         $ —     

Accrual changes

     682        231        —           —     

Payments made

     (478     (49     —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance as of March 31, 2012

   $ 1,337      $ 182      $ —         $ —     
  

 

 

   

 

 

   

 

 

    

 

 

 

The reengineering and restructuring charges are recorded in unallocated shared services.

The estimates of future reengineering and restructuring charges and the calculated impairment of long lived assets represent expectations or beliefs concerning various future events. These expectations involve a number of risks and uncertainties including potential changes to the time and cost required to sublease facility space, the ultimate sublease rentals received for the facility space, the time and cost necessary to transfer to the services of the third party logistics provider, and whether, when and how successfully the Company enacts other actions that could favorably impact its cost structure. In the event these assumptions change in the future the Company could be required to record additional impairment of long lived assets or incur additional costs to complete the initiative.

The targeted annual cash savings from all reengineering and restructuring activities is expected to range from $6.0 to $8.0 million annually by 2013.

 

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Note 12 — Uncertain Tax Positions

The Company recognizes the financial statement impacts of a tax return position when it is more likely than not, based on technical merits, that the position will ultimately be sustained. For tax positions that meet this recognition threshold, the Company applies judgment, taking into account applicable tax laws, experience managing tax audits and relevant GAAP, to determine the amount of tax benefits to recognize in its financial statements. For each position, the difference between the benefit realized on the Company’s tax return and the benefit reflected in its financial statements is recorded on the condensed consolidated balance sheet as an unrecognized tax benefit (“UTB”). The Company updates its UTBs at each financial statement date to reflect the impacts of audit settlements and other resolution of audit issues, expiration of statutes of limitation, developments in tax law and ongoing discussions with tax authorities. The balance of UTBs was $7.1 million at March 31, 2012 and December 31, 2011.

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. All U.S. tax years prior to 2008 related to acquired entities in a 2009 merger have been audited by the Internal Revenue Service. VSS-Cambium Holdings II Corp. and its subsidiaries have been examined by the Internal Revenue Service through the end of 2006. Various state tax authorities are in the process of examining income tax returns for various tax years through 2007.

Note 13 — Commitments and Contingencies

The Company is involved in various legal proceedings incidental to its business. Management believes that the outcome of these proceedings will not have a material adverse effect upon the Company’s consolidated operations or financial condition and the Company has recognized appropriate liabilities as necessary based on facts and circumstances known to management. The Company expenses legal costs related to legal contingencies as incurred.

The Company had a potential contingent liability related to state income taxes and related interest that had been assessed against a former subsidiary. On August 27, 2010, the former subsidiary received a decision and order of determination from the Michigan taxing authority. According to the determination of the Michigan taxing authority, the former subsidiary was liable to the State of Michigan for unpaid taxes and interest in the amount of approximately $10.4 million. In order to expedite resolution of this matter and access the Michigan Court of Claims, the Company paid this liability to the state of Michigan on behalf of the former subsidiary on September 7, 2010 and filed an action in the Michigan Court of Claims to pursue a refund of the assessment. On November 16, 2011, the Court of Claims in Michigan ruled in favor of the Company’s motion for summary judgment. The Michigan state taxing authority has since appealed the decision of the Court of Claims to the Michigan Court of Appeals.

As management believes it is more likely than not that the Company’s position will ultimately be upheld, a tax receivable for the expected refund plus statutory interest is recorded in other assets on the Condensed Consolidated Balance Sheets totaling $11.2 million and $11.0 million as of March 31, 2012 and December 31, 2011, respectively.

This liability was identified as an agreed contingency for purposes of the CVRs issued as part of a 2009 merger. In accordance with the terms of the merger agreement, dated June 20, 2009, fifty percent (50%) of any amount that is paid or due and payable with respect to each agreed contingency would offset payments due under the CVRs from an amount held for such payments by Wells Fargo Bank, N.A., as escrow agent, in an escrow account. Upon payment of the approximately $10.4 million, the Company requested a disbursement to the Company from the escrow account in an amount equal to fifty percent (50%) of the payment, or approximately $5.2 million. This cash disbursement was received by the Company during the third quarter of 2010. On September 20, 2010, the Company amended the merger agreement and the escrow agreement to extend the term of the escrow agreement until the later of the full distribution of the escrow funds or the final resolution of the agreed contingency. The final resolution of the tax litigation or potential settlement could result in a total refund from the taxing authority to the Company ranging from zero to approximately $11.2 million as of March 31, 2012, and 50% of any such refund would in turn be payable to the holders of the CVRs. As of March 31, 2012, the Company has recorded $5.0 million as a component of the CVR liability related to this agreed upon contingency, which is an estimate of the fair value based on a probability-weighted cash flow analysis using management assumptions related to the likelihood of the ultimate cash outflows. If the former subsidiary’s position is not ultimately upheld, the Company could incur non-cash charges of up to $10.4 million of indemnification expense and a $0.8 million reduction in interest income in future periods on its Condensed Statements of Operations, partially offset by the related $5.0 million reduction to the CVRs liability.

The Court of Claims in Michigan also ruled in the Company’s favor on two other tax matters that could result in a refund of up to $0.8 million, plus statutory interest. These potential tax refunds would be retained by the Company and are not subject to payment to the holders of the CVRs.

From time to time, the Company may enter into firm purchase commitments for printed materials included in inventory which the Company expects to use in the ordinary course of business. These commitments are typically for terms less than one year and require the Company to buy minimum quantities of materials with specific delivery dates at a fixed price over the term. As of March 31, 2012, these open purchase commitments totaled $2.3 million.

 

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Table of Contents

The Company has letters of credit outstanding as of March 31, 2012 in the amount of $2.9 million to support workers’ compensation insurance coverage, certain credit card programs, the build-to-suit lease, and performance bonds for certain contracts. The Company maintains a $1.1 million certificate of deposit as collateral for the workers’ compensation insurance and credit card program letters of credit and for Automated Clearinghouse (ACH) programs. The Company also maintains a $0.9 million money market fund investment as collateral for a travel card program. The certificate of deposit and money market fund investment are recorded in other assets.

