UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2009

or

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

For the transition period from                      to                     

Commission file number 001-34575

Cambium Learning Group, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		27-0587428 (I.R.S. Employer Identification No.)
1800 Valley View Lane, Suite 400, Dallas, Texas (Address of Principal Executive Offices)		75234-8923 (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $0.001 per share		The NASDAQ Global Market
(Title of class)		(Name of exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o

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

The common stock of the registrant commenced publicly trading on December 9, 2009. Accordingly, there was no public market for the registrant’s common stock as of June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter.

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of March 19, 2010 was 43,858,676.

Documents Incorporated by Reference:

Part III incorporates certain information by reference from the registrant’s definitive proxy statement for the 2010 Annual Meeting of Stockholders, which definitive proxy statement will be filed by the registrant with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2009.

 

 

TABLE OF CONTENTS

		Page
PART I
Item 1. Business			1
Item 1A. Risk Factors			11
Item 1B. Unresolved Staff Comments			21
Item 2. Properties			21
Item 3. Legal Proceedings			21
Item 4. (Removed and Reserved)			21
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			21
Item 6. Selected Financial Data			22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			43
Item 8. Financial Statements and Supplementary Data			44
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			90
Item 9A. Controls and Procedures			90
Item 9B. Other Information			90
PART III
Item 10. Directors, Executive Officers and Corporate Governance			91
Item 11. Executive Compensation			91
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			91
Item 13. Certain Relationships and Related Transactions, and Director Independence			91
Item 14. Principal Accounting Fees and Services			91
PART IV
Item 15. Exhibits, Financial Statement Schedules			91
SIGNATURES			96
Exhibit 21.1
Exhibit 23.1
Exhibit 23.2
Exhibit 23.3
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I

Cautionary Note Regarding Forward-looking Statements.

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

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

Item 1. Business.

Unless otherwise expressly indicated in this Item 1, the discussions set forth herein are as of December 31, 2009.

Cambium Learning Group, Inc. (the “Company”, “we”, “us”, or “our”) was incorporated under the laws of the State of Delaware in June 2009. On December 8, 2009, we completed the mergers of Voyager Learning Company (“VLCY”) and VSS-Cambium Holdings II Corp. (“Cambium”) into two of our wholly owned subsidiaries, resulting in VLCY and Cambium becoming our wholly owned subsidiaries. Following the completion of the mergers, all of the outstanding capital stock of VLCY’s operating subsidiaries, Voyager Expanded Learning, Inc. and LAZEL, Inc., were transferred to Cambium Learning, Inc., Cambium’s operating subsidiary (“Cambium Learning”). The results of VLCY are included in the Company’s operations beginning with the December 8, 2009 merger date; therefore, the 2009 financial information contained in this report consists of the results of the Company for the full year but only include VLCY for the last 23 days of the year.

The transaction was accounted for as an “acquisition” of VLCY by Cambium, as that term is used under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), for accounting and financial reporting purposes under the applicable accounting guidance for business combinations. In making this determination, management considered that (a) the newly developed entity did not have any significant pre-combination activity and, therefore, did not qualify to be the accounting acquirer, and (b) the former sole stockholder of Cambium is the majority holder of the combined entity, while the prior owners of VLCY became minority holders in the combined entity. As a result, the historical financial statements of Cambium have become the historical financial statements of the Company.

We currently operate in three business segments: Voyager, a comprehensive intervention business; Sopris, a supplemental solutions business; and Cambium Learning Technologies, an education technology business. Throughout our three business segments, we provide research-based education solutions for students in Pre-K through 12^th grade, including intervention curricula, educational technologies and services focused almost exclusively on serving the needs of the nation’s most at risk students and learners challenged in realizing their full potential. We have extensive experience in information aggregation and dissemination, content development and educational publishing.

Cambium Learning was founded in December 2002 to create a leading company focused on the at-risk and special student populations. In 2007, Cambium Learning was acquired by a consortium of equity sponsors led by Veronis Suhler Stevenson (“VSS”). A significant portion of Cambium Learning’s growth has resulted from the acquisition and growth of companies acquired by Cambium Learning and from newly introduced programs developed by authors and researchers. In October 2003, Cambium Learning acquired Metropolitan Teaching & Learning, Inc. Metropolitan Teaching & Learning, Inc. was founded in 1998, and has developed culturally responsive instructional materials and customized programs for use in urban markets, with particular emphasis on mathematics. In February 2004, Cambium Learning acquired Sopris West Educational Services, Inc., a provider of intervention programs in literacy, mathematics, and behavior. In April 2005, Cambium Learning acquired Kurzweil Education Systems, Inc., which develops reading enabling technologies for struggling readers and individuals with visual impairments. In February 2006, Cambium Learning acquired IntelliTools, Inc., a provider of assistive hardware and software technologies for the special education and at-risk market segments in math and literacy.

VLCY’s predecessor company, Bell & Howell Company, was incorporated in Delaware in 1907. On January 31, 2005, VLCY completed the acquisition of Voyager Expanded Learning, Inc., in support of its long-term strategy to grow its educational business for grades K-12. On June 30, 2007, ProQuest Company amended Article I of its certificate of incorporation solely to change the corporate name from ProQuest Company to Voyager Learning Company. The name change and amendment were completed pursuant to a merger of VLCY’s wholly owned subsidiary with and into VLCY.

Overview

Our mission is to deliver solutions that bring all of America’s students to their learning potential. We currently focus on six areas related to Pre-K-12 education: reading programs and resources; math and science programs and resources; professional development programs; intervention solutions; services; and learning technologies. Our intervention solutions address both the behavioral and academic needs of the students we serve. We are a leading provider of results-driven reading and math intervention programs, professional development programs regarding the teaching of reading and math, subscription-based online supplemental reading, online and print based math and science resources and programs, and a core reading program for school districts throughout the United States. We are also a leading company focused on the tools and resources for the greatest at-risk and special education students.

Our products have achieved acceptance across a broad, economically and geographically diverse customer base. Our customer base and sales force cover every state in the United States, from small to large districts. We count some of the nation’s largest districts among our major customers, including Los Angeles, Clark County, Nevada, Houston, New York City, Buffalo, Richmond, Virginia, Cleveland, Milwaukee, and Miami-Dade County. The breadth of this customer base provides us with a national platform from which to launch new products, address new markets, and cross-sell products to existing customers.

Our customers generally purchase our reading, math, intervention or professional development programs along with any necessary implementation services or training for a single school year. For many of our products, in subsequent school years, customers wishing to serve the same number of students generally need to purchase new student materials or renew access to online content, but do not typically repurchase teacher materials. Our Learning A-Z and ExploreLearning businesses’ online subscriptions generally run for a twelve-month period.

Strategy for Growth and Development

Our strategy for growth and development is based upon the following:

We focus our efforts on the Pre-K-12 at-risk and special education markets. We believe that the Pre-K-12 at-risk and special education markets represent approximately 40% of the U.S. student population and that these markets have traditionally been under-served by major providers of educational programs and services. Key federal and state programs address the specific needs of at-risk and special student populations. We believe the intervention category will experience growth as greater funding, resources and education focus are diverted to the at-risk student population.

We offer content-driven products and services designed to provide school districts with tools to improve the performance of at-risk and special student populations. We have developed relationships with authors who are known for their expertise in improving the cognitive and behavioral performance of at-risk and special education students. These authors are engaged by us to develop content and then to refine that content once feedback is obtained from our customers. We also employ both in-house and contracted developers of curriculum and on-line content. Our content is designed to benefit from our assistive technology platforms, which feature student facing practice components, data management, and formative assessment reporting, which enable teachers to build upon core concepts and enable students to scaffold from a limited educational base to more highly developed educational experiences.

We employ a multi-faceted sales strategy to increase market penetration. We employ multiple interrelated sales channels to market and sell our products and services. These channels include selling efforts by our own direct sales force as well as by our authors, supplemented by product training sessions, strategic sales initiatives, direct catalog marketing, special customer events and resellers. Marketing and sales are focused on those schools and school districts having the significant percentages of at-risk and special student populations.

We intend to explore strategic acquisitions. We operate in a highly fragmented market. We believe that this fragmentation is likely to continue to present viable consolidation opportunities. We intend to explore strategic product, service and company acquisitions in the future.

Our growth prospects derive from several other potential sources. We believe that our growth will be driven by a number of factors, including:

•

expanding at-risk and special education populations;

•

prospective increases in federal funding aimed at our primary student constituency, or at-risk students;

•

positive student results achieved in school districts using our programs;

•

growth in services, such as teacher training and professional development; and

•

new programs addressing adjacent markets characterized by different student learning needs.

Funding Sources for Our Solutions

The recent recession, declines in the property tax base, and high unemployment in many states has caused most state and local governments to face large budget deficits, creating constrictions in education funding across the country. As a result of state and local government spending cuts, including reduced spending on education, overall funding for our solutions has been negatively impacted since the 2008 recession. The magnitude and duration of the state and local budget crisis and its impact on education funding can not be forecasted but is at least expected to continue throughout 2010.

United States federal funding in education historically has represented approximately 10% of the money spent on public education in America. However, the federal education programs play a prominent role in our sales as they provide funds to school districts to specifically supplement state and local funding for at-risk students. Federal funding is distributed to school districts in order for them to provide supplemental services and materials targeted to at-risk students which allowed schools to focus on academic intervention for struggling students and on closing the achievement gap between subgroups of students. School districts use these federal funds, in part to purchase our solutions which are largely geared for the at-risk student population. Two such important and historically long lasting funding sources are the Title I and Title III portions of the Elementary and Secondary Education Act (ESEA) for economically disadvantaged children and the Individuals with Disabilities Education Act (IDEA) for students with disabilities eligible for special education. In 2009, the American Recovery and Reinvestment Act (ARRA) provided unprecedented increases in funding to Title I and IDEA. While our sales benefited from ARRA funds, schools have used the majority of these funds to augment declining overall budgets and specifically to retain teaching staff.

While the ARRA funds have provided a much needed economic boost in the face of the state and local budget crisis, the ARRA funds are temporary and are available for use only through the 2010 — 2011 government fiscal year. The Obama Administration with the Congress has used a portion of the ARRA funds to create additional funding opportunities for state education agencies and the 15,000 school districts across our country. These programs include “Race to the Top” and “Investing in Innovation” which allow states and local districts to compete for new funding targeted toward reforms in education, including turning around the county’s lowest performing schools.

On March 13, 2010, the U.S. Department of Education released “A Blueprint for Reform; The Reauthorization of the Elementary and Secondary Education Act.” This Blueprint provides incentives for states to adopt common academic standards that prepare students to succeed in college and the workplace as well as to create data and accountability systems that are capable of measuring student growth. Measuring academic growth in students must also be incorporated into evaluating teacher and principal performance. “Race to the Top” funding will be provided to allow states and local districts to implement the reforms outlined in the Blueprint, as a prelude to ESEA Reauthorization.

Product Overview

Prior to the merger transaction completed on December 8, 2009, we had two reportable segments: Published Products and Learning Technologies. Subsequent to the merger transaction, we operate as three reportable segments with separate management teams and infrastructures that offer various products and services, as follows:

•

Voyager, our comprehensive intervention business;

•

Sopris, our supplemental solutions business; and

•

Cambium Learning Technologies, our technology based education product business.

During 2009, net sales were $52.9 million for Voyager, $25.2 million for Sopris and $22.9 million for Cambium Learning Technologies. We also have shared services such as accounting, information technology, human resources, legal, facilities and corporate management that are not allocated to these segments. Note, however, that while combined revenues for the two pre-merger companies was approximately $200 million in 2009, assuming no merger had occured, we report only $101 million for 2009 because we only include VCLY financial results for the last 23 days of 2009 under business combination accounting.

Voyager

Educating at-risk and special education student populations requires intervention efforts that differ in approach and intensity from traditional instructional materials that largely address on-grade level students. Our comprehensive intervention business is conducted under the Voyager business segment. These products offer a complete suite of comprehensive intervention products, blending content, services and technology to meet student needs. We offer reading programs, math programs and professional development programs under the Voyager business unit.

Voyager Reading Programs. The reading programs in the Voyager business unit consist of: Voyager Passport^tm; LANGUAGE!; Passport Reading Journeys^tm; Read Well; Voyager Universal Literacy System^®; Ticket to Read^®; TimeWarp^® Plus; Voyager Pasaporte^tm; and We Can!.

Voyager Passport is a comprehensive reading intervention system for grades K-5. Voyager Passport provides direct, systematic instruction in each of the five essential reading components (phonemic awareness, phonics, fluency, vocabulary, and comprehension) and is designed as an intervention program for grade K-5 students for whom a core reading program is not sufficient. The lessons are typically daily and run 30 to 40 minutes in duration. They are based on the latest scientific research regarding effective reading instruction and are carefully designed to effectively and efficiently address each of the strategies and skills necessary to improve the reading ability of struggling readers.

LANGUAGE!, our principal literacy offering, is a complete literacy program that targets students in grades 3-12 achieving at or below the 35th percentile. The program consists of a 36-unit curriculum organized into six levels that cover phonemic awareness and phonics, word recognition and spelling, vocabulary and morphology, grammar and usage, listening and reading comprehension and speaking and writing. LANGUAGE! is designed for special education students, as well as students learning to speak English. The curriculum is a mastery-based curriculum. Students exit as soon as they achieve grade-level proficiency, which will vary depending on the specific needs of the student and where the student enters the program.

Passport Reading Journeys is a targeted intervention program designed to accelerate reading for struggling readers in middle school and high school, grades 6-9. The lesson format integrates reading, comprehension, vocabulary, fluency and writing. Age-appropriate content, real-life journeys on DVDs, online interactive lessons, and captivating text hold student interest and motivate students to read for both information and enjoyment. The program targets the affective domain as much as the cognitive domain as many struggling readers have lost confidence, are not engaged, and are close to dropping out. The program meets all of the instructional recommendations of the Reading Next Report, which is a research report outlining the key elements of effective literacy intervention for middle and high school students, and provides teachers with the tools necessary to help students become successful readers.

Read Well targets at-risk students in grades K-2. The program is a research-based and data-driven reading curriculum that addresses all five components of effective reading instruction — phonemic awareness, phonics, vocabulary, comprehension and fluency.

The Voyager Universal Literacy System is a comprehensive core reading curriculum for grades K-3 that explicitly and systematically teaches the five essential components of reading instruction as outlined by the National Reading Panel in 2000.

Ticket to Read (www.tickettoread.com) is an interactive web-based program offered with Voyager’s Passport and Universal Literacy System programs. Ticket to Read is designed to improve reading by allowing students to practice various aspects of reading skills. Instruction is leveled, self-paced and teacher-monitored. Students are motivated by a leader board, a virtual clubhouse that includes earning online tickets and other rewards, games, and engaging self-selected passages on a variety of topics as they build vocabulary, fluency, phonics and reading comprehension skills. Approximately one-quarter of the use takes place after school hours, including weekends, further enabling students to reinforce what they have learned in the classroom and enabling parents and/or guardians to become more involved in their children’s education.

TimeWarp Plus is a four-to-six week summer reading intervention program which immerses grade K-9 students in reading adventures to build essential reading skills that can prevent summer learning loss and prepare students for the coming year. TimeWarp Plus is a balanced, research-based reading program offered as a two-to-four hour daily reading instruction focused around exciting, adventure-based themes and hands-on learning experiences. Student engagement and maximizing teacher time are key components of the program.

Voyager Pasaporte provides students in grades K-3 with targeted reading intervention in Spanish, using a similar scientifically-based reading research and framework as Voyager Passport. The lessons typically run daily for 30 to 40 minutes in duration. They are based on the latest scientific research regarding effective reading instruction and are carefully designed to effectively and efficiently address each of the strategies and skills necessary to improve the reading ability of struggling Spanish-speaking children who cannot read effectively in any language. Built-in assessment and progress monitoring tools provide teachers with vital information about student learning so they can adjust instruction as needed.

We Can! is a multilingual early childhood program which is designed to develop both social and academic skills. The program offers flexible lesson plans for customized instruction, a classroom management system and learning center choices. We Can! also fits within a variety of Pre-K settings.

Voyager Math Programs. The math programs in the Voyager business unit consist of: Vmath^®, Vmath Summer Adventure, TransMath, Algebra Rescue and Voyages.

