Attached files
file | filename |
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EX-31.1 - EX-31.1 - Archipelago Learning, Inc. | d82144exv31w1.htm |
EX-32.1 - EX-32.1 - Archipelago Learning, Inc. | d82144exv32w1.htm |
EX-31.2 - EX-31.2 - Archipelago Learning, Inc. | d82144exv31w2.htm |
EX-10.8 - EX-10.8 - Archipelago Learning, Inc. | d82144exv10w8.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to __________.
Commission File Number: 001-34555
Archipelago Learning, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) 3232 McKinney Avenue, Suite 400, Dallas, Texas (Address of Principal Executive Offices) |
27-0767387 (I.R.S. Employer Identification No.) 75204 (Zip Code) |
(800) 419-3191
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of
the Act). Yes o No þ
As of May 5, 2011, the number of outstanding shares of the registrants Common Stock, $0.001
par value, was 26,332,066.
TABLE OF CONTENTS
2
Table of Contents
Special Note Regarding Forward-Looking Statements
Certain disclosures and analyses in this Form 10-Q, including information incorporated herein
by reference, may include forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, or the Securities Act, Section 21E of the Securities Exchange
Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of
1995. All statements other than statements of historical fact are considered forward-looking
statements and reflect current expectations and projections relating to our financial condition,
results of operations, plans, objectives, future performance and business. Forward-looking
statements generally can be identified by use of phrases or terminology such as anticipate,
estimate, expect, project, forecast, plan, intend, believe, may, should, can
have, likely, future and other words and terms of similar meaning in connection with any
discussion of the timing or nature of future operating or financial performance or other events.
These forward-looking statements are based on assumptions that we have made in light of our
industry experience and on our perceptions of historical trends, current conditions, expected
future developments and other factors we believe are appropriate under the circumstances. These
statements are not guarantees of performance or results. They are subject to risks and
uncertainties which may be beyond our control, including those discussed below, in the Risk
Factors section in Item 1A of our Form 10-K, and elsewhere in this Form 10-Q and the documents
incorporated by reference herein. Although we believe that these forward-looking statements are
based on reasonable assumptions, many factors could cause actual results to vary materially from
those anticipated in such forward-looking statements.
Any forward-looking statement contained herein speaks only as of the date on which we make it.
Factors or events that could cause our actual results to differ may emerge from time to time, and
it is not possible for us to predict all of them. We undertake no obligation to update any
forward-looking statement, whether as a result of new information, future developments or
otherwise, except as may be required by law.
Archipelago Learning, Study Island, Northstar Learning, EducationCity, Reading Eggs
and their respective logos are our trademarks. Solely for convenience, we refer to our trademarks
in this Form 10-Q without the TM and ® symbols, but such references are not intended to indicate,
in any way, that we will not assert, to the fullest extent under applicable law, our rights to our
trademarks. Other service marks, trademarks and trade names referred to in this document are the
property of their respective owners.