Note 14 — Long-Term Debt

Long-term debt consists of the following at March 31, 2012 and December 31, 2011:

 

     March 31,     December 31,  
(in thousands)    2012     2011  

$175.0 million of 9.75% senior secured notes due February 15, 2017, interest payable semiannually

   $ 175,000      $ 175,000   

Less: Unamortized discount

     (794     (835
  

 

 

   

 

 

 

Total long-term debt

   $ 174,206      $ 174,165   
  

 

 

   

 

 

 

In February 2011, the Company closed an offering of $175 million aggregate principal amount of 9.75% senior secured notes due 2017 (the “Notes”) and entered into an asset-based revolving credit facility with potential for up to $40 million in borrowing capacity. Deferred financing costs are capitalized in other assets in the condensed consolidated balance sheets, net of accumulated amortization, and are to be amortized over the term of the related debt using the effective interest method. Unamortized capitalized deferred financing costs at March 31, 2012 and December 31, 2011 were $7.3 million and $7.7 million, respectively.

Interest on the Notes will accrue at a rate of 9.75% per annum from the date of original issuance and will be payable semi-annually in arrears on each February 15 and August 15, to the holders of record of the Notes on the immediately preceding February 1 and August 1. No principal repayments are due until the maturity date of the Notes.

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

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

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

As of March 31, 2012, the balances of accounts receivable and inventory collateralizing the ABL Facility were $10.6 million and $22.1 million, respectively. As of March 31, 2012, the Company had a borrowing base under the ABL Loan Agreement of up to $17.2 million.

 

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Table of Contents

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

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

Note 15 — Segment Reporting

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

Voyager Learning:

Voyager Learning offers reading, math, professional development programs, and online courseware and credit recovery targeted towards the at-risk and special education student populations. Voyager Learning provides strategic and intensive comprehensive interventions that are adaptive to the needs of diverse populations. Voyager Learning’s research-based instructional materials, support services and educational technology help accelerate struggling students to grade-level proficiency, with the goal to increase graduation rates.

Sopris Learning:

Sopris Learning supplemental products focus on the full spectrum of academic support utilizing print and technology based supplemental solutions—including assessments, literacy and mathematics interventions, positive behavior supports, and professional development. Whether implemented in a single classroom, school-wide, or district-wide, Sopris Learning supplements have been proven to strengthen core instruction and to quickly and positively impact the academic achievement of students in all key areas of instruction. When compared to products offered by the Company’s other business units, Sopris Learning products tend to be more tightly tailored to specific skills and target a smaller, more specific audience.

Cambium Learning Technologies:

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

Other:

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

The following table represents the revenue, operating expenses and income (loss) from operations which are used by the Company’s chief operating decision maker to measure the segment’s operating performance. The Company does not track assets directly by segment and the chief operating decision maker does not use assets or capital expenditures to measure a segment’s operating performance, and therefore this information is not presented.

 

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Table of Contents
     Voyager
Learning
    Sopris
Learning
    Cambium
Learning
Technologies
     Other     Consolidated  
             
             

Quarter Ended March 31, 2012

           

Net revenues

   $ 12,036      $ 3,212      $ 12,607       $ —        $ 27,855   

Cost of revenues

     7,951        1,316        1,332         567        11,166   

Amortization

     —          —          —           6,370        6,370   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total cost of revenues

     7,951        1,316        1,332         6,937        17,536   

Other operating expenses

     8,032        2,044        6,698         4,526        21,300   

Embezzlement and related expense (recoveries)

     —          —          —           (85     (85

Depreciation and amortization

     —          —          —           1,659        1,659   

Impairment of long-lived assets

     —          —          —           2,791        2,791   

Net interest expense

     —          —          —           4,777        4,777   

Other income, net

     —          —          —           (36     (36

Income tax expense

     —          —          —           177        177   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Segment net income (loss)

   $ (3,947   $ (148   $ 4,577       $ (20,746   $ (20,264
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Quarter Ended March 31, 2011

           

Net revenues

   $ 14,692      $ 4,185      $ 11,818       $ —        $ 30,695   

Cost of revenues

     7,993        1,670        1,223         81        10,967   

Amortization

     —          —          —           6,618        6,618   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total cost of revenues

     7,993        1,670        1,223         6,699        17,585   

Other operating expenses

     7,593        2,316        5,161         4,358        19,428   

Embezzlement and related expense (recoveries)

     —          —          —           (2,436     (2,436

Depreciation and amortization

     —          —          —           1,736        1,736   

Net interest expense

     —          —          —           4,405        4,405   

Other income, net

     —          —          —           (363     (363

Income tax expense

     —          —          —           97        97   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Segment net income (loss)

   $ (894   $ 199      $ 5,434       $ (14,496   $ (9,757
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Note 16 — Embezzlement

On April 26, 2008, the Company began an internal investigation that revealed irregularities over the control and use of cash and certain other general ledger accounts of the Company, revealing a misappropriation of assets. These irregularities were perpetrated by a former employee over more than a three-year period beginning in 2004 and continuing through April 2008 and the losses incurred by the Company totaled $14.0 million. Charges included in the condensed consolidated statement of operations after April 2008 represent expenses incurred by the Company to recover property purchased by the former employee using the embezzled funds, net of any recoveries.

During the three months ended March 31, 2012, the net recoveries represented changes in the estimated fair value of warrants expected to be issued upon the sale of recovered properties, partially offset by related expenses. Warrants to purchase 35,106 shares of the Company’s stock were issued to VSS-Cambium Holdings III, LLC as a result of the cash recoveries during the quarter. Upon the sale of the recovered properties the Company will be required to issue additional warrants based on the amount of cash received, net of related expenses. The number of warrants to be issued will equal 0.45 multiplied by the quotient of the net cash recovery divided by $6.50. The Company will be obligated to issue these warrants upon the cash realization of the related recoveries; therefore an estimated liability of $0.5 million has been recorded as Embezzlement and related expense (recoveries) in the condensed consolidated statements of operations and Accrued expenses in the condensed consolidated balance sheets. During the three months ended March 31, 2011, the Company received cash recoveries of $0.5 million and title to two properties purchased by the former employee with embezzled funds that had an appraised fair value of approximately $2.6 million, net of estimated selling costs, as of March 31, 2011. Ongoing expenses incurred related to the Company’s recovery efforts totaled $0.1 million during the quarter.

Note 17 — Subsidiary Guarantor Financial Statements

The following tables present condensed consolidated financial information as of March 31, 2012 and December 31, 2011 and for the three month periods ended March 31, 2012 and 2011 for: (a) the Company without its consolidated subsidiaries (the “Parent Company”); (b) on a combined basis, the guarantors of the Notes, which include Cambium Learning, Inc., Cambium Education, Inc., LAZEL, Inc., and Kurzweil/IntelliTools, Inc. (the “Subsidiary Guarantors”); and (c) Voyager Learning Company (the “Non-Guarantor Subsidiary”). Separate financial statements of the Subsidiary Guarantors are not presented because the guarantors are unconditionally, jointly, and severally liable under the guarantees, and the Company believes such separate statements or disclosures would not be useful to investors.