Vmath is a targeted, systematic intervention system that is aligned with the tenets of the National Council of Teachers of Mathematics and is designed to complement and enhance all major math programs by building upon and reinforcing the concepts, skills, and strategies of a core math program. Through 30 to 40 minutes of daily instruction, Vmath helps struggling students build a foundation in math and learn the skills and concepts crucial to achieving grade-level success. VmathLive is a standalone or complementary online math capability, targeting additional student practice for grades 3-8.

Vmath Summer Adventure targets math students who may need summer intervention to prevent summer learning loss in math as well as in reading. Vmath Summer Adventure combines explicit instruction in essential math concepts and skills and real-life adventures to stimulate student interest and understanding over a shortened summer school program for grades K-8.

TransMath targets students in the 25th percentile and below in grades 5-12. TransMath provides students with in-depth, sequential skill building of foundational math concepts through reform-based and procedural instruction. Multisensory strategies are designed to promote problem-solving proficiency, vocabulary development and mathematical discourse.

Algebra Rescue targets students at risk of failure in algebra and teaches them a variety of core objectives through activities intended to make learning fun. Students may participate in Algebra Rescue in small groups, as a supplement to basal curricula, or as a stand-alone algebra intervention program.

Voyages targets grades K-5 and is a core mathematics program designed by teachers, for teachers. Educators may utilize Voyages as a core program, as an intervention program or as part of a gifted and talented program.

Voyager Professional Development Programs. The professional development programs in the Voyager business unit include VoyagerU^®, our professional development program for teachers, coaches and administrators consisting of courses in literacy and math. VoyagerU is a professional development program delivered to teachers, coaches and educators in collaboration with state-wide and school district-wide professional development initiatives. It is designed to improve teacher effectiveness by providing a consistent approach to teaching reading and math. The program blends independent student instruction with facilitator-led training. We offer courses that are comprehensive or targeted for specific skills. Participants may earn college credit and hours toward professional development requirements. VoyagerU is designed to improve teacher instruction and student reading performance.

Sopris

The Sopris business unit is our supplemental education materials business. Supplemental interventions are typically smaller “footprint” offerings as measured either by the cost per student to implement or their more targeted (less comprehensive) skills coverage. These products typically are used to complement core programs by focusing on specific skill deficits and providing intense remediation of those deficits. The Sopris business unit is a collection of many products, titles and resources. Sopris’ primary products are Step Up to Writing; Rewards; Dynamic Indicators of Basic Early Literacy Skills (DIBELS/IDEL); Language Essentials for Teachers of Reading and Spelling (LETRS); The Six Minute Solution; and Algebra Ready.

Step Up to Writing is a strategies-based program that spans grades K-12 and addresses students who score at or below the basic skill level in writing. The program teaches students to write both narrative and expository pieces, actively engage with reading materials and develop study skills. Step Up to Writing is designed to fit alongside a school district’s existing reading program and to be integrated into any standard curriculum or instructional system.

Rewards is a research-based, reading intervention program designed for general and special education, remedial reading, summer school and after-school programs. The program focuses on de-coding, fluency, vocabulary, comprehension, test-taking abilities and content-area reading and writing.

DIBELS/IDEL is a literary screening and progress monitoring tool. Students from grades K-3 take benchmark assessments three times a year in order to measure the critical areas of early reading: awareness, phonics, fluency, comprehension and vocabulary. Students in grades 4-6 are assessed in the areas of fluency and comprehension. For those with reading difficulties, progress monitoring assessments are given to determine the effectiveness of the interventions being used. IDEL offers DIBELS materials for Spanish-speaking students.

LETRS is a stand-alone professional development program for educators. The training program is delivered through a combination of print materials, online courses, software and face-to-face training. LETRS Institutes are grouped into a series of three-day sessions presented by certified national LETRS trainers and engage educators through group activities and hands-on practice.

The Six Minute Solution targets grades K-12 and helps students improve reading fluency. This peer-mentoring and feedback system is designed to complement a reading curriculum.

Algebra Ready teaches students fundamental mathematics and is designed to prepare them for algebra and geometry. Students can utilize Algebra Ready during summer school, extended days, or as a supplement to a core math curriculum.

Growth for Sopris is partially dependent on new product additions. In late 2009, we added DISE (Direct Instruction Spoken English), an intervention program for English learners at grades 4-12. Additionally, we recently announced that we had signed an agreement with a well-known author to publish RAVE-O (Reading through Automaticity, Vocabulary, Engagement, and Orthography), an intensive, multisensory, small group reading intervention for primary through intermediate grades. RAVE-O is expected to be available in summer 2010.

Cambium Learning Technologies

Cambium Learning Technologies leverages technology to help students reach their potential. The technology solutions are offered under four different industry leading brands: Learning A-Z, ExploreLearning, Kurzweil Educational Systems and IntelliTools.

Learning A-Z. Learning A-Z is a group of related websites known as Reading A-Z^tm, Raz-Kids^tm, Reading-Tutors^tm, Vocabulary A-Z^tm and Writing A-Z^tm, which provide online supplemental reading, writing and vocabulary lessons, books, and other resources for students and teachers. Science A-Z ^tm, a Learning A-Z website, is aimed at the supplemental science market.

We sell online supplemental reading, math and science products under the Learning A-Z brand. There are three free websites (LearningPage^tm, Sites for Teachers and Sites for Parents), which aid in directing interested parents, teachers, schools and districts to six subscription-based sites: Reading A-Z, Raz-Kids, Reading-Tutors, Vocabulary A-Z, Writing A-Z, and Science A-Z. Each of these websites offers products available for purchase through online subscriptions.

Reading A-Z offers thousands of research-based, printable teacher materials to teach guided reading, phonological awareness, phonics, comprehension, fluency, letter recognition and formation, high-frequency words, poetry and vocabulary. The teaching resources include professionally developed downloadable leveled books (27 levels), a systematic phonics program that includes decodable books, high-frequency word books, poetry books, nursery rhymes, vocabulary books, read-aloud books, lesson plans, worksheets, graphic organizers and reading assessments. All leveled books, worksheets, graphic organizers and quizzes are available as printable PDF files and as projectables for use on interactive and non-interactive whiteboards. The leveled books and a variety of other books are available in Spanish and French, as well as a version with UK spellings.

Raz-Kids is a student-centered online collection of interactive leveled books and quizzes designed to guide and motivate emergent and reluctant readers, as well as improve the skills of fluent readers. Students can listen to and read books as well as record their reading and then take an online quiz while receiving immediate feedback. Students earn stars for their reading activity. The stars can then be spent in each student’s personal clubhouse-like environment for purchasing a catalog full of items that include aliens and other fun characters. The program currently consists of over 300 online books along with companion quizzes and worksheets spread over 27 levels of difficulty. The website also features a classroom management system for teachers to build rosters, assign books and review student reading activity.

Reading-Tutors is a low-cost, easy-to-use collection of research-based resource packets for tutors. Each of the 400 packets contains items tutors need to help emerging readers gain key literacy skills in the alphabet, phonological awareness, phonics, high-frequency words, fluency and comprehension. It also has all the resources needed to train tutors as well as set up and administer a successful tutoring program.

Vocabulary A-Z provides customized and pre-made vocabulary lessons for use by teachers to improve student vocabularies. Vocabulary A-Z has thousands of vocabulary words that can be used to generate custom vocabulary lessons and assessments. Word activities and worksheets are available based on the word lists the user generates. The Vocabulary A-Z lesson generator incorporates best practices from current educational research.

Writing A-Z provides teachers with a comprehensive collection of resources to enhance the writing proficiency of students in grades K-6. The site provides core writing lessons grouped by genre, including student packets with leveled materials, mini-lessons that target key writing processes and skills, and writing tools for organizing and improving writing.

Science A-Z provides teachers with an online collection of resources to improve student skills in both science and reading. The website offers a collection of downloadable resources organized into thematic units aligned with state standards. The materials are categorized into four scientific domains: life, earth, physical and process science. The thematic units are organized into three grade-level groupings: K-2, 3-4, and 5-6. The themed packs include lessons, books, high- interest information sheets, career sheets, and process activities. Within each grade span, all books and information sheets are written to a high, medium and low level of difficulty. The website includes many other science resources, including science fair resources and a monthly “Science In the News” feature.

ExploreLearning. ExploreLearning^tm is a subscription-based online library of interactive simulations in math and science for grades 3-12. ExploreLearning supplies online simulations in math and science. ExploreLearning has won National Science Foundation funding, supports the tenets of the National Council of Teachers of Mathematics and has received positive mention in books published by the Association of Supervision and Curriculum Development and the National Science Teachers Association. ExploreLearning materials are correlated to state standards and over 120 math and science textbooks. Like Learning A-Z, ExploreLearning is an online subscription-based business.

Kurzweil Educational Systems. Kurzweil Educational Systems is a program that primarily targets students in middle school through higher education struggling with reading and writing, specifically those students with ADHD, dyslexia and visual impairments. Kurzweil Educational Systems produces the following two software products for individuals with learning difficulties and for those who are visually impaired:

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Kurzweil 3000. Kurzweil 3000 is a reading, writing and learning software package for students with dyslexia, attention deficit disorder or other learning difficulties, including physical impairments or language learning needs.

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Kurzweil 1000. Kurzweil 1000 provides visually impaired users access to printed and electronic materials. Documents and digital files are converted from text to speech and read aloud in a variety of voices that can be modified to suit individual preferences. In addition, this software provides users with document creation and editing, studying and study skills for note-taking, summarizing and outlining text.

IntelliTools. IntelliTools offers hardware products that target students with physical, visual and cognitive disabilities that make using a standard keyboard and mouse difficult. IntelliTools also offers software products that target elementary and middle school special education students struggling with reading and math. IntelliTools’ products include:

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IntelliKeys® USB, which is a programmable alternative keyboard with supporting software for students or adults who have difficulty using a standard keyboard.

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IntelliTools Classroom Suite, which is an authoring and application tool intended to boost achievement on standards-based tests and help meet adequate yearly progress goals under the No Child Left Behind Act.

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IntelliTools, which offers software products with a simple interface for students to use. The software includes lessons, activities and assessments that reinforce reading, writing and math skills with the capability to generate reports and provide detailed data tracking.

Marketing and Distribution

Curriculum Development

We continually seek to take advantage of new product and technology opportunities and view product development to be essential to maintaining and growing our market position. We have developed relationships with authors who are known for their expertise in improving the cognitive and behavioral performance of at-risk and special education students. Many authors are leaders in their respective fields, such as literacy, mathematics, and positive school climate. These authors are engaged by us to develop content and then to refine that content once feedback is obtained from our customers. We also employ both in-house and contracted developers of curriculum and on-line content. We generally conduct an extensive refresh of our products every three to five years to incorporate the latest research, bring images current, and update factual content. The web-based products are enhanced continuously. Between the product refreshes, we often develop variations, expansions (i.e., more grade levels) and other basic enhancements of our products. As of December 31, 2009, we had 112 employees in curriculum development. Research and development expense was $5.6 million for 2009 and $6.4 million for 2008. In addition, we capitalize certain expenditures also related to curriculum and technology development.

Sales and Marketing

Sales Force Organization

We generally organize our marketing and sales force around our Voyager, Sopris and Cambium Learning Technologies business units. We have separate sales forces by unit and sales producers sell all available products in the unit and are generalist relationship managers. They are supported by product or subject matter experts as well as a corporate marketing team. As of December 31, 2009, our sales force consisted of 91 field and 43 inside sales producers for a total of 134 direct sales producers, excluding sales management and marketing. Where we elect to use both field and inside sales producers in a business unit, we tend to segment the customers primarily based on size of a territory, whereby larger territories are covered by field representatives and smaller territories are covered more effectively by inside sales employees. We also use direct marketing through catalogs and are increasingly making use of e-commerce and the Internet to sell our products. Sales and marketing expense was $23.4 million for 2009 and $24.6 million for 2008.

Competition

The market for our products is highly competitive. We compete with a wide range of companies from large publishers covering a broad array of products to small providers who specialize in very limited areas. We compete with:

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Basal text book suppliers, which often offer intervention products as part of their core reading programs, including Houghton Mifflin/Harcourt (Riverdeep), Scott Foresman (Pearson), and The McGraw-Hill Companies;

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Supplemental suppliers, including School Specialty, Haights Cross Communications and The Hampton-Brown Company;

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Technology suppliers, including Scientific Learning, Educational Resources, Renaissance Learning, and Plato Learning; and

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Service providers, including Sylvan Learning and Kaplan Early Learning Company.

Concentration Risk

We are not overly dependent upon any one customer or a few customers, the loss of which would have a material adverse effect on our business. We have a broad customer base; in the three years ended December 31, 2009 for both VLCY and the Company, no single customer accounted for more than 10% of our total net sales in any one year. On a combined basis, our top ten customers accounted for less than 17% of our net sales in 2009.

Seasonality

Our quarterly operating results fluctuate due to a number of factors, including the academic school year, funding cycles, the amount and timing of new products and spending patterns. In addition, customers experience cyclical funding issues that can impact revenue patterns. Historically, we have experienced our lowest sales and earnings in the first and fourth fiscal quarters with our highest sales and earnings in the second and third fiscal quarters.

Governmental Regulations

Our operations are governed by laws and regulations relating to equal employment opportunity, workplace safety, information privacy, and worker health, including the Occupational Safety and Health Act and regulations under that Act. Additionally, as a company that often bids on various state, local and federally funded programs, we are subject to various governmental procurement policies and regulations. We believe that we are in compliance in all material respects with applicable laws and regulations and that future compliance will not have a material adverse effect upon our consolidated operations or financial condition.

Employees

Our future success is substantially dependent on the performance of our management team and our ability to attract and retain qualified technical and managerial personnel. As of December 31, 2009, we had a total of 622 employees. None of our employees are represented by collective bargaining agreements. We regard our relationship with our employees to be good.

Executive Officers

Ronald Klausner. Ronald Klausner, age 56, currently serves as a Class III director and our Chief Executive Officer. Mr. Klausner has served as one of our directors since December 8, 2009. Mr. Klausner served as President of Voyager Expanded Learning from October 2005 until December 8, 2009, when he became our Chief Executive Officer. Prior to that, Mr. Klausner served as President of ProQuest Information and Learning Company (a subsidiary of VLCY until it was sold in 2007) from April 2003 to October 2005. Mr. Klausner came to VLCY from D&B (formerly known as Dun & Bradstreet), a global business information and technology solutions provider, where he worked for 27 years. He most recently served as D&B’s Senior Vice President, U.S. Sales, leading a segment with more than $900 million in revenue. Previously, Mr. Klausner led global data and operations, and customer service, providing business-to-business, credit, marketing and purchasing information in over 200 countries.

David F. Cappellucci. David F. Cappellucci, age 53, currently serves as a Class I director and our President. Mr. Cappellucci has served as one of our directors since December 8, 2009. Mr. Cappellucci served as the Chief Executive Officer of Cambium from April 2007 until December 8, 2009 and has 24 years of experience in the education industry. Before co-founding Cambium in December of 2002, Mr. Cappellucci spent 13 years with Houghton Mifflin Company, where he served in a variety of senior management positions, overseeing strategy, mergers and acquisitions, planning and operations at both the corporate level and within a number of business units, including the K-12 School Publishing Group and the Educational and Business Software Divisions. In 2000, Mr. Cappellucci co-founded Classwell Learning Group, an education company formed within the Houghton Mifflin organization. Through 2002, Mr. Cappellucci served as President and Chief Executive Officer of Classwell Learning Group, which was described as the “best new brand in the education market” by a major industry magazine in 2002. From 1992 to 1997, Mr. Cappellucci served as Senior Vice President of Elementary Education for Simon & Schuster. Prior to that, Mr. Cappellucci was Vice President of Finance, Planning and Operations for Houghton Mifflin’s K-12 school and assessment businesses.

Bradley C. Almond. Bradley C. Almond, age 43, currently serves as our Senior Vice President and Chief Financial Officer. Mr. Almond served as Chief Financial Officer of VLCY since January 2009 and continues to serve as our subsidiary’s Chief Financial Officer. Mr. Almond joined VLCY in November 2006 as Chief Financial Officer of the Voyager Expanded Learning operating unit. Before joining VLCY, Mr. Almond was Chief Financial Officer, Treasurer and Vice President of Administration at Zix Corporation, a publicly traded email encryption and e-prescribing service provider located in Dallas, Texas, since 2003. From 1998 to 2003, Mr. Almond worked at Entrust Inc., where he held a variety of management positions, including president of Entrust Japan, general manager of Entrust Asia and Latin America, vice president of finance and vice president of sales and customer operations. Mr. Almond is a licensed Certified Public Accountant.