3
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ARCHIPELAGO LEARNING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share data)
(in thousands, except share data)
As of | As of | |||||||
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 33,601 | $ | 32,398 | ||||
Accounts receivable, net |
10,042 | 10,807 | ||||||
Deferred tax assets |
3,328 | 3,463 | ||||||
Prepaid expenses and other current assets |
3,120 | 3,560 | ||||||
Total |
50,091 | 50,228 | ||||||
Property and equipment, net |
4,510 | 3,760 | ||||||
Goodwill |
166,127 | 165,694 | ||||||
Intangible assets, net |
36,839 | 37,290 | ||||||
Investment |
6,446 | 6,446 | ||||||
Notes receivable |
1,984 | 1,934 | ||||||
Other long-term assets |
1,500 | 1,610 | ||||||
Total assets |
$ | 267,497 | $ | 266,962 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable trade |
$ | 969 | $ | 928 | ||||
Accrued employee-related expenses |
1,215 | 2,518 | ||||||
Other accrued expenses |
1,095 | 1,247 | ||||||
Taxes payable |
1,459 | 979 | ||||||
Deferred tax liabilities |
269 | 384 | ||||||
Deferred revenue |
42,490 | 44,733 | ||||||
Current portion of note payable to related party |
2,388 | 2,352 | ||||||
Current portion of long-term debt |
850 | 850 | ||||||
Other current liabilities |
502 | 463 | ||||||
Total |
51,237 | 54,454 | ||||||
Long-term deferred tax liabilities |
15,753 | 15,478 | ||||||
Long-term deferred revenue |
14,974 | 14,312 | ||||||
Long-term debt, net of current |
74,701 | 74,913 | ||||||
Other long-term liabilities |
378 | 488 | ||||||
Total liabilities |
157,043 | 159,645 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock ($0.001 par value, 10,000,000 shares authorized, none issued
and outstanding at March 31, 2011 and December 31, 2010) |
| | ||||||
Common stock ($0.001 par value, 200,000,000 shares authorized, 26,336,335
and 26,354,198 shares issued and outstanding at March 31, 2011 and December
31, 2010, respectively) |
26 | 26 | ||||||
Additional paid-in capital |
96,701 | 95,395 | ||||||
Accumulated other comprehensive income |
2,373 | 1,531 | ||||||
Retained earnings |
11,354 | 10,365 | ||||||
Total stockholders equity |
110,454 | 107,317 | ||||||
Total liabilities and stockholders equity |
$ | 267,497 | $ | 266,962 | ||||
See the accompanying notes to the unaudited condensed consolidated financial statements.
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Table of Contents
ARCHIPELAGO LEARNING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share and per share data)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share and per share data)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Revenue |
$ | 17,303 | $ | 12,549 | ||||
Cost of revenue |
1,707 | 913 | ||||||
Gross profit |
15,596 | 11,636 | ||||||
Operating expense: |
||||||||
Sales and marketing |
5,921 | 3,822 | ||||||
Content development |
1,707 | 1,041 | ||||||
General and administrative |
5,453 | 2,789 | ||||||
Total |
13,081 | 7,652 | ||||||
Operating income |
2,515 | 3,984 | ||||||
Other income (expense): |
||||||||
Interest expense |
(1,094 | ) | (770 | ) | ||||
Interest income |
70 | 153 | ||||||
Foreign exchange loss |
(121 | ) | | |||||
Derivative loss |
| (73 | ) | |||||
Total |
(1,145 | ) | (690 | ) | ||||
Income before tax |
1,370 | 3,294 | ||||||
Provision for income tax |
381 | 1,227 | ||||||
Net income |
$ | 989 | $ | 2,067 | ||||
Earnings per share: |
||||||||
Basic |
$ | 0.04 | $ | 0.08 | ||||
Diluted |
$ | 0.04 | $ | 0.08 | ||||
Weighted-average shares outstanding: |
||||||||
Basic |
25,381,150 | 23,856,327 | ||||||
Diluted |
25,629,288 | 24,252,248 |
See the accompanying notes to the unaudited condensed consolidated financial statements.
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Table of Contents
ARCHIPELAGO LEARNING, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AND COMPREHENSIVE
INCOME (UNAUDITED)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AND COMPREHENSIVE
INCOME (UNAUDITED)
(in thousands)
Preferred | Common | Accumulated | ||||||||||||||||||||||||||||||
Stock | Stock | Additional | Other | |||||||||||||||||||||||||||||
Par | Par | Paid-in | Comprehensive | Retained | Total | |||||||||||||||||||||||||||
Shares | Value | Shares | Value | Capital | Income | Earnings | Equity | |||||||||||||||||||||||||
Balance at December 31, 2010 |
| $ | | 26,354 | $ | 26 | $ | 95,395 | $ | 1,531 | $ | 10,365 | $ | 107,317 | ||||||||||||||||||
Stock-based compensation expense |
| | | | 1,286 | | | 1,286 | ||||||||||||||||||||||||
Grants of stock and restricted stock |
| | 22 | | | | | | ||||||||||||||||||||||||
Forfeiture of restricted stock |
| | (40 | ) | | | | | | |||||||||||||||||||||||
Additional contributed capital |
| | | | 20 | | | 20 | ||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
| | | | | | 989 | 989 | ||||||||||||||||||||||||
Currency translation adjustment |
| | | | | 842 | | 842 | ||||||||||||||||||||||||
Total |
1,831 | |||||||||||||||||||||||||||||||
Balance at March 31, 2011 |
| $ | | 26,336 | $ | 26 | $ | 96,701 | $ | 2,373 | $ | 11,354 | $ | 110,454 | ||||||||||||||||||
See the accompanying notes to the unaudited condensed consolidated financial statements.