 

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Table of Contents

Condensed Consolidated Statement of Operations

Three Months Ended March 31, 2012

(In thousands)

(unaudited)

 

     Parent
Company
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiary
    Eliminations      Consolidated  

Net revenues

   $ —        $ 27,855      $ —        $ —         $ 27,855   

Total costs and expenses

     510        42,510        181        —           43,201   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loss before interest, other income and income taxes

     (510     (14,655     (181     —           (15,346

Net interest expense

     (4,650     (123     (4     —           (4,777

Other income, net

     —          36        —          —           36   

Income tax expense

     —          (177     —          —           (177
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net loss

   $ (5,160   $ (14,919   $ (185   $ —         $ (20,264
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Condensed Consolidated Statement of Operations

Three Months Ended March 31, 2011

(In thousands)

(unaudited)

 

      Parent
Company
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiary
    Eliminations      Consolidated  

Net revenues

   $ —        $ 30,695      $ —        $ —         $ 30,695   

Total costs and expenses

     1,003        34,999        311        —           36,313   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loss before interest, other income and income taxes

     (1,003     (4,304     (311     —           (5,618

Net interest (expense) income

     (2,191     (2,332     118        —           (4,405

Other income, net

     —          363        —          —           363   

Income tax expense

     —          (97     —          —           (97
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net loss

   $ (3,194   $ (6,370   $ (193   $ —         $ (9,757
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Condensed Consolidated Balance Sheet

As of March 31, 2012

(In thousands)

(unaudited)

 

     Parent
Company
     Subsidiary
Guarantors
     Non-Guarantor
Subsidiary
    Eliminations     Consolidated  

Investment in subsidiaries

   $ 252,333       $ —         $ —        $ (252,333   $ —     

Other assets

     213,034         329,168         20,280        (224,489     337,993   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 465,367       $ 329,168       $ 20,280      $ (476,822   $ 337,993   

Total liabilities

   $ 213,878       $ 257,676       $ 20,813      $ (224,489   $ 267,878   

Total stockholders’ equity

     251,489         71,492         (533     (252,333     70,115   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 465,367       $ 329,168       $ 20,280      $ (476,822   $ 337,993   

 

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Condensed Consolidated Balance Sheet

As of December 31, 2011

(In thousands)

(unaudited)

 

     Parent
Company
     Subsidiary
Guarantors
     Non-Guarantor
Subsidiary
    Eliminations     Consolidated  

Investment in subsidiaries

   $ 252,333       $ —         $ —        $ (252,333   $ —     

Other assets

     214,311         355,628         20,535        (220,794     369,680   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 466,644       $ 355,628       $ 20,535      $ (473,127   $ 369,680   

Total liabilities

   $ 210,295       $ 269,217       $ 20,892      $ (220,794   $ 279,610   

Total stockholders’ equity

     256,349         86,411         (357     (252,333     90,070   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 466,644       $ 355,628       $ 20,535      $ (473,127   $ 369,680   

Condensed Statement of Cash Flows

Three Months Ended March 31, 2012

(In thousands)

(unaudited)

 

     Parent
Company
     Subsidiary
Guarantors
    Non-Guarantor
Subsidiary
     Eliminations      Consolidated  

Net cash used in operating activities

   $ —         $ (17,235   $ —         $ —         $ (17,235

Net cash used in investing activities

     —           (3,792     —           —           (3,792

Net cash used in financing activities

     —           (396     —           —           (396

Decrease in cash and cash equivalents

     —           (21,423     —           —           (21,423

Cash and cash equivalents, beginning of period

     5,288         57,903        —           —           63,191   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 5,288       $ 36,480      $ —         $ —         $ 41,768   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Condensed Statement of Cash Flows

Three Months Ended March 31, 2011

(In thousands)

(unaudited)

 

     Parent
Company
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiary
     Eliminations      Consolidated  

Net cash (used in) provided by operating activities

   $ (162,345   $ 158,901      $ —         $ —         $ (3,444

Net cash used in investing activities

     —          (3,354     —           —           (3,354

Net cash (used in) provided by financing activities

     167,345        (152,884     —           —           14,461   

Increase in cash and cash equivalents

     5,000        2,663        —           —           7,663   

Cash and cash equivalents, beginning of period

     5,219        6,612        —           —           11,831   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 10,219      $ 9,275      $ —         $ —         $ 19,494   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

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

This section should be read in conjunction with the audited Consolidated Financial Statements of Cambium Learning Group, Inc. and its subsidiaries (the “Company,” “we,” “us,” or “our”) and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Cautionary Note Regarding Forward-looking Statements.

This report contains forward-looking statements within the meaning of the federal securities laws that involve risks and uncertainties, and which are based on beliefs, expectations, estimates, projections, forecasts, plans, anticipations, targets, outlooks, initiatives, visions, objectives, strategies, opportunities, drivers and intents of our management. Such statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this report, including statements regarding our future financial position, economic performance and results of operations, as well as our business strategy, objectives of management for future operations, and the information set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements.

Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as “believes,” “expects,” “estimates,” “projects,” “forecasts,” “plans,” “anticipates,” “targets,” “outlooks,” “initiatives,” “visions,” “objectives,” “strategies,” “opportunities,” “drivers,” “intends,” “scheduled to,” “seeks,” “may,” “will,” or “should,” or the negative of those terms, or other variations of those terms or comparable language, or by discussions of strategy, plans, targets, models or intentions. Forward-looking statements speak only as of the date they are made, and except for our ongoing obligations under the federal securities laws, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements. Accordingly, you are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Although we believe that the expectations reflected in such forward-looking statements are reasonable as of the date made, expectations may prove to have been materially different from the results expressed or implied by such forward-looking statements, as it is impossible for us to anticipate all factors that could affect our actual results. These risks and uncertainties include, but are not limited to, those described in “Risk Factors” in Part II, Item 1A and elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2011, and those described from time to time in our future reports filed with the SEC. Unless otherwise required by law, we also disclaim any obligation to update our view of any such risks or uncertainties or to announce publicly the results of any revisions to the forward-looking statements made in this report.

Our Company

We are one of the largest providers of proprietary intervention curricula, educational technologies, professional services and other research-based education solutions for students in the Pre-K through 12th grade education market in the United States. The intervention market, where we focus, provides supplemental education solutions to at-risk and special education students. We offer a distinctive, blended intervention solution that combines different forms of instruction techniques, including textbooks, education games, data management, teacher training and student centric e-learning solutions. We believe that our approach builds a more comprehensive and effective instructional model that combines teacher-led instruction and student directed technology and that this approach sets us apart from our competitors and yields better student outcomes for at-risk students.