John Campbell. John Campbell, age 49, currently serves as Senior Vice President and the President of the Cambium Learning Technologies business unit. Mr. Campbell served as Chief Operating Officer of Voyager Expanded Learning from January 2004 until December 8, 2009. Before joining VLCY, Mr. Campbell served as Chief Operating Officer and business unit head of a research based reading company (Breakthrough to Literacy) within McGraw-Hill. Prior to joining Breakthrough/McGraw-Hill, he served as Director of Technology for Tribune Education. Additionally, Mr. Campbell has experience as General Manager of a software start-up (Insight) and as Director of Applications and Technical Support for a hardware manufacturer (Commodore International).

George A. Logue. George A. Logue, age 58, currently serves as Executive Vice President and the President of the Supplemental Solutions business unit. Mr. Logue served as the Executive Vice President of Cambium from June 2003 until December 8, 2009 and has 35 years of education industry experience. Before joining Cambium, Mr. Logue spent 18 years in various leadership roles with Houghton Mifflin Company. At Houghton Mifflin, Mr. Logue served as Executive Vice President of the School Division from 1996 to 2003. Prior to serving as Executive Vice President of Houghton Mifflin, Mr. Logue was Vice President for Sales and Marketing from 1994 to 1996.

Carolyn W. Getridge. Carolyn W. Getridge, age 65, currently serves as our Senior Vice President of Human Resources and Urban Development. She joined VLCY in 1997 as a member of the team that launched the company after a distinguished 30-year career in public education. Immediately prior to joining Voyager, Ms. Getridge was Superintendent of the Oakland Unified School District. Ms. Getridge also served as Associate Superintendent of Curriculum and Instruction in Oakland and as Director of Education Programs for the Alameda (CA) County Office of Education.

Todd W. Buchardt. Todd W. Buchardt, age 50, currently serves as our Senior Vice President, General Counsel and Secretary. Mr. Buchardt served VLCY as Senior Vice President since November 2002, Vice President since March 2000, and General Counsel and Secretary since 1998. Before joining VLCY, Mr. Buchardt held various legal positions with First Data Corporation from 1986 to 1998.

Proprietary Rights

We regard a substantial portion of our technologies and content as proprietary and rely primarily on a combination of patent, copyright, trademark and trade secret laws, and employee or vendor non-disclosure agreements, to protect our rights.

We have developed relationships with authors who are known for their expertise in improving the cognitive and behavioral performance of at-risk and special education students. Many authors are leaders in their respective fields, such as literacy, mathematics, and positive school climate. These authors are engaged by us to develop content and then to refine that content once feedback is obtained from our customers. We act as exclusive agents for these well-known authors, whereby we publish their works under a royalty arrangement. We also derive a substantial amount of our curriculum content through in-house development efforts. To a much lesser degree, we also license from third parties published works, certain technology content or services upon which we rely to deliver certain products and services. Curriculum developed in-house or developed through the use of independent contractors is our proprietary property. Certain curriculum might be augmented or complemented with third party products, which may include printed materials, videos or photographs. This additional third party content may be sourced from various providers who retain the appropriate trademarks and copyrights to the material and agree to our use under a nonexclusive, fee-based arrangement.

We use U.S.-registered trademarks to identify various products which we develop. The trademarks survive as long as they are in use and the registration of these trademarks is renewed.

Website Access to Company Reports

We make available free of charge through our website, www.cambiumlearning.com, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Forms 3, 4 and 5 filed on behalf of our directors, officers and other affiliate persons, and all amendments to those reports as soon as reasonably practical after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). We also will provide any of the foregoing information without charge upon written request to Cambium Learning Group, Inc., 1800 Valley View Lane, Suite 400, Dallas, Texas 75234-8923, Attention: Investor Relations.

We are providing the address to our website solely for the information of our investors. Our website and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.

Code of Ethics

We have adopted a Senior Financial Officers Code of Ethics and a Code of Business Conduct to promote such standards as (1) honest and ethical conduct; (2) full, fair, accurate, timely and understandable disclosure in our periodic reports; and (3) compliance with applicable governmental rules and regulations. Amendments to, or waivers from, the code of ethics will be posted on our website. A copy of the code of ethics and the code of business conduct are posted on our website, www.cambiumlearning.com, within the “Investor Relations” section under the heading “Corporate Governance”. The code of ethics is also available in print to anyone who requests it by writing to the Company at the following address: Cambium Learning Group, Inc., 1800 Valley View Lane, Suite 400, Dallas, Texas 75234-8923, Attention: Investor Relations.

We have also implemented a whistleblower hotline, as required under the Sarbanes-Oxley Act of 2002, by engaging a third party service that provides anonymous reporting for serious workplace ethical issues via telephone and/or the Internet.

Item 1A. Risk Factors.

This section should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto included in this Annual Report on Form 10-K for the year ended December 31, 2009.

Risks Related to our Business

Changes in funding for public schools could cause the demand for our products to decrease.

We derive a significant portion of our revenues from public schools, which are heavily dependent on federal, state and local government funding. In addition, the school appropriations process is often slow, unpredictable and subject to many factors outside of our control. Budget cuts, curtailments, delays, changes in leadership, shifts in priorities or general reductions in funding could reduce or delay our revenues. Funding difficulties experienced by schools, which have been exacerbated by the current economic downturn and state budget deficits, could also cause those institutions to demand price reductions and could slow or reduce purchases of intervention products, which in turn could materially harm our business.

Our business may be adversely affected by changes in educational funding at the federal, state or local level, resulting from changes in legislation, changes in state procurement processes, changes in government leadership, emergence of other funding or legislative priorities and changes in the condition of the local, state or U.S. economy. While state and federal funding for elementary and high school education has steadily increased over the long term, recent reductions in related appropriations and other declines in budgeted revenues in states that have traditionally purchased products and services have caused some school districts to reduce spending on the types of products and services that we sell, and both have been affected by these reductions. Moreover, future reductions in federal funding provided to the states or reductions in the state and local tax bases could create an unfavorable environment, leading to budget shortfalls resulting in decreases in educational funding. Any decreased funding for public schools may harm our recurring and new business materially if our customers are not able to find and obtain alternative sources of funding.

On March 13, 2010, the U.S. Department of Education released “A Blueprint for Reform: The Reauthorization of the Elementary and Secondary Education Act.” The blueprint provides incentives for states to adopt academic standards that prepare students to succeed in college and the workplace and create accountability systems that measure student growth toward meeting the goal that all children graduate and succeed in college. The blueprint builds on the following key priorities: (1) college- and career-ready students; (2) great teachers and leaders in every school; (3) equity and opportunity for all students; (4) raise the bar and reward excellence; and (5) promote innovation and continuous improvement. This blueprint could provide a means for overhauling the No Child Left Behind Act, although we do not yet know how any legislation resulting from this blueprint will affect funding for our products and services.

We receive significant sales from certain states and reductions in public school education spending in those states could cause the demand for our products to decrease.

In 2009, VLCY and Cambium, on a combined basis, derived significant sales from the following three states in the following approximate percentages: California — 10%; Florida — 9%; and Texas — 12%. California and Florida experienced significant budget problems in 2009 as a result of the current economic downturn and have announced that they anticipate reductions in their 2010 spending for education relative to fiscal 2008/2009 levels. To the extent that the economic situation in any of these states causes reductions in public school spending, our sales to these states could be materially reduced which could harm our business and financial condition.

We participate in state adoptions and sales may be materially reduced if we are not able to replace sales in years subsequent to the first year of adoption or if states elect to defer or eliminate adoption purchases.

We participate in state-wide adoptions for education products, as well as intervention products when states issue specific adoption calls for intervention products. The cost of participating in such adoptions is high, with no guarantee of future sales. In addition, sales are traditionally high in the first year of adoption but decline in subsequent years, making it difficult to replace first year sales. After an adoption has occurred, states may elect to allow school districts to use adoption funds for alternative purposes other than the purposes stated in the initial adoption, as has occurred in Florida in 2009. Postponements of district-level adoptions could also limit market potential in other states. We may not be able to recover costs we incur for participating in adoptions and sales may be materially reduced if we are not able to replace sales in years subsequent to adoption years or if states elect to defer or eliminate adoption purchases.

Changes in school procurement policies may adversely affect our business.

School districts choose to procure educational materials in various ways which can change quickly necessitating a change in our sales strategy or sales investments. Districts and states may switch procurement decisions from a centralized (district-wide) to a decentralized (school by school) decision, states may switch from state-wide standard adoptions to flexible district level procurement, and customers could increasingly utilize competitive requests for proposals (RFP) or procurement via the Internet. Any of these changes could cause us to modify our sales strategy or cause us to expend greater sales effort to win business and if we are slow to respond the result could be a material loss of market share.

Our failure to expand our customer base could diminish incremental revenues from certain products.

We sell products that require customers to purchase certain replenishment materials year after year if they chose to continue serving the same number of students. Sales of these consumable items and replacement materials typically involve considerably less revenue than the initial sale. Therefore, our ability to maintain and grow sales and profitability will depend significantly upon the ability to acquire new customers or increase sales to existing customers. Acquiring new customers or expanding student use within existing customers could prove challenging as a result of competition from larger competitors, reductions in state and local funding, customer preferences and any requirement to provide enhancements to product capabilities. We may also be adversely affected by existing customers who reduce or discontinue use of our products and services, which may occur if our product offering is less competitive with those of our competitors, or as a result of budgetary constraints which have become increasingly acute in the current economic downturn. If we are not successful in continuing to acquire additional customers or expanding business from our existing customers, our earnings may be adversely affected.

Our sales growth and profitability will depend, in part, on our ability to attract and retain productive resellers.

Historically, we have used resellers as a sales channel for certain products. Entities that resell our products may discontinue selling the products or choose to substitute a competing product, or they may not dedicate sufficient attention and resources to our products that they are selling. Should any of our current or future resellers perform below our expectations, or should we lose one or more relationships with one of our current resellers, or fail to establish relationships with additional or replacement resellers, our sales and profitability could be adversely affected.

We may be unable to integrate successfully the businesses of Cambium and VLCY and realize the anticipated benefits of the mergers.

The mergers of Cambium and VLCY involved the combination of two companies which, prior to the mergers, operated as independent companies. We have devoted and will continue to be required to devote significant management attention and resources to integrating the businesses practices and operations of the two previously separate companies. Potential difficulties we may encounter in the integration process include, without limitation, the following:

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the inability to successfully combine the businesses of Cambium and VLCY in a manner that permits us to achieve the cost savings and revenue synergies anticipated to result from the mergers, which would result in the anticipated benefits of the mergers not being realized partly or wholly in the time frame currently anticipated or at all;

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lost sales and customers as a result of certain customers of either of the two companies deciding not to do business with us, including the risks associated with changing the customer relationship from one sales representative to another sales representative;

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complexities associated with managing the combined businesses; and

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integrating personnel from the two companies while maintaining focus on providing consistent, high-quality products and customer service.

In addition, it is possible that the integration process could result in the diversion of management’s attention, the disruption or interruption of, or the loss of momentum in, ongoing business of the combined company or inconsistencies in products, services, standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers and employees, or our ability to achieve the anticipated benefits of the mergers, or could reduce the earnings or otherwise adversely affect our business and financial results. The integration process may be difficult, unpredictable and subject to substantial delay because the businesses are complex, were developed independently and were designed without regard to such integration. Moreover, prior to the mergers, the businesses were headquartered in different geographical regions, which may further complicate integration efforts and make integration of the two companies more challenging. In some instances, Cambium and VLCY historically served the same customers, and some of these customers may decide that it is desirable to seek out additional or different vendors in order to ensure that we are competitive with other companies. If we cannot successfully integrate these businesses and continue to provide customers with products, services and new features on a timely basis, we may lose customers and our business and results of operations may be harmed materially. We also may incur additional unanticipated costs in the integration of the businesses of Cambium and VLCY.

Our sales and profitability will depend on our ability to continue to develop new products and services that appeal to customers and end users and respond to changing customer preferences.

We operate in markets that are characterized by continuous and rapid change, including product introductions and enhancements, changes in customer demands and evolving industry standards. In a period of rapid change, the technological and curriculum life cycles of our products are difficult to estimate. The demand for some of our more “mature” products and services has begun to migrate to other, newer products and services. As a result, we will need to continuously reassess our product and service offerings. We could make investments in new products and services that may not be profitable, or whose profitability may be significantly lower than what we have experienced historically. If we are unable to anticipate trends and develop new products or services responding to changing customer preferences, our revenues and profitability could be adversely affected. Our business could be harmed if we are unable to develop new products and invest in existing products in an appropriate balance to keep our company competitive in the marketplace.

Our business is anticipated to be seasonal and our operating results are anticipated to fluctuate seasonally.

Our business is likely to be subject to seasonal fluctuations. Historically, revenue and income from operations have been higher during the second and third calendar quarters. In addition, the quarterly results of operations have fluctuated in the past, and our quarterly results of operations can be expected to continue to fluctuate in the future, as a result of many factors, including:

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general economic trends;

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state and local budgets for education;

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the traditional cyclical nature of educational material sales;

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school, library and consumer purchasing decisions;

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unpredictable funding of schools and libraries by federal, state and local governments;

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consumer preferences and spending trends;

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the need to increase inventories in advance of the primary selling season; and

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the timing of introductions of new products and services.

If we are unable to compete effectively, we may be unable to successfully attract and retain customers and our profitability could be materially harmed.

The market for our products and services is highly competitive and is characterized by frequent product developments and enhancements of existing products. We cannot assure you that products or services introduced by others will not adversely affect our business.

Many companies, both privately and publicly owned, develop products and services similar to our products. These competitors include basal text book suppliers, which often offer intervention products as part of their core reading programs, supplemental suppliers, technology suppliers and service providers. Several of our competitors have substantially greater financial, research and development, manufacturing and marketing resources than us as well as greater name recognition and larger customer bases. Accordingly, our competitors may be able to respond more quickly to new technologies and changes in customer requirements, have more favorable access to suppliers and devote greater resources to the development and sale of their products and services. These competitors may be successful in developing products and services that are more effective or less costly than any products or services that we may provide currently or may develop in the future. Any incursions by competitors could materially and adversely affect our ability to attract and retain customers and thus may materially harm our business.

Our intellectual property protection may be inadequate, which may allow others to use our technologies and thereby reduce our ability to compete.

The technology underlying our services and products may be vulnerable to attack by our competitors. We rely on a combination of trademark, copyright and trade secret laws, employee and third party nondisclosure agreements and other contracts to establish and protect our technology and other intellectual property rights. The steps that we have taken in order to protect our proprietary technology may not be adequate to prevent misappropriation of our technology or to prevent third parties from developing similar technology independently.

Technology content licensed from third parties may not continue to be available.

We license from third parties technology content upon which we rely to deliver products and services to customers. This technology may not continue to be available to us on commercially reasonable terms or at all. Moreover, we may face claims from persons who claim that our licensed technologies infringe upon or violate those persons’ proprietary rights. These types of claims, regardless of the outcome, may be costly to defend and may divert management’s efforts and resources.

Our products could infringe on the intellectual property of others, which may cause us to engage in costly litigation and to pay substantial damages or restrict or prohibit us from selling our products.

Third parties may assert infringement or other intellectual property claims against us based on their intellectual property rights. If any of these claims are successful, we may be required to pay substantial damages, possibly including treble damages, for past infringement. We also may be prohibited from selling our products or providing certain content without first obtaining a license from the third party, which, if available at all, may require us to pay additional fees or royalties to the third party. Even if infringement claims against us are without merit, defending a lawsuit takes significant time, is often expensive and may divert management attention away from other business concerns.

Our success will depend in part on our ability to attract and retain key personnel.

Our success depends in part on our ability to attract and retain highly qualified executives and management, as well as creative and technical personnel. Members of our senior management team have substantial industry experience that is critical to the execution of our business plan. If they or other key employees were to leave the Company, and we were unable to find qualified and affordable replacements for these individuals, our business could be harmed materially.