6
Table of Contents
ARCHIPELAGO LEARNING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 989 | $ | 2,067 | ||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||
Amortization of debt financing costs |
109 | 78 | ||||||
Depreciation and amortization |
1,482 | 699 | ||||||
Stock-based compensation |
1,286 | 408 | ||||||
Unrealized gain on interest rate swap |
| (259 | ) | |||||
Deferred income taxes |
121 | 1,198 | ||||||
Deferred rent |
4 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
825 | 1,871 | ||||||
Prepaid expenses and other |
399 | (39 | ) | |||||
Accounts payable and accrued expenses |
(1,281 | ) | (1,664 | ) | ||||
Deferred revenue |
(1,863 | ) | (1,979 | ) | ||||
Other
long-term liabilities |
14 | | ||||||
Net cash provided by operating activities |
2,085 | 2,380 | ||||||
Cash flows from investing activities: |
||||||||
Purchase of property and equipment |
(1,020 | ) | (330 | ) | ||||
Net cash used in investing activities |
(1,020 | ) | (330 | ) | ||||
Cash flows from financing activities: |
||||||||
Contribution from member in Reorganization |
20 | | ||||||
Payment of offering costs |
| (1,460 | ) | |||||
Payments on term note |
(212 | ) | (175 | ) | ||||
Net cash used in financing activities |
(192 | ) | (1,635 | ) | ||||
Effect of foreign exchange on cash and cash equivalents |
330 | | ||||||
Net change in cash and cash equivalents |
1,203 | 415 | ||||||
Beginning of period |
32,398 | 58,248 | ||||||
End of period |
$ | 33,601 | $ | 58,663 | ||||
Supplemental information: |
||||||||
Cash paid for interest |
$ | 968 | $ | 716 | ||||
Cash paid for income taxes |
$ | 13 | $ | 645 | ||||
Non-cash investing and financing activities: |
||||||||
Accrued purchases of property and equipment |
$ | 203 | $ | 20 | ||||
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Table of Contents
ARCHIPELAGO LEARNING, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The Company
Archipelago Learning, Inc. (the Company) is a leading subscription-based,
software-as-a-service (SaaS) provider of education products. The Company provides standards-based
instruction, practice, assessments and productivity tools that improve the performance of educators
and students at a low cost via proprietary web-based platforms.
Study Island, the Companys core product line, helps students in Kindergarten through 12th
grade (K-12), master grade level academic standards in a fun and engaging manner. In June 2010,
the Company acquired Educationcity Limited (EducationCity), an online Pre-K-6 educational content
and assessment program for schools in the United Kingdom (U.K.) and United States (U.S.). In
August 2010, we began selling Reading Eggs, an online product focused on teaching young children to
read. Reading Eggs is sold under a distribution agreement with Blake Publishing, which requires us
to pay a 35% royalty to Blake Publishing for every sale. The Company also offers online
postsecondary programs through its Northstar Learning product line.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP)
for interim financial information and with instructions for Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, the Companys unaudited condensed consolidated financial statements and footnotes
contained herein do not include all of the information and footnotes required by GAAP to be
considered complete financial statements. However, in the opinion of the Companys management,
the accompanying unaudited condensed consolidated financial statements and footnotes contain all
adjustments, including normal recurring adjustments, considered necessary for a fair presentation
of the Companys consolidated financial information as of, and for, the periods presented. The
condensed consolidated results of operations of the Company for an interim period are not
necessarily indicative of its consolidated results of operations to be expected for its fiscal
year. The December 31, 2010 consolidated balance sheet was included in the audited consolidated
financial statements in the Companys annual report on Form 10-K for the year ended December 31,
2010 (2010 Annual Report), which includes all disclosures required by GAAP. Therefore, these
unaudited condensed consolidated financial statements should be read in conjunction with the
consolidated financial statements of the Company included in the 2010 Annual Report.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our
estimates, including those related to the allowance for doubtful accounts, intangible assets, and
income taxes. We base our estimates on historical experience and on other relevant assumptions that
are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results could differ from those estimates.