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

Our research-based intervention programs have demonstrated consistent success with at-risk and special education student populations and have established us as one of the most readily recognized companies focused on serving this market. We operate in three reportable business segments: Voyager Learning, a comprehensive intervention business; Sopris Learning, a supplemental solutions education business; and Cambium Learning Technologies (“CLT”), a technology-based education business.

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

 

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Overview

We anticipate an overall funding situation in 2012 similar to the conditions in 2011. Based on the most recently submitted federal budgets, federal funding for Title 1 and IDEA were proposed at substantially the same level as 2011. However, it is likely that the expiration of ARRA funding in September 2011 will have some downward pressure on the overall funding available for schools, at least in the first half of 2012 when compared to the same period in 2011. Race to the Top, President Obama’s signature school reform program, has requested $850 million under the budget proposal. A large portion of that sum would go to early learning and focus on helping states and local districts support reforms and innovations to close achievement gaps and increase student achievement. At the state and local funding level we expect challenges similar to 2011 as states continue to face fiscal challenges and constraints. However, trends emerging from state governors’ reports indicate fewer and more modest anticipated declines in K-12 education funding versus cuts in 2010 and 2011.

As expected, the first quarter of 2012 proved challenging in replicating the order volume achieved in the first quarter of 2011. We saw order volume declination in each of our three operating segments; however, we did see improvement in our Learning A-Z product line within the CLT segment and our service offerings within the Voyager Learning segment led by our school turnaround product line. In March 2012, we were selected as the school turnaround provider for three schools in Providence, RI. This growth is encouraging and we hope to continue to expand this offering throughout 2012.

While the funding environment continues to pose challenges, we are optimistic that the efficacy of our solutions, the need for our products in the education market, and our product diversification will strengthen our ability to sustain market share in a troubled market and, further, capture market share as the market recovers. Management expects to pursue the following activities in 2012 to encourage future revenue growth:

 

   

We will continue our strategy to achieve growth through acquisitions, and in particular we will target technology-centric, adaptive, student-directed offerings.

 

   

All segments will continue increased investments in technology enabled solutions. We expect the technology solutions to focus especially on student-directed learning as well as mastery-based or competency-based solutions.

 

   

We intend to increase investments in sales and marketing focused on our technology based solutions.

 

   

We plan to continue investments started in late 2011 in sales optimization via the application of a new Customer Relationship Management (CRM) system.

 

   

Sopris Learning will continue to engage leading authors to develop new products and to digitize some of our current print based offerings.

 

   

Voyager Learning will change the pricing structure of certain of its core intervention offerings, providing greater price point flexibility to school districts and in some cases lowering the per student cost of implementing these solutions. We are anticipating that the impact of such price reductions will be offset by higher student order volumes for the affected solutions.

 

   

Voyager Learning will continue to provide high-quality services. Voyager Learning’s support services reinforce our commitment to partner with school districts to drive efficacy of our intervention solutions and the Voyager Education Services group is the go-to source for school-wide improvement services. We believe our focus on student outcomes through a blended model of print, technology and professional services, with an overall partnership approach with the customer to implement our solutions in the manner that the program was designed, results in higher student success rates. Such success, if achieved, will assist in customer retention and growth through reference sales.

 

   

Voyager Learning’s Class.com offering and its fully accredited high school, Lincoln National Academy (“LNA”), is expected to provide growth and serve as a key supplemental education partner with public schools.

 

   

Voyager Learning selling activities will be diversified to encompass multiple channels to market with less overall dependence on the field sales force. Such diversification includes increased ecommerce and inside sales resources.

 

   

Additional investments in online and e-marketing will increase the productivity of our sales, marketing and advertising efforts across all business segments.

 

   

We have embarked on a series of new cost reductions and efficiency improvement activities in order to improve our earnings and to provide funding for many of the investment initiatives listed above.

 

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In late 2011, we launched a reengineering and restructuring initiative to align our organizational and cost structure to our strategic goals. The financial goal of these actions is to provide savings to both improve earnings and to fund re-investment in growth areas of the business. The majority of these costs are expected to be incurred by the end of 2012. Reengineering and restructuring activities will be assessed and enacted throughout 2012 and are expected to include:

 

   

Obtaining new leadership and employee skill sets that support our transformation to focus more heavily on technology solutions and services and other strategic objectives;

 

   

Outsourcing warehouse operations to a third party logistics provider, which will allow us to take advantage of a lower and more variable cost structure for our print based products, as well as locate operations closer to the geographic center of our nationwide customer base;

 

   

Rationalizing facilities space by consolidating facilities and subleasing entire or partial facilities where feasible;

 

   

Assessing and implementing projects to improve cost efficiencies and enhance the customer experience throughout the order to cash and service delivery processes; and

 

   

Other reductions as needed to improve our cost structure.

The total expense for all reengineering and restructuring initiatives from the fourth quarter of 2011 through the end of 2012 is expected to be approximately $6.3 million, including both cash and non-cash items, and capital expenditures are expected to be between $0.4 and $0.5 million. The targeted annual cash savings from all reengineering and restructuring activities is expected to range from $6.0 million to $8.0 million annually by 2013.

First Quarter of Fiscal 2012 Compared to the First Quarter of Fiscal 2011

 

(in thousands)    Three Months Ended     Year Over Year Change  
     March 31, 2012     March 31, 2011     Favorable/(Unfavorable)  
     Amount     % of
Revenues
    Amount     % of
Revenues
    $     %  

Net revenues:

            

Voyager Learning

   $ 12,036        43.2   $ 14,692        47.9   $ (2,656     (18.1 )% 

Sopris Learning

     3,212        11.5     4,185        13.6     (973     (23.2 )% 

Cambium Learning Technologies

     12,607        45.3     11,818        38.5     789        6.7
  

 

 

     

 

 

     

 

 

   

Total net revenues

     27,855        100.0     30,695        100.0     (2,840     (9.3 )% 

Cost of revenues:

            

Voyager Learning

     7,951        28.5     7,993        26.0     42        0.5

Sopris Learning

     1,316        4.7     1,670        5.4     354        21.2

Cambium Learning Technologies

     1,332        4.8     1,223        4.0     (109     (8.9 )% 

Shared Services

     567        2.0     81        0.3     (486     (600.0 )% 

Amortization expense

     6,370        22.9     6,618        21.6     248        3.7
  

 

 

     

 

 

     

 

 

   