Our customer contracts are not likely to insulate us from potential reductions in revenues.

We provide products and services to several governmental agencies, school districts and educational facilities under contractual arrangements that, in most cases, are terminable at-will. We may have no recourse in the event of a customer’s cancellation of a contract that is terminable at-will. In addition, contracts awarded pursuant to a procurement process are subject to challenge by competitors and other parties during and after that process. The termination or successful challenge of significant contracts could materially and adversely affect our business, financial condition, results of operations and liquidity.

Increases in operating costs and expenses, many of which are beyond our control, could materially and adversely affect our operating performance.

We must control our employee compensation expenses and our printing, paper and distribution (such as postage, shipping and fuel) costs in order to be profitable. Our ability to control compensation expenses is limited by our need to offer our employees competitive salaries and benefit packages in order to attract and retain the quality of employees required to grow and expand our business. Our ability to control compensation expenses is also limited by general economic factors, including those affecting costs of health insurance, as well as by trends specific to the employee skills that we require.

Paper prices fluctuate based on worldwide demand and supply for paper, in general, as well as for the specific types of paper we use. If there is a significant disruption in the supply of paper or a significant increase in paper costs, which would generally be beyond our control, or if our strategies to manage these costs are ineffective, our results of operations could be materially and adversely affected.

Acquisitions, if completed, could adversely affect our operations.

We may seek potential acquisitions of products, technologies and businesses in the education industry that could complement or expand our current product and service offerings and businesses. In the event that we identify appropriate acquisition candidates, we may not be able to successfully negotiate, finance or integrate the acquired products, technologies or businesses. Furthermore, such an acquisition could cause a diversion of management’s time and resources. Any particular acquisition, if completed, may materially and adversely affect our business, results of operations, financial condition or liquidity.

The failure to manage growth properly could have a material adverse effect upon our business, results of operations, financial condition or liquidity.

The educational products industry is a fragmented industry. If this industry becomes more concentrated over time, it will be important for us to grow and to manage our growth effectively. Our ability to manage our growth, if any, will require us to expand our management team and assure that our systems and controls are designed to support this growth. Any measurable growth in business will result in additional demands on customer support, sales, marketing, administrative and technical resources, and upon our related systems and controls. We may not be able to successfully address these additional demands, and our operating and financial control systems may not be adequate to support our future operations and anticipated growth.

We use the Internet extensively, and federal or state governments may adopt laws or regulations that could expose us to substantial liability and/or taxation in connection with these activities.

As a result of increasing usage of the Internet, federal and state governments may adopt laws or regulations regarding commercial online services, the Internet, user privacy, intellectual property rights, content and taxation of online communications. Laws and regulations directly applicable to online commerce or Internet communications are becoming more prevalent and could expose us to substantial liability. Furthermore, various proposals at the federal, state and local levels could impose additional taxes on Internet sales. These laws, regulations and proposals could decrease Internet commerce and other Internet uses and adversely affect the success of our online products and business.

We could experience system failures, software errors or capacity constraints, any of which would cause interruptions in the delivery of electronic content to customers and ultimately may cause us to lose customers.

Any significant delays, disruptions or failures in the systems, or errors in the software, that we use for the technology-based component of our products, as well as for internal operations, could harm our business materially. We have occasionally suffered computer and telecommunication outages or related problems in the past. The growth of our customer base, as well as the number of websites we provide, could strain our systems in the future and will likely magnify the consequences of any computer and telecommunications problems that we may experience.

Many of the systems that we use to deliver our services to customers are located in multiple facilities across several states. However, destruction or disruption at a single site can cause a system-wide failure. Although we maintain property insurance on these premises, claims for any system failure could exceed our coverage. In addition, our products could be affected by failures associated with third party hosting providers or by failures of third party technology used in our products, and we may have no control over remedying these failures.

Any failures or problems with our systems or software could force us to incur significant costs to remedy the failure or problem, decrease customer demand for our products, tarnish our reputation and harm our business materially.

Our systems face security risks and we need to ensure the privacy of our customers.

Our systems and websites may be vulnerable to unauthorized access by hackers, computer viruses and other disruptive problems. Any security breaches or problems could lead to misappropriation of our customers’ information, our websites, our intellectual property and other rights, as well as disruption in the use of our systems and websites. Any security breach related to our websites could tarnish our reputation and expose us to damages and litigation. We also may incur significant costs to maintain our security precautions or to correct problems caused by security breaches. Furthermore, to maintain these security measures, we may be required to monitor our customers’ access to our websites, which may cause disruption to customers’ use of our systems and websites. These disruptions and interruptions could harm our business materially.

We have a single distribution center and could experience significant disruption of business and ultimately lose customers in the event it was damaged or destroyed.

In the first quarter of 2010, we completed the integration of VLCY’s Dallas, Texas distribution facility into Cambium’s distribution facility in Frederick, Colorado. As a result, we store and distribute the majority of our printed materials through this single warehouse in Frederick, Colorado. In the event that this distribution facility was damaged or destroyed, we would be delayed in responding to customer requests. Customers often purchase materials very close to the school year and such delivery delays could cause our customers to turn to competitors for products they need immediately. While we maintain adequate property insurance, the loss of customers could have a long-term, detrimental impact on our reputation and business.

The complexity of our distribution operations may subject us to technological risk.

Our distribution center is highly automated, which means that their operations are complicated and may be subject to a number of risks related to computer viruses, the proper operation of software and hardware, electronic or power interruptions and other system failures. Risks associated with upgrading or expanding the warehouse may significantly disrupt or increase the cost of operating this center.

Our business may not grow as anticipated if we are not able to maintain and enhance our brands.

We believe that maintaining and enhancing our brands is important to attracting and retaining customers. Our success in growing brand awareness will depend in part on our ability to continually provide high quality programs and solutions that enhance the learning process. Competitors may offer goods and services similar to those offered by us, which may diminish the value of our brand. In addition, some of our brand names are new, or have changed or may be changed, and we may not successfully maintain and grow the brand equity.

Failure to efficiently manage our direct marketing initiatives could negatively affect our business.

We use various direct marketing strategies to market our products, including direct mailings, catalogs, online marketing and telemarketing. In each case, we rely on our customer list, which is a database containing information about our current and prospective customers. We use this database to develop and implement our direct marketing campaigns. Managing the frequency of our direct marketing campaigns and delivering appropriately tailored products in these campaigns is crucial to maintaining and increasing our customer base and achieving adequate results from our direct marketing efforts. We also face the risk of unauthorized access to our customer database or the corruption of our database as a result of technology failure or otherwise. Enhancing and refreshing the database, maintaining the ability to use the information available from the database, and properly using the available information is vital to the success of our business, and our failure to do so could lead to decreased sales and could materially and adversely affect our results of operations, financial condition and liquidity.

Both Cambium and VLCY have been subjected to material accounting irregularities in recent years, which could result in enhanced regulatory scrutiny in the future and could undermine the confidence that some investors may have in the integrity of our financial statements.

During 2008, Cambium discovered certain irregularities relating to the control and use of cash and certain other general ledger items which revealed a substantial misappropriation of assets spanning fiscal 2004 through fiscal 2008. These irregularities were perpetrated by a former employee, resulting in embezzlement losses, before the effect of income taxes, amounting to $14.0 million. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.” In early 2006, VLCY (then known as ProQuest Company) announced that it had identified potential material irregularities in its accounting that were to be investigated by VLCY’s audit committee, with the assistance of outside experts. In July 2006, VLCY announced that its audit committee had completed its investigation and issued a statement that detailed the key findings, including that the evidence indicated that a single individual was responsible for the misstatements. After completion of that investigation, VLCY restated certain of its previously filed financial statements. The fact that both Cambium and VLCY have experienced material accounting irregularities within the past six years could result in enhanced regulatory scrutiny and could impair the confidence of investors, financing sources, research analysts and potential acquirers in the integrity of our financial statements.

Risks Related to Ownership of our Common Stock

An active, liquid trading market for our common stock may not develop.

Prior to the listing of our common stock on the NASDAQ Global Market in December 2009, there has been no public market for our securities in the United States or elsewhere. Accordingly, we cannot assure you that an active trading market will develop or be sustained or that the market price of our common stock will not decline. The price at which our common stock has traded has been highly volatile. The stock market has experienced extreme volatility that often has been unrelated to the performance of its listed companies. Moreover, only a limited number of our shares are traded each day, which could increase the volatility of the price of our stock. These market fluctuations might cause our stock price to fall regardless of our performance. The market price of our common stock might fluctuate significantly in response to many factors, some of which are beyond our control, including the following:

	•		actual or anticipated fluctuations in our annual and quarterly results of operations;
	•		changes in securities analysts’ expectations;
	•		variations in our operating results, which could cause us to fail to meet analysts’ or investors’ expectations;
	•		announcements by state governments regarding spending on educational programs;
	•		announcements by our competitors or us of significant new products, contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
	•		conditions and trends in our industry;
	•		general market, economic, industry and political conditions;
	•		changes in market values of comparable companies;
	•		additions or departures of key personnel;
	•		stock market price and volume fluctuations attributable to inconsistent trading volume levels; and
	•		future sales of equity or debt securities, including sales which dilute existing investors.

We do not foresee paying cash dividends in the foreseeable future and, as a result, our investors’ sole source of gain, if any, will depend on capital appreciation, if any.

We do not plan to declare or pay any cash dividends on our shares of common stock in the foreseeable future and currently intend to retain future earnings, if any, for future operation, debt reduction and expansion. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, restrictions imposed by applicable law, business and investment strategy, contractual limitations and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future indebtedness we or our subsidiaries incur, including the Cambium Learning senior secured credit agreement and the Cambium Learning senior unsecured credit agreement. As a result, our stockholders may not receive any return on an investment in our common stock unless they sell our common stock for a price greater than that which they paid for it. Moreover, investors may not be able to resell their shares of the Company at or above the price they paid for them.

Our majority stockholder has a contractual right to increase its percentage of ownership in our company which, if exercised, would dilute the ownership percentage of all other stockholders and could reduce the price of our common stock.

Our majority stockholder, VSS-Cambium Holdings III, LLC, the holding company through which VSS owns its interest in the company, and funds managed or controlled by VSS, have the right to increase their percentage ownership of our company at a discount from market price. Under a stockholders agreement entered into in connection with the mergers, at any time and from time to time at or prior to December 8, 2011, VSS-Cambium Holdings III, LLC and funds managed or controlled by VSS have the right to purchase from us, in cash, at a 10% discount from market price, up to the lesser of 7,500,000 shares of our common stock or shares of our common stock with an aggregate purchase price of $20 million. VSS-Cambium Holdings III, LLC also holds a warrant which was exercisable for up to 526,834 shares of our common stock at December 31, 2009 and may become exercisable for more shares in the future. If VSS-Cambium Holdings III, LLC decides to exercise its right to purchase shares of our common stock under the stockholders agreement or exercises its warrant, it could result in a reduction to the price of our common stock.

The existence of a majority stockholder may adversely affect the market price of our common stock and could delay, hinder or prevent a change in corporate control or result in the entrenchment of management and the board of directors, and our majority stockholder has a contractual right to maintain its percentage ownership in our company.

VSS-Cambium Holdings III, LLC, owns a majority of our outstanding common stock. Accordingly, VSS-Cambium Holdings III, LLC will likely have the ability to determine the outcome of matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all our assets. In addition, VSS-Cambium Holdings III, LLC will likely have the ability to control our management, affairs and operations. Accordingly, this concentration of ownership may harm the market price of our common stock by delaying, deferring or preventing a change in control or impeding a merger, consolidation, takeover or other business combination.

The ownership of a large block of stock by a single stockholder may reduce our market liquidity. Should VSS-Cambium Holdings III, LLC determine to sell any of its position in the future, sales of substantial amounts of our common stock on the market, or even the possibility of these sales, may adversely affect the market price of our common stock. These sales, or even the possibility of these sales, also may make it more difficult for us to raise capital through the issuance of equity securities at a time and at a price it deems appropriate.

Moreover, VSS-Cambium Holdings III, LLC has a contractual right to maintain its percentage ownership in our company. Specifically, under the terms of a stockholders agreement entered into in connection with the mergers, if we were to engage in a new issuance of our securities, VSS-Cambium Holdings III, LLC and funds managed or controlled by VSS would have preemptive rights to purchase an amount of our securities that would enable them to maintain their same collective percentage of ownership in our company following the new issuance. VSS-Cambium Holdings III, LLC and funds managed or controlled by VSS would have these preemptive rights for so long as those entities collectively beneficially own, in the aggregate, at least 25% of the outstanding shares of our common stock. Thus, while other holders of our securities would risk suffering a reduction in percentage ownership in connection with a new issuance of securities by us, VSS-Cambium Holdings III, LLC and funds managed or controlled by VSS would, through this preemptive right, have the opportunity to avoid a reduction in percentage ownership.

We are a “controlled company” within the meaning of the NASDAQ rules and, as a result, qualify for, and rely on, exemptions from various corporate governance standards, which limits the presence of independent directors on our board of directors and board committees.

Due to the fact that VSS-Cambium Holdings III, LLC owns a majority of our outstanding common stock, we are deemed a “controlled company” for purposes of NASDAQ Rule 5615(c)(2). Under this rule, a company of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company is a “controlled company” and is exempt from certain NASDAQ corporate governance requirements, including requirements that a majority of the board of directors consist of independent directors, that compensation of officers be determined or recommended to the board of directors by a majority of independent directors or by a compensation committee that is composed entirely of independent directors and that director nominees be selected or recommended for selection by a majority of the independent directors or by a nominating committee composed solely of independent directors. We intend to rely upon these exemptions. Accordingly, our stockholders may not have the same protections afforded to stockholders of other companies that are required to comply fully with the NASDAQ rules.

Since the “controlled company” exemption does not extend to the composition of audit committees, we are required to have an audit committee that consists of at least three directors, each of whom must be “independent” based on independence criteria set forth in Rule 10A-3 of the Securities Exchange Act of 1934 (the “Exchange Act”). Our board of directors has adopted an audit committee charter which will govern our audit committee. These three directors must also satisfy the requirements set forth in NASDAQ Rule 5605(a) and (c). The audit committee is currently composed entirely of independent directors.

Cambium Learning has a significant amount of senior secured and senior unsecured debt and will have the obligation to make principal and interest payments on that debt, and to comply with restrictions contained in credit agreements with our senior secured and senior unsecured lenders.

Cambium Learning has an aggregate of $156.8 million of outstanding senior secured and senior unsecured debt as of December 31, 2009, consisting of $97.2 million under senior secured term loans, $54.6 million under senior unsecured notes, and $5.0 million drawn under a revolving credit facility. The amount of leverage could have important consequences for holders of our securities, including:

•

a substantial portion of the cash provided from operations will be committed to the payment of our debt service and will not be available for other purposes;

•

our ability to obtain additional financing in the future for working capital, capital expenditures or acquisitions may be limited; and

•

the level of indebtedness of our combined company may limit our flexibility in reacting to changes in our business environment.

Our senior secured and senior unsecured term loan facilities mature on April 11, 2013 and April 11, 2014, respectively, and must be either repaid, refinanced or extended on those respective dates. We may not be able to extend the debt at that time (or prior thereto in the case of acceleration) and equity or debt financing may not be available to replace some or all of the maturing debt on acceptable terms, if at all.

The failure of the original Cambium Learning investors to own at least 35% of our common stock or the sale by the VSS funds of more than 15% of their common stock would constitute an event of default under the Cambium Learning credit agreements, entitling the lenders to accelerate the repayment of all outstanding indebtedness.

Cambium Learning’s senior secured and senior unsecured credit agreements contain various restrictions on changes in the direct or indirect ownership or control of Cambium Learning. These restrictions are embodied in the credit agreements’ “Change in Control” definition and under their “Events of Default” provisions. In addition to customary ownership and control changes, a “Change in Control” would occur if at least 35% of our common stock were not owned by at least one of the original investors in Cambium Learning or if the VSS funds sold more than 15% of our common stock owned by them (through VSS-Cambium Holdings III, LLC). As of December 31, 2009, the original Cambium Learning investors, through VSS-Cambium Holdings III, LLC, own approximately 55% of our common stock. Future issuances of common or other capital stock by us could dilute the original Cambium Learning investors’ ownership percentage below the requisite 35% amount.