Seasonality
In
the United States, seasonal trends associated with school budget
years and state testing calendars also affect the timing of our
sales of subscriptions to new and existing customers. As a result,
most new subscriptions and renewals occur in the third quarter
because teachers and school administrators typically make purchases
for the new academic year at the beginning of their districts
fiscal year, which is usually July 1. Our fourth quarter has
historically produced the second highest level of new subscriptions
and renewals, followed by our second and first quarters.
In
the United Kingdom, seasonal trends associated with school budget
years affect the timing of our sales of subscriptions to new and
existing customers. As a result, there is a peak in new subscriptions
and renewals late in the first quarter because teachers and school
administrators often make purchases at the end of their fiscal year,
which is usually April 5. The fourth quarter is also typically
strong, with some customers working to calendar year budget periods,
while third quarter is weakest due to the U.K. vacation period.
8
Table of Contents
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Adopted
In September 2009, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic 605) Multiple-Deliverable
Revenue Arrangements. The new standard modifies the revenue recognition guidance for arrangements
that involve the delivery of multiple elements to a customer at different times as part of a single
revenue generating transaction. The new standard also expands the disclosure requirements for
multiple deliverable revenue arrangements. The new standard was effective for fiscal years
beginning on or after June 15, 2010, with earlier adoption permitted. The Company adopted this
standard effective January 1, 2011, which did not have a material impact on the financial position,
results of operations or cash flows of the Company.
In September 2009, the FASB also issued ASU No. 2009 14 Software (Topic 985) Certain
Revenue Arrangements That Include Software Elements. This standard removes tangible products from
the scope of software revenue recognition guidance and also provides guidance on determining
whether software deliverables in an arrangement that includes a tangible product, such as embedded
software, are within the scope of the software revenue guidance. The new standard was effective
for fiscal years beginning on or after June 15, 2010, with earlier adoption permitted. The Company
adopted this standard effective January 1, 2011, which did not have a material impact on the
financial position, results of operations or cash flows of the Company.
In December 2010, the FASB issued ASU 2010-29 Disclosure of Supplementary Pro Forma
Information for Business Combinations, which will change the disclosures of supplementary pro forma
information for business combinations. The new standard clarifies that if a public entity completes
a business combination and presents comparative financial statements, the entity should disclose
revenue and earnings of the combined entity as though the business combination that occurred during
the current year had occurred as of the beginning of the comparable prior annual reporting period
only. The amendments also expand the supplemental pro forma disclosures under ASC topic 805 to
include a description of the nature and amount of material, nonrecurring pro forma adjustments
directly attributable to the business combination included in the reported pro forma revenue and
earnings. ASU 2010-29 is effective for any business combination we complete on or after January 1,
2011. The revised disclosure requirements did not affect the Companys financial position, results
of operations or cash flows.
3. FAIR VALUE MEASUREMENTS
ASC 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between
market participants at the measurement date.
ASC 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to
measure fair value. This hierarchy requires entities to maximize the use of observable inputs and
minimize the use of unobservable inputs. The three levels of inputs to valuation techniques used in
fair value calculations are defined as follows:
| Level 1 Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access. | ||
| Level 2 Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data. | ||
| Level 3 Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Companys own assumptions about the assumptions that market participants would use. |
9
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The following table summarizes assets and liabilities measured at fair value on a recurring
basis (in thousands):
The Companys cash equivalents consist of highly liquid money market funds. The fair values of
our cash equivalents were determined based upon market prices.