Total cost of revenues

     17,536        63.0     17,585        57.3     49        0.3

Research and development expense

     3,332        12.0     2,379        7.8     (953     (40.1 )% 

Sales and marketing expense

     11,896        42.7     10,903        35.5     (993     (9.1 )% 

General and administrative expense

     5,745        20.6     5,812        18.9     67        1.2

Shipping costs

     327        1.2     334        1.1     7        2.1

Depreciation and amortization expense

     1,659        6.0     1,736        5.7     77        4.4

Embezzlement and related expense (recoveries)

     (85     (0.3 )%      (2,436     (7.9 )%      (2,351     (96.5 )% 

Impairment of long-lived assets

     2,791        10.0     —          0.0     (2,791     (100.0 )% 
  

 

 

     

 

 

     

 

 

   

Loss before interest, other income and income taxes

     (15,346     (55.1 )%      (5,618     (18.3 )%      (9,728     (173.2 )% 

Net interest expense

     (4,777     (17.1 )%      (4,405     (14.4 )%      (372     (8.4 )% 

Other income, net

     36        0.1     363        1.2     (327     (90.1 )% 

Income tax expense

     (177     (0.6 )%      (97     (0.3 )%      (80     (82.5 )% 
  

 

 

     

 

 

     

 

 

   

Net loss

   $ (20,264     (72.7 )%    $ (9,757     (31.8 )%    $ (10,507     (107.7 )% 
  

 

 

     

 

 

     

 

 

   

 

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Table of Contents

Net Revenues.

Our total net revenues decreased $2.8 million, or 9.3%, to $27.9 million in the first quarter of 2012 compared to the same period in 2011 due to a decline in order volume.

Voyager Learning. The Voyager Learning segment’s net revenues decreased $2.7 million, or 18.1%, to $12.0 million in the first quarter of 2012 compared to the same period in 2011 due to a decline in order volume.

Sopris Learning. The Sopris Learning segment’s net revenues decreased $1.0 million, or 23.2%, to $3.2 million in the first quarter of 2012 compared to the same period in 2011, which is attributable to decreased order volume.

Cambium Learning Technologies. The Cambium Learning Technologies segment’s net revenues increased $0.8 million, or 6.7%, to $12.6 million in the first quarter of 2012 compared to the same period in 2011. Although order volume declined compared to the first quarter of 2011, net revenues increased as a large portion of the Cambium Learning Technologies segment’s sales are recognized over the related subscription period and the segment experienced order volume growth in 2011.

Cost of Revenues.

Cost of revenues includes expenses to print, purchase, handle and warehouse our products, as well as order processing and royalty costs, and to provide services and support to customers. Cost of revenues, excluding amortization, increased $0.2 million, or 1.8%, to $11.2 million in the first quarter of 2012 compared to the same period in 2011. This increase was primarily related to reengineering and restructuring costs incurred in connection with the outsourcing of our warehouse operations to a third party logistics firm of $0.6 million offset by the impact of lower order volumes.

Voyager Learning. Cost of revenues for the Voyager Learning segment were $8.0 million, in the first quarter of 2012 and 2011. Declines in order volume and cost savings in support services were offset by an increase in costs related to our school turnaround product line due to the signing of five additional contracts since the first quarter of 2011.

Sopris Learning. Cost of revenues for the Sopris Learning segment decreased by $0.4 million, or 21.2%, to $1.3 million in the first quarter of 2012 compared to the same period in 2011 commensurate with the decline in order volume.

Cambium Learning Technologies. Cost of revenues for the Cambium Learning Technologies segment increased by $0.1 million, or 8.9%, to $1.3 million in the first quarter of 2012 compared to the same period in 2011 primarily due to increased royalty costs.

Shared Services. Cost of revenues for Shared Services for the first quarter of 2012 of $0.6 million is related to our re-engineering and restructuring efforts, primarily the outsourcing of our warehouse operations to a third party logistics firm. The charges incurred in the first quarter of 2011 of $0.1 million were primarily related to the costs incurred to maintain our customer-facing software applications.

Amortization Expense.

Amortization expense included in cost of revenues includes amortization for acquired pre-publication costs and technology, acquired publishing rights, and developed pre-publication and technology. Amortization for the first quarter of 2012 decreased $0.2 million compared to the first quarter of 2011, or 3.7%, primarily due to the fact that a majority of our intangible assets are amortized using accelerated methodologies.

Research and Development Expense.

Research and development expenditures include costs to research, evaluate and develop educational products, net of capitalization. Research and development expense for the first quarter of 2012 increased $1.0 million, or 40.1%, to $3.3 million compared to the first quarter of 2011 primarily due to higher investments in technology and the timing of capitalizable versus non-capitalizable activities. Additionally, the first quarter of 2012 includes charges of $0.1 million related to our reengineering and restructuring efforts.

Sales and Marketing Expense.

Sales and marketing expenditures include all costs to maintain our various sales channels, including the salaries and commissions paid to our sales force, and costs related to our advertising and marketing efforts. Sales and marketing expense for the first quarter of 2012 increased $1.0 million, or 9.1%, from the first quarter of 2011 to $11.9 million due to increased employee and contractor costs within our Voyager Learning and CLT segments. Sales and marketing expenses in the first quarter of 2012 includes charges of $0.1 million related to our re-engineering and restructuring efforts.

 

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General and Administrative Expense.

General and administrative expenses were $5.7 million and $5.8 million in the first quarter of 2012 and 2011, respectively. General and administrative expenses in the first quarter of 2012 included reengineering and restructuring costs of $0.1 million, corporate costs related to a 2009 merger of $0.2 million, stock based compensation of $0.2 million and contingent value right (“CVR”) expense of $0.1 million. General and administrative expenses in the first quarter of 2011 included corporate costs related to a 2009 merger of $0.3 million, stock based compensation of $0.2 million, and CVR Expense of $0.3 million. Excluding these charges, the increase in general and administrative expense from the first quarter of 2011 is primarily related to increased spending in IT, corporate development, and our Class.com product line.

Embezzlement and related expense (recoveries). During the three months ended March 31, 2012, the net recoveries represented changes in the estimated fair value of warrants expected to be issued upon the sale of recovered properties, partially offset by related expenses. During the three months ended March 31, 2011, the Company received cash recoveries of $0.5 million and title to two properties purchased by the former employee with embezzled funds that had an appraised fair value of approximately $2.6 million, net of estimated selling costs, as of March 31, 2011. Ongoing expenses incurred related to the Company’s recovery efforts totaled $0.1 million during the quarter ended March 31, 2011.