However, the investment funds controlled by VSS, which are among the original Cambium Learning investors, have the contractual right (but not the obligation) to subscribe for additional shares of our common stock in order to maintain their ownership level and thereby prevent unwanted dilution. This contractual right requires these investment funds to pay consideration to acquire any such additional shares. We cannot assure you that these funds will at any time elect to exercise their subscription right or will have the funds to do so.

The occurrence of a “Change in Control” would constitute an “Event of Default” under the credit agreements. Either the administrative agent or a majority of the lenders have the right, upon the occurrence of an “Event of Default,” to terminate all commitments to make revolving loans, and to accelerate all outstanding revolving and term loans by declaring them immediately due and payable. Neither we nor Cambium Learning is expected to have sufficient cash on hand to repay these loans in full upon such an acceleration.

We may seek to raise additional funds, finance additional acquisitions or develop strategic relationships by issuing additional securities, including capital stock.

In the future, we may seek to raise additional funds, finance additional acquisitions or develop or engage in strategic relationships by issuing equity or debt securities. The issuance of equity securities, including debt securities that are convertible into equity, would reduce the percentage ownership of our existing stockholders. Furthermore, any newly issued equity securities could have rights, preferences and privileges senior to those of the holders of our common stock. The issuance of new debt securities could also subject us to covenants which constrain our ability to grow or otherwise take steps that may be favored by our holders of common stock.

Under the terms of a stockholders agreement that we entered into on December 8, 2009 in compliance with the mergers, so long as our sole stockholder and funds controlled by VSS beneficially own in the aggregate at least 25% of the outstanding shares of our common stock, they will have preemptive rights which generally give them the opportunity to purchase an amount of our securities in a new issuance of securities by us that would enable them to maintain their same collective percentage ownership in us following the new issuance. Thus, while other stockholders risk suffering a reduction in percentage ownership in connection with an issuance of securities by us, VSS-Cambium Holdings III, LLC and funds managed or controlled by VSS will have the opportunity to avoid a reduction in percentage ownership. In addition, under the stockholders agreement, until December 8, 2011, VSS-Cambium Holdings III, LLC and funds managed or controlled by VSS will have the right to purchase from us, in cash, at a 10% discount from market price, up to the lesser of 7,500,000 shares of our common stock or shares of our common stock with a discounted purchase price of $20 million. Any purchases of stock at a discount from the market price may dilute the ownership percentage and equity ownership of all other stockholders.

Provisions of our organizational documents and Delaware law may delay or deter a change of control.

Our organizational documents contain provisions that may have the effect of discouraging, delaying or preventing a change of control of, or unsolicited acquisition proposals for, our company. These include provisions that:

•

vest our board of directors with the sole power to set the number of directors of our company;

•

provide that our board of directors will be elected on a staggered term basis, so that generally only one-third of the board will be elected at each annual meeting of stockholders;

•

limit the persons that may call special meetings of stockholders;

•

establish advance notice requirements for stockholder proposals and director nominations; and

•

limit stockholder action by written consent.

Also, our board of directors has the authority to issue shares of preferred stock in one or more series and to fix the rights and preferences of these shares, all without stockholder approval. Any series of preferred stock is likely to be senior to our common stock with respect to dividends, liquidation rights and, possibly, voting rights. The ability of our board of directors to issue preferred stock also could have the effect of discouraging unsolicited acquisition proposals, thus adversely affecting the market price of our common stock.

In addition, Delaware corporate law makes it difficult for stockholders that recently have acquired a large interest in a corporation to cause the merger or acquisition of the corporation against the directors’ wishes. Under Section 203 of the Delaware General Corporate Law (the “DGCL”), a Delaware corporation such as the Company may not engage in any merger or other business combination with an interested stockholder or such stockholder’s affiliates or associates for a period of three years following the date that such stockholder became an interested stockholder, except in limited circumstances, including by approval of the corporation’s board of directors.

If we are unable to favorably assess the effectiveness of our internal control over financial reporting, or if our auditors are unable to provide an unqualified attestation report on our internal control over financial reporting, the stock price of our common stock could be adversely affected.

Pursuant to Sections 302 and 404 of the Sarbanes-Oxley Act of 2002, our management will be required to certify to and report on, and our auditors will be required to attest to, the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex, and require significant documentation, testing and possible remediation. Our management was not required to perform an assessment of internal control over financial reporting for the fiscal year ended December 31, 2009. Our management expects to complete an assessment and certification on, and for our auditors to attest to, the effectiveness of internal control over financial reporting beginning with our annual report on Form 10-K for the fiscal year ending December 31, 2010.

Compliance with regulatory requirements relating to internal controls is expensive and may cause us to focus a significant amount of management time and other internal resources on these matters. We also may encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our internal control over financial reporting. In addition, in connection with the attestation process by our auditors, we may encounter problems or delays in completing the implementation of any identified improvements or receiving a favorable attestation. If we cannot favorably assess the effectiveness of our internal control over financial reporting, or if our auditors are unable to provide an unqualified attestation report on internal control over financial reporting, investor confidence and the market price of our common stock could be adversely affected.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our principal corporate office is located in Dallas, Texas. We lease office and warehouse facilities in Dallas, Texas, Charlottesville, Virginia, Tucson, Arizona, Frederick, Colorado, Natick, Massachusetts and Ann Arbor, Michigan. Some leases contain renewal and escalation clauses for a proportionate share of operating expenses. The Frederick, Colorado warehouse is under a build-to-suit lease and so is included in our property, computers and equipment but is not considered owned for purposes of the table below.

The following table provides summary information in square feet with respect to these facilities as of December 31, 2009, excluding the 95,873 square foot warehouse facility in Dallas, Texas, which was integrated into the Frederick, Colorado warehouse in the first quarter of 2010.

		Total
		(sq ft)
Owned			—
Leased			350,897
Total			350,897

We believe the buildings and equipment used in our continuing operations generally to be in good condition and adequate for our current needs and that additional space will be available as needed.

Item 3. Legal Proceedings.

We are not presently engaged in any pending legal proceeding material to our financial condition, results of operations or liquidity.

Item 4. (Removed and Reserved).

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information: Our common stock is traded on the NASDAQ Global Market under the symbol “ABCD.” Below are the high and low sale prices for each quarter since our common stock commenced publicly trading on December 9, 2009.

2009

2008

Fiscal Quarter

High

Low

High

Low

First

N/A

N/A

N/A

N/A

Second

N/A

N/A

N/A

N/A

Third

N/A

N/A

N/A

N/A

Fourth (Since December 9, 2009)

$

14.80

$

3.62

N/A

N/A

Record Holders: As of December 31, 2009, there were 104 holders of record of our common stock. The holders of record at year-end 2009 do not include any previous VLCY stockholders who have not yet returned their letters of transmittal to exchange their VLCY shares for our shares of common stock in connection with the mergers.

Purchases Of Equity Securities: We made no repurchases of our equity securities in the fiscal year ended December 31, 2009.

Dividends: We have not declared or paid any cash dividends to our stockholders. Any future determination to pay dividends, if any, will be at the discretion of our board of directors.

Securities Authorized for Issuance Under Equity Compensation Plans: We have securities authorized for issuance under the Cambium Learning Group, Inc. 2009 Equity Incentive Plan (“Incentive Plan”). In connection with the then pending merger with VLCY, on July 31, 2009, the Company’s board of directors and sole stockholder approved the Incentive Plan. The general purposes of the Incentive Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentives to employees, directors and consultants, and to promote the success of the Company.

Securities authorized for issuance under equity compensation plans at December 31, 2009 are as follows:

Number of securities

Number of securities to be

Weighted-average

remaining available for

issued upon exercise of

exercise price of

future issuance

(in thousands, except per share amounts)

outstanding options

outstanding options

under equity

Plan Category

and rights

and rights

incentive plan (a)

Equity compensation plans approved by security holders

2,256

$

6.03

2,744

Equity compensation plans not approved by security holders

—

—

—

Total

2,256

$

6.03

2,744

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

As described elsewhere in this Annual Report on Form 10-K, on December 8, 2009, the Company completed its acquisition of each of Cambium and VLCY pursuant to the terms of the merger agreement entered into in connection with the transaction. With respect to the acquisition of Cambium, under the terms of the merger agreement, the Company acquired all of the common stock of Cambium through the merger of a wholly owned subsidiary of the Company with and into Cambium, with Cambium continuing as the surviving corporation (the “Cambium Merger”). As a result of the effectiveness of the Cambium Merger, Cambium became a wholly owned subsidiary of the Company.

Under the merger agreement, as consideration for the Cambium Merger, the shares of Cambium’s common stock held by VSS-Cambium Holdings III, LLC, the sole stockholder of Cambium immediately prior to the Cambium Merger (the “Cambium Stockholder”), were converted into the right to receive 20,491,870 shares of the Company’s common stock. In addition, as part of the Cambium Merger consideration, the Cambium Stockholder received a warrant (the “Warrant”) to purchase a number of shares of the Company’s common stock determined by a formula set forth in the merger agreement, which Warrant is currently exercisable for a total of 526,834 shares. Immediately prior to the effective time of the mergers, the Company also issued the Cambium Stockholder an additional 3,846,154 shares of Company common stock in exchange for a $25 million contribution the Cambium Stockholder made to the Company.

All of the above-described issuances and sales of securities of the Company (including both of common stock of the Company and of the Warrant) to the Cambium Stockholder were exempt from registration under Section 4(2) of the Securities Act.

Stock Performance Graph: No performance graph has been included in this report since our common stock began publicly trading on December 9, 2009, and therefore only was publicly traded for the 23-day period from December 9, 2009 through December 31, 2009 during our last fiscal year.

Item 6. Selected Financial Data.

The tables below present summary selected historical consolidated financial data derived from our consolidated financial statements prepared in accordance with GAAP. You should read the information set forth below in conjunction with our consolidated financial statements and related notes, management’s discussion and analysis of financial condition and results of operations and other financial information presented elsewhere herein.

The summary selected historical consolidated financial data for the year ended December 31, 2006, the period from January 1, 2007 through April 11, 2007 (the “2007 predecessor period”), the period from January 29, 2007 through December 31, 2007 (the “2007 successor period”), the year ended December 31, 2008 and the year ended December 31, 2009 have been derived from our audited consolidated financial statements. The summary selected historical consolidated financial data for the year ended December 31, 2005 have been derived from our unaudited consolidated financial statements prepared on a basis consistent with the accounting policies used for our audited financial statements.

On December 8, 2009, we completed the mergers of VLCY and Cambium into two of our wholly-owned subsidiaries resulting in VLCY and Cambium becoming our wholly-owned subsidiaries. Following the completion of the mergers, all of the outstanding capital stock of VLCY’s operating subsidiaries, Voyager Expanded Learning, Inc. and LAZEL, Inc. were transferred to Cambium Learning. The transaction was accounted for as an “acquisition” of VLCY by Cambium, as that term is used under U.S. GAAP, for accounting and financial reporting purposes under the applicable accounting guidance for business combinations. As a result, the historical financial statements of Cambium have become the historical financial statements of the Company and the results of VLCY are included from the merger date.

										Successor
										Period from					Predecessor
										January 29,					Period from
										2007					January 1,
										(Inception)					2007				Predecessor				Predecessor
		Year Ended				Year Ended				through					through				Year Ended				Year Ended
		December 31,				December 31,				December 31,					April 11,				December 31,				December 31,
(in thousands, except per share data)		2009				2008				2007(1)					2007				2006				2005
Statement of Operations Data:
Product sales		$	90,385			$	89,207			$	71,266				$	15,238			$	92,882			$	75,430
Service revenues			10,663				10,524				9,581					3,176				13,542				9,726
Net sales			101,048				99,731				80,847					18,414				106,424				85,156
Total operating expenses, excluding in-process research and development, impairment, and embezzlement			(115,108	)			(104,648	)			(81,305	)				(32,179	)			(97,955	)			(81,017	)
Acquired in-process research and development			—				—				(890	)				—				—				(500	)
Goodwill and other intangible asset impairment(3)			(9,105	)			(75,966	)			—					—				—				(4,132	)
Embezzlement and related expense(2)			(129	)			(7,254	)			(5,732	)				(1,000	)			(3,261	)			(290	)
(Loss) income before interest, other income (expense), and income taxes			(23,294	)			(88,137	)			(7,080	)				(14,765	)			5,208				(783	)
Gain from settlement with previous stockholders(4)			—				30,202				—					—				—				—
Net (loss) income			(35,765	)			(69,560	)			(13,931	)				(11,812	)			440				(1,212	)
Net (loss) income per common share		$	(1.63	)		$	(3.39	)		$	(0.68	)			$	(4.34	)		$	0.16			$	(0.45	)

		As of:
														Predecessor				Predecessor
		December 31,				December 31,				December 31,				December 31,				December 31,
(in thousands)		2009				2008				2007				2006				2005
																		(unaudited)
Balance Sheet Data:
Cash and cash equivalents		$	13,345			$	2,418			$	1,206			$	1,642			$	9,823
Total current assets			74,316				31,617				26,601				25,007				32,672
Total assets			393,841				270,477				369,138				138,028				115,034
Total current liabilities			58,366				16,360				16,849				26,871				12,416
Total long term debt, less current portion			150,487				153,787				176,402				17,500				17,500
Total liabilities			254,069				202,273				239,058				59,133				49,414
Total members’ interest and stockholders’ equity			139,772				68,204				130,080				78,895				65,620

Footnotes to the Selected Financial Data:

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This section should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto included in this Annual Report on Form 10-K for the year ended December 31, 2009.

Organization of Information

This section includes the following sections:

•

Overview

•

Results of Operations

•

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

•

Year Ended December 31, 2008 (“fiscal 2008”) Compared to Period from January 29, 2007 through December 31, 2007 (“2007 successor period”) and Period from January 1, 2007 through April 11, 2007 (“2007 predecessor period”)

•

Liquidity and Capital Resources

•

Non-GAAP Measures

•

Capital Expenditures and Outlook

•

Commitments and Contractual Obligations

•

Off-Balance Sheet Arrangements

•

Critical Accounting Policies and Estimates

•

Recently Issued Financial Accounting Standards

Overview

On December 8, 2009, we completed the business combination of Cambium and VLCY as contemplated by the Agreement and Plan of Mergers, dated as of June 20, 2009, among us, VLCY, Vowel Acquisition Corp., our wholly-owned subsidiary, Cambium, a wholly-owned subsidiary of VSS-Cambium Holdings III, LLC, Consonant Acquisition Corp., our wholly owned subsidiary, and Vowel Representative, LLC, solely in its capacity as stockholders’ representative. We refer to this agreement and plan of mergers in this report as the merger agreement. Pursuant to the merger agreement, we acquired all of the common stock of each of Cambium and VLCY through the merger of Consonant Acquisition Corp. with and into Cambium, with Cambium continuing as the surviving corporation (the “Cambium Merger”), and the concurrent merger of Vowel Acquisition Corp. with and into VLCY, with VLCY continuing as the surviving corporation (the “Voyager Merger”). As a result of the effectiveness of the mergers, Cambium and VLCY became our wholly owned subsidiaries.

Under the terms of the merger agreement, each outstanding share of VLCY’s common stock was converted in the Voyager Merger into the right to receive at the election of each stockholder, either (i) $6.50 in cash, without interest, or (ii) one share of our common stock, plus, regardless of the election made, additional consideration consisting of cash and a contingent value right, as described in the merger agreement. The amount of cash available to satisfy cash elections by the VLCY stockholders was limited to $67.5 million in the aggregate. As anticipated, the cash consideration payable to the former VLCY stockholders was insufficient to accommodate all of the cash elections that were made. Accordingly, the amount of cash paid to the former VLCY stockholders who elected to exchange shares of VLCY common stock for cash was to be reduced, pro rata, in accordance with agreed procedures set forth in the merger agreement. Pursuant to these procedures, we paid $67.5 million in cash to the former holders of VLCY’s common stock and issued to those stockholders a total of 19.5 million shares of common stock. The cash consideration paid to the former VLCY stockholders consisted of $25 million contributed by VSS-Cambium Holdings III, LLC and $42.5 million contributed by VLCY. In exchange for its contribution of $25 million, VSS-Cambium Holdings III, LLC received 3.8 million shares of our common stock issued at the ascribed value of $6.50 per share. The shares of Cambium’s common stock held by VSS-Cambium Holdings III, LLC, its sole stockholder, were converted in the Cambium Merger into the right to receive 20.5 million shares of the our common stock. In addition, as part of the merger consideration, VSS-Cambium Holdings III, LLC received a warrant to purchase a number of shares of our common stock determined by a formula set forth in the merger agreement, which is currently equal to 0.5 million shares. In connection with the consummation of this transaction we entered into a stockholders agreement pursuant to which we granted VSS-Cambium Holdings III, LLC and funds managed and controlled by VSS the right to purchase up to 7.5 million shares of our common stock as provided for in the stockholders agreement.