Impairment of long-lived assets. In connection with our reengineering and restructuring initiatives mentioned above, during the three months ended March 31, 2012 we recorded an impairment charge of $2.8 million related to our leased facility in Frederick, Colorado and warehouse related assets. We plan to complete the outsourcing of our warehouse operations to a third party logistics provider during the quarter ending June 30, 2012.

Net Interest Expense.

Net interest expense was $4.8 million and $4.4 million in the quarters ended March 31, 2012 and 2011, respectively, as interest expense related to our long-term debt was partially offset by interest income recognized for our state tax receivables.

Income Tax Provision.

We recorded income tax expense of $0.2 million during the first quarter of 2012 and $0.1 million during the first quarter of 2011 for state income tax expense in states where the Company cannot file on a unitary basis. We did not record a Federal or state income tax benefit for consolidated losses incurred during either period because realization of the tax benefits from the losses is not assured beyond a reasonable doubt given the Company’s recent history of cumulative losses. Therefore the increases in net deferred tax assets in the periods were offset by increases in the valuation allowance.

Liquidity and Capital Resources

Because sales seasonality affects operating cash flow, we normally incur a net cash deficit from all of our activities through the early part of the third quarter of the year. We typically fund these seasonal deficits through the drawdown of cash, supplemented by borrowings on a revolving credit facility, if needed. The primary sources of liquidity are our current cash balances and our annual cash flow from operations and the primary liquidity requirements relate to interest on our long-term debt, pre-publication costs, capital investments and working capital. We believe that based on current and anticipated levels of operating performance, cash flow from operations and availability under a revolving credit facility, we will be able to make required interest payments on our debt and fund our working capital and capital expenditure requirements for the next 12 months in addition to making planned internal investments and executing on selected acquisition targets.

Long-term debt

In February 2011, the Company closed an offering of $175 million aggregate principal amount of 9.75% senior secured notes due 2017 (the “Notes”) and entered into an asset-based revolving credit facility with potential for up to $40 million in borrowing capacity. Deferred financing costs are capitalized in other assets in the consolidated balance sheets, net of accumulated amortization, and are to be amortized over the term of the related debt using the effective interest method. Unamortized capitalized deferred financing costs at March 31, 2012 and December 31, 2011 were $7.3 million and $7.7 million, respectively.

Interest on the Notes will accrue at a rate of 9.75% per annum from the date of original issuance and will be payable semi-annually in arrears on each February 15 and August 15, to the holders of record of the Notes on the immediately preceding February 1 and August 1. No principal repayments are due until the maturity date of the Notes.

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

 

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

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

As of March 31, 2012, the balances of accounts receivable and inventory collateralizing the ABL Facility were $10.6 million and $22.1 million, respectively. As of March 31, 2012, the Company had a borrowing base under the ABL Loan Agreement of up to $17.2 million.

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

The ABL Facility contains a financial covenant that generally requires the ABL Credit Parties to maintain, on a consolidated basis, either (i) excess availability of at least the greater of $8 million and 15% of the revolver commitment or (ii) a fixed charge coverage ratio of 1.1 to 1.0. The ABL Credit Parties will be required to pay, quarterly in arrears, an unused line fee equal to the product of (x) either 0.375% or 0.50% (depending upon the ABL Credit Parties’ fixed charge coverage ratio at the time) and (y) the average daily unused amount of the revolver. As of March 31, 2012, we were in compliance with this covenant.

Cash flows

Cash from operations is seasonal, with more cash generated in the second half of the year than in the first half of the year. Cash is historically generated during the second half of the year because the buying cycle of school districts generally starts at the beginning of each new school year in the fall. Cash provided by (used in) our operating, investing and financing activities is summarized below:

 

     For the three months ended March 31,  
(in thousands)    2012     2011  

Operating activities

   $ (17,235   $ (3,444

Investing activities

     (3,792     (3,354

Financing activities

     (396     14,461   

Operating activities. Cash used in operations was $17.2 million and $3.4 million for the three month periods ended March 31, 2012 and 2011, respectively. Overall, cash used in operations was $13.8 million higher in 2012 due to collection in the first quarter of 2011 of significant accounts receivable balances outstanding at year end 2010.

 

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Investing activities. Cash used in investing activities for capital expenditures was $3.8 million in the first quarter of 2012 compared to $3.4 million in the first quarter of 2011.

Financing activities. Cash (used in) provided by financing activities was ($0.4) million in the first quarter of 2012 and $14.5 million in the first quarter of 2011. Cash used in financing activities during the first quarter of 2012 relate to capital lease payments. Cash provided by financing activities in the first quarter of 2011 consisted of net proceeds received from the issuance of the 9.75% senior secured notes in February 2011 of $174.0 million offset by repayment of $152.1 million of existing notes and payments of $7.3 million related to the debt financing.

Contingency

The Company had a potential contingent liability related to state income taxes and related interest that had been assessed against a former subsidiary. On August 27, 2010, the former subsidiary received a decision and order of determination from the Michigan taxing authority. According to the determination of the Michigan taxing authority, the former subsidiary was liable to the State of Michigan for unpaid taxes and interest in the amount of approximately $10.4 million. In order to expedite resolution of this matter and access the Michigan Court of Claims, the Company paid this liability to the state of Michigan on behalf of the former subsidiary on September 7, 2010 and filed an action in the Michigan Court of Claims to pursue a refund of the assessment. On November 16, 2011, the Court of Claims in Michigan ruled in favor of the Company’s motion for summary judgment. The Michigan state taxing authority has since appealed the decision of the Court of Claims to the Michigan Court of Appeals.

As management believes it is more likely than not that the Company’s position will ultimately be upheld, a tax receivable for the expected refund plus statutory interest is recorded in other assets on the Condensed Consolidated Balance Sheets totaling $11.2 million and $11.0 million as of March 31, 2012 and December 31, 2011, respectively.

This liability was identified as an agreed contingency for purposes of the CVRs issued as part of a 2009 merger. In accordance with the terms of the merger agreement, dated June 20, 2009, fifty percent (50%) of any amount that is paid or due and payable with respect to each agreed contingency would offset payments due under the CVRs from an amount held for such payments by Wells Fargo Bank, N.A., as escrow agent, in an escrow account. Upon payment of the approximately $10.4 million, the Company requested a disbursement to the Company from the escrow account in an amount equal to fifty percent (50%) of the payment, or approximately $5.2 million. This cash disbursement was received by the Company during the third quarter of 2010. On September 20, 2010, the Company amended the merger agreement and the escrow agreement to extend the term of the escrow agreement until the later of the full distribution of the escrow funds or the final resolution of the agreed contingency. The final resolution of the tax litigation or potential settlement could result in a total refund from the taxing authority to the Company ranging from zero to approximately $11.2 million as of March 31, 2012, and 50% of any such refund would in turn be payable to the holders of the CVRs. As of March 31, 2012, the Company has recorded $5.0 million as a component of the CVR liability related to this agreed upon contingency, which is an estimate of the fair value based on a probability-weighted cash flow analysis using management assumptions related to the likelihood of the ultimate cash outflows. If the former subsidiary’s position is not ultimately upheld, the Company could incur non-cash charges of up to $10.4 million of indemnification expense and a $0.8 million reduction in interest income in future periods on its Statements of Operations, partially offset by the related $5.0 million reduction to the CVRs liability.

The Court of Claims in Michigan also ruled in the Company’s favor on two other tax matters that could result in a refund of up to $0.8 million, plus statutory interest. These potential tax refunds would be retained by the Company and are not subject to payment to the holders of the CVRs.

Non-GAAP Measures

The net losses as reported on a GAAP basis include material non-recurring and non-operational items. We believe that earnings (loss) from operations before interest and other income (expense), income taxes, and depreciation and amortization, or EBITDA, and Adjusted EBITDA, which further excludes non-recurring and non-operational items, provide useful information for investors to assess the results of the ongoing business of the combined company.

EBITDA and Adjusted EBITDA are not prepared in accordance with GAAP and may be different from similarly named, non-GAAP financial measures used by other companies. Non-GAAP financial measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. We believe that Adjusted EBITDA provides useful information to investors because it reflects the underlying performance of the ongoing operations of the Company and provides investors with a view of the Company’s operations from management’s perspective. Adjusted EBITDA removes significant one-time or certain non-cash items from earnings. We use Adjusted EBITDA to monitor and evaluate the operating performance of the Company and as the basis to set and measure progress towards performance targets, which directly affect compensation for employees and executives. We generally use these non-GAAP measures as measures of operating performance and not as measures of liquidity. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or nonrecurring items.

 

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Below are reconciliations between net loss and Adjusted EBITDA for the three month periods ended March 31, 2012 and 2011:

Reconciliation Between Net Revenues to Adjusted Net Revenues and Between Net Loss and Adjusted EBITDA for the Three Months Ended March 31, 2012 and 2011

 

     Three Months Ended
March 31,
 
     2012     2011  
     (In thousands)  
     (Unaudited)  

Total net revenues

   $ 27,855      $ 30,695   

Non-recurring and non-operational costs included in net revenues but excluded from adjusted net revenues:

    

Adjustments related to purchase accounting (a)

     132        332   
  

 

 

   

 

 

 

Adjusted net revenues

   $ 27,987      $ 31,027   
  

 

 

   

 

 

 

Net loss

   $ (20,264   $ (9,757

Reconciling items between net loss and EBITDA:

    

Depreciation and amortization

     8,029        8,354   

Net interest expense

     4,777        4,405   

Other income

     (36     (363

Income tax expense

     177        97   
  

 

 

   

 

 

 

Income (loss) from operations before interest and other income (expense), income taxes, and depreciation and amortization (EBITDA)

     (7,317     2,736   

Non-recurring, non-operational, and certain non-cash costs included in EBITDA but excluded from Adjusted EBITDA:

    

Re-engineering and restructuring costs (b)

     3,704        —     

Corporate costs related to a 2009 merger (c)

     181        311   

Stock-based compensation expense (d)

     225        290   

Embezzlement and related expenses (recoveries) (e)

     (85     (2,436

Adjustments related to purchase accounting (a)

     103        288   

Adjustments to CVR liability (f)

     53        308   
  

 

 

   

 

 

 

Adjusted EBITDA

   $ (3,136   $ 1,497   
  

 

 

   

 

 

 

 

(a) Under applicable accounting guidance for business combinations, an acquiring entity is required to recognize all of the assets acquired and liabilities assumed in a transaction at the acquisition date fair value. Net revenues have been reduced by $0.1 million and $0.3 million, respectively, for the quarters ended March 31, 2012 and 2011 in the historical financial statements due to the write-down of deferred revenue to its estimated fair value as of the merger date. The write-down was determined by estimating the cost to fulfill the related future customer obligations plus a normal profit margin. Partially offsetting this impact, cost of revenues were reduced for other purchase accounting adjustments, primarily a write-down of deferred costs to zero at the acquisition date. During the quarters ended March 31, 2012 and 2011, the historical cost of revenues was reduced by zero and $0.1 million, respectively. The adjustment of deferred revenue and deferred costs to fair value is required only at the purchase accounting date; therefore, its impact on net revenues, cost of revenues, and sales and marketing expense is non-recurring.
(b) In late 2011, we launched a reengineering and restructuring initiative to align our organizational and cost structure to our strategic goals. The financial goal of these actions is to provide savings to both improve earnings and to fund re-investment in growth areas of the business. The majority of these costs are expected to be incurred by the end of 2012. Reengineering and restructuring activities will be assessed and enacted throughout 2012 and are expected to include: (1) Obtaining new leadership and employee skill sets that support our transformation to focus more heavily on technology solutions and services and other strategic objectives; (2) Outsourcing warehouse operations to a third party logistics provider, which will allow us to take advantage of a lower and more variable cost structure for our print based products, as well as locate operations closer to the geographic center of our nationwide customer base; (3) Rationalizing facilities space by consolidating facilities and subleasing entire or partial facilities where feasible; (4) Assessing and implementing projects to improve cost efficiencies and enhance the customer experience throughout the order to cash and service delivery processes; and (5) Other reductions as needed to improve our cost structure. During the three months ended March 31, 2012 we recorded reengineering and restructuring charges of $3.7 million, including an impairment charge of $2.8 million related to our leased facility in Frederick, Colorado and warehouse related assets.

 

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(c) Corporate costs relate to non operational charges from a 2009 acquired entity including liabilities such as pension and severance costs for former employees.
(d) Stock-based compensation and expense is related to our outstanding options, restricted stock awards, warrants, and stock appreciation rights (SARs).
(e) During 2008, we discovered certain irregularities relating to the control and use of cash and certain other general ledger items which resulted from a substantial misappropriation of assets over more than a three-year period beginning in 2004 and continuing through April 2008. These irregularities were perpetrated by a former employee, resulting in embezzlement losses, net of recoveries.
(f) Adjustments to the CVR liability as a result of the amendments of the merger agreement and the related escrow agreement, the expiration of the statute of limitations on potential tax liabilities and changes in likelihood of collecting potential tax receivables included in the estimate of the fair value of the CVRs.