The merger transaction was accounted for as an “acquisition” of VLCY by Cambium, as that term is used under U.S. GAAP, for accounting and financial reporting purposes under the applicable accounting guidance for business combinations. In making this determination, management considered that (a) the newly developed entity did not have any significant pre-combination activity and, therefore, did not qualify to be the accounting acquirer, and (b) the former sole stockholder of Cambium is the majority holder of the combined entity, while the prior owners of VLCY became minority holders in the combined entity. As a result, the historical financial statements of Cambium have become the historical financial statements of the Company. The results of VLCY are included in the Company’s operations beginning with the December 8, 2009 merger date; therefore, the 2009 financials include VLCY for the last 23 days of the year and the results of the Company for the full year.

Prior to the merger transaction completed on December 8, 2009, we had two reportable segments: Published Products and Learning Technologies. Subsequent to the merger transaction, we operate as three reportable segments with separate management teams and infrastructures that offer various products and services, as follows:

	•		Voyager, our comprehensive intervention business;
	•		Sopris, our supplemental solutions business; and

•

Cambium Learning Technologies, our technology based education product business.

Our historical segment reporting results have been adjusted for comparative purposes to reflect the current organizational structure. These reclassifications required certain assumptions and estimates. See Note 21 to the financial statements for further information on our reportable segments.

Results of Operations

Fiscal Year 2009 Compared to Fiscal Year 2008

Highlights

Throughout the first half of 2009, we continued to experience the adverse developments in the education funding environment, including the reductions in Reading First funding and reductions in available state and local funds as many state and local governments struggled with deficits caused in part by the decline in property tax receipts, which significantly decreased the funding available to schools to purchase our products and services. Some school districts found it difficult to secure alternative funding sources in the midst of these market conditions. Additionally, we experienced declines in key adoption states, such as Alabama and Florida, where we enjoyed significant sales success in 2008.

During the latter half of 2009, we began to see the positive impact, both directly and indirectly, of the American Reinvestment and Recovery Act (ARRA) passed in February 2009. The Act provides significant new federal funding for various education initiatives over the next two years. While the education funding is for a broad set of education initiatives, we believe that schools and districts directed and may continue to direct some of the new funding for programs which use our products. In some instances, if ARRA funding is not used directly for programs using our products, we may still be receiving an indirect benefit. When the ARRA funding is used to assist schools to meet their overall financial needs, other funds may be freed up to use for our programs. While success in winning some of these funds for our products is not certain at this time, we believe it has the potential to continue to stabilize some of the negative funding trends which emerged in 2008, continue in 2009 and are expected to prevail into 2010.

The following trends have or may have an impact on our revenues and profitability:

•

The acquisition of VLCY in late 2009 added several online subscription-based products to our portfolio. We expect to see growth in these products in the coming years.

•

We have a growing portfolio to address the math needs of the market, including products such as Vmath, Algebra Rescue, Transitional Math and ExploreLearning. We have experienced success in the growth of our math capabilities and expect that the market for these products will continue to be strong in 2010.

•

We believe our product diversification, such as growth in the online offerings, math intervention and new reading intervention products for higher grades, will allow us to strengthen our ability to sustain market share in a troubled market and capture market share when the market recovers.

•

We believe our focus on product usage and an overall partnership approach with the customer to implement our solutions with fidelity will result in higher success rates, and such success, if achieved, will lead to customer retention and growth through reference sales.

•

We believe there is a trend to direct greater funding to special needs or at risk children in the United States. New funding sources, such as Race to the Top, could provide additional funds for our products should recipients of these funding sources chose to direct them to programs that utilize our products and services.

•

We believe that the economic crisis faced by many states and local entities will continue in 2010 and have a continued depressive effect on general spending and thus could negatively impact our short term sales prospects.

•

Efforts taken in 2009 by both VLCY and Cambium to reduce their cost structures, including a reduction in force, better align our cost structure to current market conditions. We expect to achieve further significant cost savings throughout 2010 and 2011 as we integrate VLCY and Cambium, which will be partially offset by one-time integration cots to achieve these synergies.

•

We performed a goodwill impairment analysis in the second quarter of 2009 and as a result of the execution of the merger agreement in late June, which was considered a triggering event, and in consideration of the continuing impact of adverse marketplace and economic conditions. As a result of this analysis, we recorded a goodwill impairment charge of $9.1 million in the second quarter.

The following tables set forth information regarding Cambium’s net sales, costs and expenses, operating loss and other components of our statements of operations. The results and percentages for the years ended December 31, 2009 and 2008, the successor period from January 29, 2007 (inception) through December 31, 2007 and the predecessor period from January 1, 2007 through April 11, 2007 are set forth in the tables below. Due to purchase accounting adjustments, some amounts may not be comparable between each period presented.

																		Successor Period,
																		from January 29,								Predecessor Period
																		2007 (inception)								from January 1,
		Year Ended								Year Ended								through December								2007 through April
		December 31, 2009								December 31, 2008								31, 2007								11, 2007
						% of								% of								% of								% of
(in thousands)		Amount				Sales				Amount				Sales				Amount				Sales				Amount				Sales
Net sales:
Product sales
Voyager		$	44,329				43.9	%		$	40,424				40.5	%		$	35,827				44.3	%		$	4,132				22.4	%
Sopris			23,431				23.2	%			27,495				27.6	%			21,496				26.6	%			5,136				27.9	%
Cambium Learning Technologies			22,625				22.4	%			21,288				21.3	%			13,943				17.2	%			5,970				32.4	%
Service revenues
Voyager			8,594				8.5	%			7,924				7.9	%			7,275				9.0	%			2,287				12.4	%
Sopris			1,754				1.7	%			2,217				2.2	%			2,064				2.6	%			773				4.2	%
Cambium Learning Technologies			315				0.3	%			383				0.4	%			242				0.3	%			116				0.6	%
Total sales			101,048				100.0	%			99,731				100.0	%			80,847				100.0	%			18,414				100.0	%
Cost of sales:
Cost of product sales
Voyager			10,678				10.6	%			11,214				11.2	%			13,106				16.2	%			1,136				6.2	%
Sopris			6,350				6.3	%			6,003				6.0	%			4,755				5.9	%			1,699				9.2	%
Cambium Learning Technologies			2,537				2.5	%			3,029				3.0	%			1,888				2.3	%			1,061				5.8	%
Shared Services			26				0.0	%			—				0.0	%			—				0.0	%			—				0.0	%
Cost of service revenues
Voyager			5,992				5.9	%			5,721				5.7	%			4,877				6.0	%			1,384				7.5	%
Sopris			1,093				1.1	%			1,489				1.5	%			1,316				1.6	%			460				2.5	%
Cambium Learning Technologies			172				0.2	%			253				0.3	%			119				0.1	%			64				0.3	%
Amortization expense			17,527				17.3	%			15,966				16.0	%			11,719				14.5	%			3,392				18.4	%
Total cost of sales			44,375				43.9	%			43,675				43.8	%			37,780				46.7	%			9,196				49.9	%
Research and development expense			5,611				5.6	%			6,416				6.4	%			5,247				6.5	%			1,737				9.4	%
Sales and marketing expense			23,368				23.1	%			24,600				24.7	%			15,059				18.6	%			6,393				34.7	%
General and administrative expense			30,519				30.2	%			16,156				16.2	%			11,142				13.8	%			13,676				74.3	%
Shipping costs			1,512				1.5	%			2,348				2.4	%			2,739				3.4	%			445				2.4	%
Depreciation and amortization expense			9,723				9.6	%			11,453				11.5	%			9,338				11.6	%			732				4.0	%
Acquired in-process research and development			—				0.0	%			—				0.0	%			890				1.1	%			—				0.0	%
Goodwill impairment charge			9,105				9.0	%			75,966				76.2	%			—				—				—				—
Embezzlement and related expense			129				0.1	%			7,254				7.3	%			5,732				7.1	%			1,000				5.4	%
Loss before interest, other income (expense) and income taxes			(23,294	)			(23.1	)%			(88,137	)			(88.4	)%			(7,080	)			(8.8	)%			(14,765	)			(80.2	)%
Net interest income (expense)			(19,477	)			(19.3	)%			(18,434	)			(18.5	)%			(13,132	)			(16.2	)%			(742	)			(4.0	)%
Gain from settlement with previous stockholders			—				—				30,202				30.3	%			—				—				—				—
Loss on extinguishment of debt			—				—				(5,632	)			(5.6	)%			—				—				—				—
Other income (expense), net			(698	)			(0.7	)%			(981	)			(1.0	)%			(1,557	)			(1.9	)%			1				0.0	%
Income tax benefit			7,704				7.6	%			13,422				13.5	%			7,838				9.7	%			3,694				20.1	%
Net loss		$	(35,765	)			(35.4	)%		$	(69,560	)			(69.7	)%		$	(13,931	)			(17.2	)%		$	(11,812	)			(64.1	)%

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Net sales

Net sales for the year ended December 31, 2009 increased $1.3 million, or 1.3%, to $101.0 million from $99.7 million in the same period for 2008. Our net sales for 2009 were impacted by several significant declines, such as the nationwide economic slowdown, which caused the amount of funding available to schools to decline, a decline in our Sopris segment related to our assessment product, and declines in key adoption states such as Alabama and Florida. Regarding the decline in adoption states, we enjoyed increased sales performance in 2008 in these states but the nature of the adoption leads to lower sales in the year following the adoption. Offsetting these declines was the impact of the acquisition of VLCY, contributing an incremental $4.5 million in net sales, and increases in sales of our math products as well as some growth in several new and existing customers.

Voyager. The Voyager segment’s net sales in 2009 increased $4.6 million, or 9.5%, to $52.9 million from net sales of $48.3 million in 2008. Product sales increased $3.9 million, or 9.7%, to $44.3 million from net sales of $40.4 million in 2008. Service revenues increased $0.7 million, or 8.5%, to $8.6 million from net sales of $7.9 million in 2008. The increase in year over year net sales was due mainly to the impact of the acquisition of VLCY, contributing an incremental $3.0 million in product sales and $0.8 million in service revenues. Additionally, Voyager was able to offset the decline in the state adoption sales in Alabama and Florida and overcome the general state and local funding crisis with increases in sales of our math products as well as some growth in several new and existing customers.

Sopris. The Sopris segment’s net sales in 2009 decreased $4.5 million, or 15.2%, to $25.2 million from net sales of $29.7 million in 2008. The decline in sales of supplementary program sales was mainly due to a decrease in sales of DIBELS in Florida, as Florida developed its own assessment program. Additionally, we renegotiated and extended a relationship with a customer in 2008 and were able to secure an additional up-front 2009 royalty payment that was recognized in 2008.

Cambium Learning Technologies. The Cambium Learning Technologies segment’s net sales in 2009 increased $1.3 million, or 5.9%, to $22.9 million from net sales of $21.7 million in 2008. The increase in year over year net sales was due mainly to the impact of the acquisition of VLCY, contributing an incremental $0.7 million in product sales.

Cost of product sales

Cost of product sales include expenses to print, purchase, handle and warehouse product, as well as royalty costs. Cost of product sales for the year ended December 31, 2009 decreased $0.7 million, or 3.2%, to $19.6 million from $20.2 million in 2008. The decrease in cost of sales was mainly due to efficiency gains from cost-cutting measures. As a percentage of product sales, cost of product sales decreased one percentage point to 21.7% for the year ended December 31, 2009 from 22.7% in the same period in 2008.

Voyager. The Voyager segment’s cost of product sales for the year ended December 31, 2009 decreased $0.5 million, or 4.8%, to $10.7 million from $11.2 million in 2008. The decrease in cost of sales was mainly due to improved cost management performance.

Sopris. The Sopris segment’s cost of product sales for the year ended December 31, 2009 increased $0.3 million, or 5.8%, to $6.4 million from $6.0 million in 2008. The increase in cost of sales was due to a change in product mix toward products with higher incremental costs.

Cambium Learning Technologies. The Cambium Learning Technologies segment’s cost of product sales for the year ended December 31, 2009 decreased $0.5 million, or 16.2%, to $2.5 million from cost of sales of $3.0 million in 2008. The decrease in cost of sales was mainly due to improved cost management performance.

Cost of service revenues

Cost of service revenues include all costs to provide services and support to customers. Cost of service revenues for the year ended December 31, 2009 decreased $0.2 million, or 2.8%, to $7.3 million from $7.5 million in 2008. The decrease in cost of sales was mainly due to efficiency gains from cost-cutting measures. As a percentage of service revenues cost of service revenues decreased to 68.1% for the year ended December 31, 2009 from 70.9% in the same period in 2008.

Voyager. The Voyager segment’s cost of service revenues for the year ended December 31, 2009 increased $0.3 million, or 4.7%, to $6.0 million from $5.7 million in 2008. The increase was driven by higher service revenues, partially offset by efficiency gains from cost-cutting measures.

Sopris. The Sopris segment’s cost of service revenues for the year ended December 31, 2009 decreased $0.4 million, or 26.6%, to $1.1 million from cost of service revenues of $1.5 million in 2008. The decrease was driven by lower service revenues and efficiency gains from cost-cutting measures.

Cambium Learning Technologies. The Cambium Learning Technologies segment’s cost of service revenues for the year ended December 31, 2009 remained relatively flat, decreasing $0.1 million, or 32.0%, to $0.2 million from $0.3 million in 2008.

Amortization expense

Amortization expense included in cost of sales includes amortization for acquired pre-publication costs and technology, acquired publishing rights, and developed pre-publication and technology. Amortization for 2009 increased $1.6 million, or 9.8%, to $17.5 million from $16.0 million in 2008. Approximately $0.7 million of the increase is related to the acquired pre-publication costs and technology acquired in the VLCY acquisition. The remainder of the increase was mainly due to higher pre-publication amortization as a result of investments made in new programs.

Research and development expenses

Research and development expenditures include costs to research, evaluate and develop educational products, net of capitalization. Research and development expenses for year ended December 31, 2009 decreased $0.8 million, or 12.5%, to $5.6 million from $6.4 million in the same period of 2008, due to planned spending decreases as a result of weak economic conditions in 2009. As a percentage of sales, research and development expenses decreased to 5.6% of sales in 2009 compared to 6.4% in 2008.

Sales and marketing expense

Sales and marketing expenditures include all costs to maintain our various sales channels, including the salaries and commission paid to our sales force, and costs related to our advertising and marketing efforts. Sales and marketing expenses for year ended December 31, 2009 decreased $1.2 million, or 5.0%, to $23.4 million from $24.6 million in the same period of 2008. As a percentage of sales, selling and marketing expenses decreased to 23.1% of sales in the 2009 compared to 24.7% in 2008. Selling costs decreased for the year ended December 31, 2009 in comparison to the same period in 2008 due to the costs incurred in 2008 to participate in several state adoption activities. We also experienced lower catalog and mailing costs due to a lower volume of catalogs mailed in 2009 compared to 2008.

General and administrative expense

General and administrative expenses for year ended December 31, 2009 increased $14.4 million, or 88.9%, to $30.5 million from $16.2 million in the same period of 2008. The increase was primarily due to the incurrence of $15.5 million in merger-related transaction and integration expenses in 2009 with only immaterial amounts incurred in 2008. Excluding these costs, general and administrative expenses were down $1.1 million, or 6.9% in 2009 compared to 2008, primarily as a result of cost-cutting measures.

Shipping costs

Shipping costs for the year ended December 31, 2009 decreased $0.8 million, or 35.6%, to $1.5 million from $2.3 million in 2008. The decrease in these shipping costs was due mainly to cost containment and efficiencies.

Depreciation and amortization expense

Depreciation and amortization expense for the year ended December 31, 2009 decreased $1.7 million, or 15.1%, to $9.7 million from $11.5 million in the same period of 2008. The decrease in this amortization was due mainly to lower contract and reseller network intangible amortization, partially offset by the depreciation and amortization related to assets acquired in the VLCY acquisition.