The deferred revenue balances as reported on a GAAP basis include material purchase accounting adjustments related to a 2009 acquisition. We believe that the adjusted deferred revenue balances, which exclude the effect of the purchase accounting adjustment, provide useful information for investors to assess the results of the ongoing business of the combined company.

Adjusted deferred revenue is not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. Non-GAAP financial measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. We believe that adjusted deferred revenue provides useful information to investors for assessing the impact of deferred revenue changes on our reported GAAP and adjusted net revenues.

Cambium Learning Group, Inc.

Change in Adjusted Deferred Revenue

(in thousands)

(Unaudited)

 

     As of:  
     December 31,
2010
     March 31,
2011
    June 30,
2011
     September 30,
2011
     December 31,
2011
    March 31,
2012
 

Deferred revenue

   $ 37,556       $ 30,779      $ 31,581       $ 43,479       $ 43,288      $ 36,207   

Purchase accounting fair value adjustment

     1,437         1,105        782         548         398        266   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Adjusted deferred revenue

     38,993         31,884        32,363         44,027         43,686        36,473   

Change in adjusted deferred revenue

   $ 3,430       $ (7,109   $ 479       $ 11,664       $ (341   $ (7,213

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements as of March 31, 2012 that have or are reasonably likely to have a current or future material effect on the Company’s financial condition, changes in financial conditions, sales or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations

On February 15, 2012, our Board of Directors approved a plan to outsource our warehouse operations to a third party logistics provider, OHL, and to cease use of the leased facility in Frederick, Colorado that includes our warehouse and other office space. Warehouse operations in Frederick are expected to be transferred to OHL and the facility be made available for sublease in the quarter ending June 30, 2012.

There have been no other material changes in the contractual obligations disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

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Recently Issued Financial Accounting Standards

In June 2011, new guidance was issued regarding the disclosure of the components of comprehensive income. This guidance gives the entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In either option, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This guidance does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This guidance is effective for interim and annual periods beginning after December 15, 2011 and is required to be adopted retrospectively. The Company adopted this guidance beginning with its Form 10-Q for the quarter ending March 31, 2012.

In September 2011, new guidance was issued regarding testing goodwill for impairment. The revised standard is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities with the option of performing a “qualitative” assessment to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company will adopt the revised standard in 2012. The Company does not believe that the disclosure requirements of this standard will have a material effect on the Company’s results of operations or financial position.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

As described in Note 14 to our condensed consolidated financial statements, in February 2011, we closed an offering of $175 million aggregate principal amount of Notes (fixed rate) due 2017 and entered into a $40 million asset-based revolving credit facility. We have no amounts outstanding under the revolving credit facility, which is our only variable interest debt. Therefore, as of March 31, 2012 we have no material interest rate risk.

Foreign Currency Risk

The Company does not have material exposure to changes in foreign currency rates. As of March 31, 2012, the Company does not have any outstanding foreign currency forwards or option contracts.

 

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Management of the Company, with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis and that such information is communicated to management, including the Chief Executive Officer, Chief Financial Officer and its Board of Directors, to allow timely decisions regarding required disclosure.

Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2012.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

 

Item 1. Legal Proceedings.

As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2011, the Company is involved in a tax litigation matter related to a Michigan state tax issue. The final resolution of the tax litigation or potential settlement could result in a total refund from the taxing authority to the Company ranging from zero to approximately $11.2 million as of March 31, 2012, and 50% of any such refund would in turn be payable to the holders of the CVRs. As of March 31, 2012, the Company has recorded $5.0 million as a component of the CVR liability related to this agreed upon contingency, which is an estimate of the fair value based on a probability-weighted cash flow analysis using management assumptions related to the likelihood of the ultimate cash outflows. If the former subsidiary’s position is not ultimately upheld, the Company could incur non-cash charges of up to $10.4 million of indemnification expense and a $0.8 million reduction in interest income in future periods on its Statements of Operations, partially offset by the related $5.0 million reduction to the CVRs liability. As management believes it is more likely than not that the Company’s position will ultimately be upheld, a tax receivable for the expected refund plus statutory interest is recorded in other assets on the Condensed Consolidated Balance Sheets totaling $11.2 million and $11.0 million as of March 31, 2012 and December 31, 2011, respectively.

 

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Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as such factors could materially affect the Company’s business, financial condition, or future results. In the three months ended March 31, 2012, there were no material changes to the risk factors disclosed in the Company’s 2011 Annual Report on Form 10-K. The risks described in the Annual Report on Form 10-K are not the only risks the Company faces. Additional risks and uncertainties not currently known to the Company, or that the Company currently deems to be immaterial, also may have a material adverse impact on the Company’s business, financial condition, or results of operations.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following is a description of the Company’s securities that were issued or sold by the Company during the period covered by this report and which were not registered under the Securities Act of 1933, as amended (the “Securities Act”).

Warrants to Purchase Common Stock

During the quarter ended March 31, 2012, the number of shares of common stock of the Company underlying the warrant issued to VSS-Cambium Holdings III, LLC, the sole stockholder of VSS-Cambium Holdings II Corp. (“Cambium”) immediately prior to the Company’s acquisition of Cambium, as part of the merger consideration payable to such stockholder in connection with the Cambium merger, was increased by 35,106 shares. The increase resulted from cash recoveries during the quarter in connection with the employee embezzlement matter, in accordance with the terms of the warrant. The warrant is exercisable for shares of common stock at an exercise price of $0.01 per share, and expires on December 8, 2014. The number of shares of common stock issuable under the warrant may be further increased in the future upon the occurrence of certain events described in the warrant. The issuance of these securities to VSS-Cambium Holdings III, LLC was exempt from registration under Section 4(2) of the Securities Act.

 

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Item 6. Exhibits.

The following exhibits are filed as part of this report.

 

Exhibit Number

  

Description

  31.1    Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of Senior Vice President and Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.ins    XBRL Instance Document.*
101.def    XBRL Taxonomy Extension Definition Linkbase 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.*

 

* Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of any registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned duly authorized officer of the registrant.

 

Date: May 11, 2012       CAMBIUM LEARNING GROUP, INC.
     

/s/ Bradley C. Almond

      Bradley C. Almond,
      Senior Vice President and Chief Financial Officer (Principal Financial Officer)

 

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EXHIBIT INDEX

 

Exhibit Number

  

Description

  31.1    Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of Senior Vice President and Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.ins    XBRL Instance Document.*
101.def    XBRL Taxonomy Extension Definition Linkbase 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.*

 

* Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of any registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections.

 

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