Goodwill impairment

We review the carrying value of goodwill for impairment at least annually and whenever certain triggering events occur. As a result of the signing of the merger agreement, we assessed the carrying values of our reporting units as of June 30, 2009. The first step of impairment testing showed the carrying value of our Published Products unit exceeded its fair value and that a step two analysis was needed. Step two impairment testing determined that the goodwill balance as of the measurement date was partially impaired and a $9.1 million impairment charge was recorded.

Due to the weakening of the economy and the impact that economic conditions were having on our customers and business in the latter portion of fiscal 2008, we identified deterioration in the expected future financial performance of our published products segment. As a result, we recorded an impairment loss of $76.0 million for this segment in 2008, reflecting the difference between the fair value and recorded value for goodwill.

Under the new segment structure, both the 2008 and the 2009 goodwill impairment charges were assigned to the Voyager segment.

Embezzlement and related expenses

In 2008, we discovered certain irregularities relating to the control and use of cash and certain other general ledger items which revealed a misappropriation of assets over a period of more than four years. These irregularities were perpetrated by a former Cambium Learning employee, resulting in substantial embezzlement losses and related expenses. Embezzlement and related expenses for the year ended December 31, 2009 were $0.1 million compared to $7.3 million in the same period of 2008. The decrease in the embezzlement and related expenses was mainly due to the non-recurring nature of the embezzlement loss and related expenses that were incurred in the year ended December 31, 2008.

Net interest income (expense)

Net interest income (expense) in the year ended December 31, 2009, increased $1.0 million, or 5.7%, to $19.5 million from $18.4 million in the same period of 2008. This increase was mainly due to higher interest expense on both our senior secured and senior unsecured debt as a result of the permanent waiver and amendments to the credit agreement we signed on August 22, 2008. Under the terms and conditions of the permanent waiver and amendment, the interest rates on Cambium’s senior secured and senior unsecured debt were increased. See “— Liquidity and Capital Resources — Long Term Debt.”

Income taxes

In 2009, we recorded an income tax benefit of $7.7 million. Pre-tax losses at statutory tax rates provided a federal tax benefit of approximately $15.2 million. The impairment charge to non-deductible goodwill did not result in a tax benefit which is $3.2 million less than the amount expected based on the federal statutory tax rate. Certain merger costs are non-deductible and did not result in a tax benefit which is $4.7 million less than the amount expected based on the federal statutory tax rate. Furthermore, after the merger with VLCY, we established a valuation allowance on our net Federal deferred tax assets.

In 2008, we recorded an income tax benefit of $13.4 million. Pre-tax losses at statutory rates provided a federal tax benefit of approximately $29.0 million. The impairment charge to non-deductible goodwill did not result in a tax benefit which is approximately $26.6 million less than the amount expected based on the federal statutory rate. We also recorded non-taxable book income related to a purchase adjustment, which resulted in a tax benefit of $10.2 million.

Gain from settlement with previous stockholders

For fiscal 2008, we received a total settlement from previous stockholders of $30.2 million relating to the embezzlement we suffered. The total settlement consisted of $20 million in escrowed funds, together with additional payments of $9.3 million and interest income of $0.9 million. The total settlement amount of $30.2 million was used to cover costs and to pay down a portion of a senior secured credit facility. Because the embezzlement was discovered after the initial purchase allocation was made in connection with the acquisition, the entire settlement amount was recorded on our consolidated statement of operations as a gain from settlement with the previous stockholders.

Loss on extinguishment of debt

For fiscal 2008, we recorded a loss on the extinguishment of debt of $5.6 million related to the modification of our senior secured credit facility and senior unsecured promissory notes resulting from the execution of an amendment of those documents and the delivery by the lenders of a permanent waiver. The associated unamortized deferred financing costs as of August 22, 2008 of $4.6 million and amendment fees of $1.0 million related to the permanent waiver were recorded as a loss on extinguishment of debt.

Year Ended December 31, 2008 (“fiscal 2008”) Compared to Period from January 29, 2007 through December 31, 2007 (“2007 successor period”) and Period from January 1, 2007 through April 11, 2007 (“2007 predecessor period”)

Net sales

Net sales for fiscal 2008 were $99.7 million, compared to $80.8 million for the 2007 successor period and $18.4 million for the 2007 predecessor period.

Voyager. The Voyager segment’s net sales for fiscal 2008 were $48.3 million, compared to $43.1 million for the 2007 successor period and $6.4 million for the 2007 predecessor period. The overall decrease of $1.2 million, or 2.4%, was due to a $1.7 million decrease in service revenues partially offset by a $0.5 million increase in core product sales. The decline in service revenues was mainly due to lower sales for conferences and institutes as the impact of state budget shortfalls significantly affected attendance. The increase in core intervention programs sales was principally attributable to a couple of key states and school districts, including Florida and Milwaukee, funded and purchased Cambium’s core programs and services.

Sopris. The Sopris segment’s net sales for fiscal 2008 were $29.7 million, compared to $23.6 million for the 2007 successor period and $5.9 million for the 2007 predecessor period. The overall increase of $0.2 million, or 0.8%, was due to a $0.9 million increase in product sales partially offset by a $0.7 million decrease in service revenues. The increase in supplementary program sales were due to higher DIBELs license fees, partially offset by a decrease in sales across most titles as the market for Sopris in general was weak due to state funding issues. The decline in service revenues was mainly due to the impact of state budget shortfalls.

Cambium Learning Technologies. The Cambium Learning Technologies segment’s net sales for fiscal 2008 were $21.7 million compared to $14.2 million for the 2007 successor period and $6.1 million for the 2007 predecessor period. The overall increase of $1.4 million, or 6.9%, was mainly due to higher international sales.

Cost of product sales

Cost of product sales was $20.2 million for fiscal 2008, compared to $19.7 million for the 2007 successor period and $3.9 million for the 2007 predecessor period. The overall decrease of $3.4 million, or 14.4%, was due to lower royalty costs as well as a $2.9 million adjustment for inventory step-up associated with purchase accounting included in the 2007 successor period, offset by a $0.3 million increase in employee severance costs associated with the December 2007 Petaluma, California office closure. The lower royalty costs were the result of a higher portion of total sales attributable to Cambium Learning Technologies and Read Well products, which carry a lower royalty rate than other Cambium products.

Voyager. The Voyager segment’s cost of product sales for fiscal 2008 decreased $3.0 million, or 21.3%, to $11.2 million from cost of product sales of $13.1 million for the 2007 successor period and $1.1 million for the 2007 predecessor period. The decrease in cost of sales was mainly due to material cost improvements, lower inventory reserve provisions and a $1.8 million adjustment for inventory step-up associated with purchase accounting included in the 2007 successor period.

Sopris. The Sopris segment’s cost of product sales for fiscal 2008 decreased $0.5 million, or 7.0%, to $6.0 million from cost of product sales of $4.8 million for the 2007 successor period and $1.7 million for the 2007 predecessor period. The decrease in cost of sales was mainly due to a $1.1 million adjustment for inventory step-up associated with purchase accounting included in the 2007 successor period, partially offset by increased costs commensurate with an increase in product sales from 2007 to 2008.

Cambium Learning Technologies. The Cambium Learning Technologies segment’s cost of product sales for fiscal 2008 increased $0.1 million, or 2.7%, to $3.0 million from cost of product sales of $1.9 million for the 2007 successor period and $1.1 million for the 2007 predecessor period. The increase in cost of sales is mainly due to increased net sales.

Cost of service revenues

Cost of service revenues was $7.5 million for fiscal 2008, compared to $6.3 million for the 2007 successor period and $1.9 million for the 2007 predecessor period. The decrease resulted from lower service revenues.

Voyager. The Voyager segment’s cost of service revenues for fiscal 2008 decreased $0.6 million, or 8.6%, to $5.7 million from cost of service revenues of $4.9 million for the 2007 successor period and $1.4 million for the 2007 predecessor period. The decrease resulted from lower net sales.

Sopris. The Sopris segment’s cost of service revenues for fiscal 2008 decreased $0.3 million, or 16.2%, to $1.5 million from cost of service revenues of $1.3 million for the 2007 successor period and $0.5 million for the 2007 predecessor period. The decrease resulted from lower net sales.

Cambium Learning Technologies. Cost of service revenues for fiscal 2008 increased $0.1 million, or 38.3%, to $0.3 million from cost of service revenues of $0.1 million for the 2007 successor period and $0.1 million for the 2007 predecessor period.

Amortization expense

Amortization expense was $16.0 million for fiscal 2008, compared to $11.7 million for the 2007 successor period and $3.4 million for the 2007 predecessor period. The overall increase of $0.9 million, or 5.7%, was mainly due to the revaluation of publishing rights and developed technology intangible assets as a result of the purchase of Cambium by VSS-Cambium Holdings, LLC. This revaluation resulted in higher amortization in the 2007 successor period and fiscal 2008.

Research and development expense

Our research and development expense was $6.4 million for fiscal 2008, $5.2 million for the 2007 successor period and $1.7 million for the 2007 predecessor period. The overall decrease from 2007 to 2008 of $0.6 million, or 8.1%, was mainly due to reductions in contracted development spending.

Sales and marketing expense

Our sales and marketing expense was $24.6 million for fiscal 2008, $15.1 million for the 2007 successor period and $6.4 million for the 2007 predecessor period. The overall increase from 2007 to 2008 of $3.1 million, or 14.7%, was mainly due to higher selling costs in 2008 in anticipation of increased sales opportunities in adoption states.

General and administrative expenses

Our general and administrative expenses were $16.2 million for fiscal 2008, $11.1 million for the 2007 successor period and $13.7 million for the 2007 predecessor period. The overall decrease from 2007 to 2008 of $8.7 million, or 34.9%, was mainly due to $5.1 million of acquisition related costs and a $2.9 million charge related to the modification of our stock option plan included in the 2007 predecessor period.

Shipping costs

Shipping costs were $2.3 million in fiscal 2008, compared to $2.7 million in the 2007 successor period and $0.4 million in the 2007 predecessor period. The overall decrease of $0.8 million, or 26.3%, was due to increased shipping efficiencies.

Depreciation and amortization expense

Depreciation and amortization expense was $11.5 million in fiscal 2008, compared to $9.3 million in the 2007 successor period and $0.7 million in the 2007 predecessor period. The overall increase of $1.4 million, or 13.7%, was due to the acquisition of Cambium by VSS-Cambium Holdings, LLC. As a result of the acquisition, other intangible assets were revalued, resulting in an increase in amortization in the 2007 successor period and fiscal 2008.

Embezzlement and related expenses

We discovered in fiscal 2008 that a former employee of Cambium Learning had perpetrated a significant misappropriation of assets during a period beginning in 2004 and extending through April 2008. We identified $14.0 million of embezzlement losses, which included $1.8 million for fiscal 2008, $5.7 million for the 2007 successor period and $1.0 million for the 2007 predecessor period. In addition, we incurred fees and expenses of $5.5 million in investigating and responding to this embezzlement matter in fiscal 2008. This amount is net of the $1.6 million appraised value of five boats that were seized by the Company from the former employee, who had used embezzled funds to acquire those boats.

Goodwill impairment

A total of $192.3 million of goodwill was recorded in connection with the acquisition of Cambium Learning by VSS-Cambium Holdings, LLC. Due to the weakening of the economy and the impact that economic conditions were having on our customers and business in the latter portion of fiscal 2008, we identified significant deterioration in the expected future financial performance of our published products product line. As a result, we recorded an impairment loss of $76.0 million within our published products unit for 2008, reflecting the difference between the fair value and recorded value for goodwill. The fair value was determined based upon management’s forecasts, which are dependent on multiple assumptions and estimates, including estimates regarding anticipated future educational funding and the actual performance and future projections of the Company.

Under the new segment structure, the 2008 goodwill impairment charge was assigned to the Voyager segment.

Net interest income (expense)

Net interest income (expense) was $18.4 million for fiscal 2008, compared to $13.1 million for the 2007 successor period and $0.7 million for the 2007 predecessor period. The overall increase of $4.6 million, or 32.9%, was due principally to higher interest expense as a result of the acquisition of Cambium by VSS-Cambium Holdings, LLC on April 11, 2007 and the higher interest rate incurred in 2008 as a result of the embezzlement we suffered.

Gain from settlement with previous stockholders

For fiscal 2008, we received a total settlement from previous stockholders of $30.2 million relating to the embezzlement we suffered. The total settlement consisted of $20 million in escrowed funds, together with additional payments of $9.3 million and interest income of $0.9 million. The total settlement amount of $30.2 million was used to cover costs and to pay down a portion of a senior secured credit facility. Because the embezzlement was discovered after the initial purchase allocation was made in connection with the acquisition, the entire settlement amount was recorded on our consolidated statement of operations as a gain from settlement with the previous stockholders.

Loss on extinguishment of debt

For fiscal 2008, we recorded a loss on the extinguishment of debt of $5.6 million related to the modification of our senior secured credit facility and senior unsecured promissory notes resulting from the execution of an amendment of those documents and the delivery by the lenders of a permanent waiver. The associated unamortized deferred financing costs as of August 22, 2008 of $4.6 million and amendment fees of $1.0 million related to the permanent waiver were recorded as a loss on extinguishment of debt.

Income tax benefit

In 2008, we recorded an income tax benefit of $13.4 million. Pre-tax losses at statutory rates provided a Federal tax benefit of approximately $29.0 million. The impairment charge to non-deductible goodwill did not result in a tax benefit which is approximately $26.6 million less than the amount expected based on the federal statutory rate. We also recorded non-taxable book income related to a purchase adjustment, which resulted in a tax benefit of $10.2 million.

We recorded a $7.8 million income tax benefit in the 2007 successor period and a $3.7 million benefit in the 2007 predecessor period. The 2007 predecessor period includes non-deductible transaction costs of $5.1 million.

Liquidity and Capital Resources

Because sales seasonality affects operating cash flow, we normally incur a net cash deficit from all of our activities through the early part of the third quarter of the year. We typically fund these seasonal deficits through the drawdown of cash, supplemented by borrowings on our revolving senior credit facility. The primary source of liquidity is cash flow from operations and the primary liquidity requirements relate to debt service, pre-publication costs, capital investments and working capital. We believe that based on current and anticipated levels of operating performances, cash flow from operations and availability under the senior secured revolving credit facility, we will be able to make required payments of principal and interest on our debt and fund our working capital and capital expenditure requirements for the next 12 months.

Long-term debt

Our long-term debt is held by our subsidiary, Cambium Learning, and as of December 31, 2009 consists of:

•

$97.2 million of floating rate senior secured notes due April 11, 2013; and

•

$54.6 million of 13.75% senior unsecured notes due April 11, 2014

Senior Secured Notes. The senior secured notes were issued pursuant to a senior secured credit facility consisting of a $30 million revolving loan and a $128 million term loan. The term loan requires quarterly principal payments of $320,000. Our senior notes are secured by all of Cambium Learning’s personal property. The interest rate on the senior notes is based on the one-, three- or six-month LIBOR or Alternative Base Rate (ABR) plus a spread tied to Cambium Learning’s credit ratings, subject to a floor on each of the two rates. Based on the credit ratings as of yearend 2009, the spread for LIBOR was 6.5%. The LIBOR rate cannot be less than 3.0%, and the ABR rate cannot be less than 4.0%. As of December 31, 2009, the interest rate on the senior secured notes was 9.5%. As of December 31, 2009, we had borrowings of $5.0 million under the revolver and, subject to borrowing base capacity limitations for outstanding letters of credit, had $23.5 million available to borrow under the revolver.

In the first quarter of 2010, our credit ratings were upgraded by Standard & Poor’s and Moody’s Investor Services. As a result of the credit rating upgrades, the spread for LIBOR decreased from 6.5% to 5.0%, with a continued LIBOR floor of 3.0% and the effective interest rate became 8.0%.

Senior Unsecured Notes. The senior unsecured notes require cash interest payments equal to 10% on a quarterly basis. Any additional interest beyond the 10% rate is added to the principal of the notes (paid in kind) and is not payable until April 11, 2014. The initial interest rate on the senior unsecured notes was 11.75% per annum. That rate was increased by 200 basis points in connection with the negotiation of the permanent waiver and credit agreement amendments in 2008. The rate was further increased by an additional 50 basis points as of March 31, 2009 by virtue of the Company’s total leverage ratio (as defined under the senior unsecured notes) exceeding 5.5 to 1 as of March 31, 2009; however, as a result of the merger with VLCY, the total leverage decreased below 5.5 to 1 and the rate was decreased by 50 basis points. Thus, as of December 31, 2009, the interest rate on the subordinated notes was 13.75% per annum. Assuming the all-in interest rate on the senior unsecured notes were to remain at 13.75% until April 11, 2014, the value of these notes, including accrued interest, will be $64.2 million.

Covenants. The senior secured credit facility includes a total leverage ratio financial covenant. The ratio is calculated quarterly using an adjusted EBITDA calculation, which is defined as earnings before interest, taxes, depreciation, and amortization, and other adjustments allowed under the terms of the senior secured credit agreement, on a rolling 12-month basis. The facility also contains customary covenants, including limitations on Cambium Learning’s ability to incur debt, and events of default as defined by the agreement. The senior secured credit facility limits Cambium Learning’s ability to pay dividends, to make advances and to otherwise engage in inter-company transactions. Effective as of the quarter ended March 31, 2009, the senior secured credit facility requires the total leverage ratio to be no greater than 6.5:1.

The senior unsecured notes include a financial covenant, which requires that beginning with the quarter ended March 31, 2009, we maintain as of the end of each fiscal quarter consolidated adjusted EBITDA of not less than $25.0 million (adjusted EBITDA is also on a rolling 12-month basis and is defined in substantially the same manner as under the senior secured credit facility). The senior unsecured notes also contain customary covenants, including limitations on our ability to incur debt.

If Cambium Learning fails to comply with these financial covenants, the Company has the right to make a cash contribution to the capital of Cambium Learning, the aggregate amount not to be in excess of the minimum amount necessary to cure the relevant failure to comply with the financial covenant. This right to make a cash contribution is available for no more than one fiscal quarter in a fiscal year. Cambium Learning’s total leverage ratio was 7.33:1 for the four-quarter period ended June 30, 2009, which ratio was greater than the maximum permitted under the credit facility, and its adjusted EBITDA was $23.1 million for the four-quarter period ended June 30, 2009, or $1.9 million less than the minimum required $25.0 million. Accordingly, as of August 14, 2009, Cambium Learning was in non-compliance with these covenants. On August 14, 2009, Cambium notified both its senior secured lenders and its senior unsecured lenders that VSS-Cambium Holdings, LLC intended to cure the non-compliance. On August 17, 2009, $3.0 million of capital was contributed to Cambium Learning by its stockholder to fund the cure. On August 20, 2009, the $3.0 million was paid by Cambium Learning to the senior secured lenders and the principal amount outstanding on our senior secured credit agreement was reduced by a corresponding amount. For purposes of calculating covenant compliance, the amount of the capital contribution will be included in the adjusted EBITDA calculations through the quarter ending March 31, 2010. We are permitted one such cure right in each fiscal year. Therefore, under the existing credit agreements, we are in compliance with our financial covenants for the year ended December 31, 2009 and, based on our performance to date, we expect to be in compliance with our financial covenants for the quarter ending March 31, 2010. The required total leverage ratio changes each year and will be 5.5:1 for fiscal year 2010, 4.5:1 for fiscal year 2011, and 4.0:1 thereafter. We are still completing our debt compliance reporting, but based on the calculation of adjusted EBITDA per the credit agreement, as shown in “Non-GAAP Measures” below we expect to report a total leverage ratio for the year ended December 31, 2009 of approximately 3.0, which is in compliance with the debt covenant requirement that the total leverage ratio be no greater than 6.5:1. Further, we are in compliance with the requirement that adjusted EBITDA per the credit agreement be in excess of $25.0 million.

Our ability to satisfy our debt service and maintain compliance with loan covenants in the future will depend in part on the operating performance of our Company, which will in turn be affected in part by prevailing economic conditions in the markets we serve and other factors, many of which are beyond our control. If a default in our covenants were to occur in the future, and we were unable to cure such default (if such default were curable under the credit agreement), our lenders may accelerate the indebtedness under the credit agreements and, upon any such acceleration, Cambium Learning would be required to repay or refinance all such indebtedness. Neither we nor Cambium Learning may have sufficient funds to repay the indebtedness and there may not be equity or debt financing opportunities available to us on acceptable terms, or at all.

See “Non-GAAP Measures” below for a reconciliation among net loss, EBITDA and adjusted EBITDA for purposes of measuring operating performance and adjusted EBITDA under our credit agreements. The calculation of adjusted EBITDA used for purposes of the credit agreements supplements the adjustments to EBITDA we use for purposes of measuring operating performance with additional adjustments to EBITDA recognized by Cambium Learning’s lenders.

Amendment to Notes. Cambium Learning entered into an amendment to each of its credit agreements on October 29, 2009. Since the senior secured credit agreement and the senior unsecured credit agreement are substantially similar agreements, each of the amendments is substantially similar to the other. The amendments were permitted under the terms of the merger agreement, and provide for the following important modifications to the credit agreements:

•

Change in Control Definition. Prior to the amendment, the original investors in Cambium Learning were required to own or control a majority of the outstanding economic or voting interests of Cambium Learning. This majority threshold is being reduced to 35%.

•

VSS Funds Ownership. VSS is not permitted to sell or otherwise transfer any of the Company’s common stock that it directly or indirectly owns, unless it continues to directly or indirectly own or control at least 35% of the outstanding Company common stock, and it has not sold or otherwise transferred, in the aggregate, more than 15% of its Company common stock.

•

Increase in Material Indebtedness. An event of default would occur if a “change in control” occurred under any of Cambium Learning’s other “material indebtedness.” The term “material indebtedness” includes the senior unsecured notes, as well as any other debt, the principal amount of which exceeds a specified threshold. The $5 million threshold is being increased under the amendment to $7.5 million.

•

Exceptions to Restricted Payments. Cambium Learning is prohibited from paying dividends, unless the specific type of payment is permitted. Additional types of payments are being permitted to allow the following:

	•		Up to $3.0 million to fund public company, administrative, overhead, franchise tax and related costs incurred by the Company; and
	•		Up to $750,000 in annual board of director compensation and expenses.

•

The annual monitoring fee previously payable to VSS is being eliminated.

•

Permitted Acquisition Basket Reset. The amount of consideration payable in an acquisition is limited under the credit agreements, and the limitations are being reset after giving effect to the acquisition of Voyager Expanded Learning by Cambium Learning in connection with the mergers. The limitation will be reset to a cumulative $150 million amount, but any single acquisition is limited to $20 million until the ratio of senior secured debt to EBITDA (as calculated under the credit agreements) does not exceed 2.50 to 1.0, and the ratio of total leverage to EBITDA (as calculated under the credit agreements) does not exceed 3.50 to 1.0, at which time the single acquisition limit will be increased to $100 million.

•

Definition of Consolidated EBITDA. The definition of Consolidated EBITDA, which is used for calculating leverage ratios under the senior secured credit agreement, and the minimum EBITDA covenant under the senior unsecured credit agreement are being modified to allow additional add-backs for the following items:

	•		Deferred revenue associated with a permitted acquisition;
	•		Up to $24.0 million in M&A costs related to the mergers;
	•		Up to $2.0 million in costs incurred in closing of locations or lease terminations in connection with the mergers;
	•		Up to $5.0 million in severance costs incurred in connection with the mergers;
	•		Up to $3.0 million in integration costs incurred connection with the mergers; and
	•		M&A costs for future transactions (whether or not completed) of up to $5.0 million for closed transactions and $0.5 million for failed transactions in any calendar year, and $2.0 million in the aggregate.

In addition, the amendments ratify and approve the mergers and the related transactions.

Each of the lenders who executed the amendment on or before October 28, 2009 received a fee equal to 20 basis points of the amount of its loans and commitments under the credit agreements, for an aggregate fee payable to all lenders equal to approximately $0.3 million.

Cash flows

In 2009, cash provided from operating activities was $1.9 million. Cash from operations was partially offset by cash outflows of $11.6 million of transaction costs related to the merger transaction.

Cash from operations is seasonal with more cash generated in the second half of the year than in the first half of the year. Cash is historically generated during the second half of the year because the buying cycle of school districts generally starts at the beginning of each new school year in the fall.

Other significant inflows of cash during fiscal 2009 included:

•

$25.0 million of capital contributed by Cambium’s stockholders related to the VLCY acquisition; and

•

$3.0 million of capital contributed by Cambium’s stockholders to fund the cure to a senior secured credit agreement financial covenant regarding Cambium Learning’s total leverage ratio for the second quarter of 2009.

Other significant uses of cash during fiscal 2009 included:

•

$9.7 million of cash paid for the VLCY acquisition, net of cash acquired;

•

$5.9 million for principal payments on debt and capital leases; and

•

$3.4 million of expenditures related to property, plant, equipment, pre-publication costs, and software.

Non-GAAP Measures

Our historical financial statements include VLCY results only for the 23-day period subsequent to the December 8, 2009 acquisition date. Further, the net losses for both the Company and VLCY as reported on a GAAP basis include material non-recurring and non-operational items. We believe that earnings (loss) from operations before interest and other income (expense), income taxes, and depreciation and amortization, or EBITDA, and Adjusted EBITDA, which further excludes non-recurring and non-operational items, provide useful information for investors to assess the results of the ongoing business of the combined company.

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

Below is a reconciliation between net loss and Adjusted EBITDA for the years ended December 31, 2009 and 2008.

Reconciliation Between Net Loss and Adjusted EBITDA for the Year Ended December 31, 2009
(in thousands)
(Unaudited)

						VLCY								Non-recurring or non-operating costs excluded from Adjusted EBITDA:
						Pre-Merger				Total												Legacy				Stock-based				Embezzlement				Adj Related
		Total				Results				Combined				Transaction				Integration				VLCY				Compensation				and				to Purchase				Goodwill				Adjusted
		GAAP				(342 days)				Results				Costs				Costs				Corporate				Expense				Related				Accounting				Impairment				EBITDA
														(a)				(b)				(c)				(d)				(e)				(f)				(g)
Voyager		$	52,923			$	77,758			$	130,681			$	—			$	—			$	—			$	—			$	—			$	509			$	—			$	131,190
Sopris			25,185				—				25,185				—				—				—				—				—				—				—				25,185
Cambium Learning Technologies			22,940				20,970				43,910				—				—				—				—				—				883				—				44,793
Total net sales			101,048				98,728				199,776				—				—				—				—				—				1,392				—				201,168
Cost of sales			26,848				30,839				57,687				—				(71	)			—				—				—				148				—				57,764
Cost of sales — amortization			17,527				16,220				33,747				—				—				—				—				—				—				—				33,747
Total cost of sales			44,375				47,059				91,434				—				(71	)			—				—				—				148				—				91,511
Research and development expense			5,611				4,331				9,942				—				—				—				—				—				—				—				9,942
Sales and marketing expenses			23,368				28,753				52,121				—				(155	)			—				—				—				108				—				52,074
General and administrative expense			30,519				24,740				55,259				(23,507	)			(2,027	)			(2,304	)			(216	)			—				—				—				27,205
Shipping costs			1,512				1,875				3,387																																3,387
Depreciation and amortization			9,723				2,081				11,804				—				—				—				—				—				—				—				11,804
Embezzlement and related			129				—				129				—				—				—				—				(129	)			—				—				—
Goodwill impairment			9,105				27,175				36,280				—				—				—				—				—				—				(36,280	)			—
Income (loss) from operations			(23,294	)			(37,286	)			(60,580	)			23,507				2,253				2,304				216				129				1,136				36,280				5,245
Interest income			10				70				80				—				—				—				—				—				—				—				80
Interest expense			(19,487	)			(628	)			(20,115	)			—				—				—				—				—				—				—				(20,115	)
Other income (expense)			(698	)			3,279				2,581				—				—				—				—				—				—				—				2,581
Income tax benefit			7,704				190				7,894				—				—				—				—				—				—				—				7,894
Net income (loss)			(35,765	)			(34,375	)			(70,140	)			23,507				2,253				2,304				216				129				1,136				36,280				(4,315	)
Normal EBITDA Adjustments:
Depreciation and amortization			27,250				18,301				45,551				—				—				—				—				—				—				—				45,551
Interest income			(10	)			(70	)			(80	)			—				—				—				—				—				—				—				(80	)
Interest expense			19,487				628				20,115				—				—				—				—				—				—				—				20,115
Other income			698				(3,279	)			(2,581	)			—				—				—				—				—				—				—				(2,581	)
Income tax			(7,704	)			(190	)			(7,894	)			—				—				—				—				—				—				—				(7,894	)
EBITDA		$	3,956			$	(18,985	)		$	(15,029	)		$	23,507			$	2,253			$	2,304			$	216			$	129			$	1,136			$	36,280			$	50,796
Reconciliation Between Net Loss and Adjusted EBITDA for the Year Ended December 31, 2008 (in thousands) (Unaudited)
						VLCY								Non-recurring or non-operating costs excluded from Adjusted EBITDA:
		GAAP				Pre-Merger				Total												Legacy				Stock-based				Embezzlement								Lease
		Results				Results				Combined				Transaction				Integration				VLCY				Compensation				and				Goodwill				Termination				Adjusted
		Cambium				(FY 2008)				Results				Costs				Costs				Corporate				Expense				Related				Impairment				Costs				EBITDA
														(a)				(b)				(c)				(d)				(e)				(g)				(h)
Voyager		$	48,348			$	80,743			$	129,091			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	129,091
Sopris			29,712				—				29,712				—				—				—				—				—				—				—				29,712
Cambium Learning Technologies			21,671				17,788				39,459				—				—				—				—				—				—				—				39,459
Total net sales			99,731				98,531				198,262				—				—				—				—				—				—				—				198,262
Cost of sales			27,709				33,761				61,470				—				—				—				—				—				—				—				61,470
Cost of sales — amortization			15,966				18,497				34,463				—				—				—				—				—				—				—				34,463
Total cost of sales			43,675				52,258				95,933				—				—				—				—				—				—				—				95,933
Research and development expense			6,416				5,302				11,718				—				—				—				—				—				—				—				11,718
Sales and marketing expenses			24,600				33,734				58,334				—				—				—				—				—				—				—				58,334
General and administrative expense			16,156				30,660				46,816				(26	)			(287	)			(18,069	)			(878	)			—				—				—				27,556
Shipping costs			2,348				2,178				4,526																																4,526
Depreciation and amortization			11,453				2,861				14,314				—				—				—				—				—				—				—				14,314
Embezzlement and related			7,254				—				7,254				—				—				—				—				(7,254	)			—				—				—
Goodwill impairment			75,966				43,141				119,107				—				—				—				—				—				(119,107	)			—				—
Lease termination costs			—				11,673				11,673				—				—				—				—				—				—				(11,673	)			—
Income (loss) from operations			(88,137	)			(83,276	)			(171,413	)			26				287				18,069				878				7,254				119,107				11,673				(14,119	)
Interest income			86				1,485				1,571				—				—				—				—				—				—				—				1,571
Interest expense			(18,520	)			(510	)			(19,030	)			—				—				—				—				—				—				—				(19,030	)
Other income (expense)			23,589				(363	)			23,226				—				—				—				—				—				—				—				23,226
Income tax benefit			13,422				1,160				14,582				—				—				—				—				—				—				—				14,582
Net loss (income)			(69,560	)			(81,504	)			(151,064	)			26				287				18,069				878				7,254				119,107				11,673				6,230
Normal EBITDA Adjustments:
Depreciation and amortization			27,419				21,358				48,777				—				—				—				—				—				—				—				48,777
Interest income			(86	)			(1,485	)			(1,571	)			—				—				—				—				—				—				—				(1,571	)
Interest expense			18,520				510				19,030				—				—				—				—				—				—				—				19,030
Other income			(23,589	)			363				(23,226	)			—				—				—				—				—				—				—				(23,226	)
Income tax			(13,422	)			(1,160	)			(14,582	)			—				—				—				—				—				—				—				(14,582	)
EBITDA		$	(60,718	)		$	(61,918	)		$	(122,636	)		$	26			$	287			$	18,069			$	878			$	7,254			$	119,107			$	11,673			$	34,658