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
As of March 31, 2011 |
||||||||||||||||
Assets cash equivalents |
$ | 29,902 | | | $ | 29,902 | ||||||||||
As of December 31, 2010 |
||||||||||||||||
Assets cash equivalents |
$ | 27,816 | | | $ | 27,816 |
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Table of Contents
The carrying amounts and estimated fair values of the Companys financial instruments that are not
reflected in the financial statements at fair value are as follows (in thousands):
As of March 31, 2011 | As of December 31, 2010 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Cost investment |
$ | 6,446 | n/a | $ | 6,446 | n/a | ||||||||||
Notes receivable |
1,984 | 2,020 | 1,934 | 1,934 | ||||||||||||
Note payable to related party |
2,388 | 2,388 | 2,352 | 2,352 | ||||||||||||
Term loan |
75,551 | 75,551 | 75,763 | 75,763 |
The investment included in the table above is in Edline LLC (Edline), a company that offers
web-based technological solutions for schools and educators which is not publicly traded and the
fair value is not readily determinable, however the Company believes the fair value of this asset
approximates or exceeds the carrying value.
As of March 31, 2011, the Company had two promissory notes receivable totaling $1.9 million
from Edline. Both of these notes bore interest at 9.5% per annum payable in kind. The interest and
principal amount on these notes receivable are due on June 30, 2016. The notes receivable were
estimated to approximate their carrying value as the notes were refinanced on December 21, 2010 at
market rates. See Note 11 for discussion of the subsequent refinancing of these notes in April
2011.
As of March 31, 2011, the Company had a note payable of $2.5 million related to the
acquisition of EducationCity in June 2010 (see Notes 4 and 10). The note payable was estimated to
approximate its carrying value as the final scheduled payment is within one year.
The fair value of our long-term debt at March 31, 2011 was estimated to approximate its
carrying value based on (i) the recentness of entering into, or amending, our credit facility, (ii)
the variable rate nature of our credit facility and (iii) the interest rate spreads charged on our
loans fluctuating with the total leverage ratio, which is a measurement of our creditworthiness.
4. ACQUISITION OF EDUCATIONCITY
EducationCity
On June 9, 2010, the Company acquired EducationCity pursuant to a Share Purchase Agreement
with Matthew Drakard, Simon Booley and Tom Morgan. The Company purchased 100% of the equity of
EducationCity for a purchase price of: (i) $65.1 million in cash; (ii) 1,242,408 shares of common
stock of the Company; and (iii) $5.0 million in additional deferred cash consideration, of which
$2.5 million was paid by the Company on December 31, 2010 and an additional $2.5 million will be
paid on December 31, 2011. The acquisition was financed with cash on hand and the proceeds of a new
$15.0 million supplemental term loan and $10.0 million in revolving loan commitments.
The following unaudited pro forma information summarizes the Companys results of operations,
as if the acquisition of EducationCity had occurred as of January 1, 2010. The pro forma
information adjusts for the effects of amortization of acquired intangibles and additional debt
incurred. The pro forma basic and diluted earnings per share includes an additional 1,242,408
shares reflecting the effect of the acquisition. The unaudited pro forma financial data is
presented for illustrative purposes only and is not necessarily indicative of the operating results
that would have been achieved if such acquisition had occurred on the dates indicated, nor is it
necessarily indicative of future consolidated results (in thousands, except per share data):
Three Months | ||||||||
Ended March 31, 2010 | ||||||||
As Reported | Pro Forma | |||||||
Revenue |
$ | 12,549 | $ | 15,093 | ||||
Net income |
2,067 | 1,646 | ||||||
Basic earnings per share |
$ | 0.08 | $ | 0.07 | ||||
Diluted earnings per share |
$ | 0.08 | $ | 0.06 |
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5. GOODWILL AND INTANGIBLE ASSETS
During the three months ended March 31, 2011, the Companys goodwill balance increased by $0.4
million due to changes in the foreign exchange rate between the U.S. Dollar and the Great British
Pound.
During the three months ended March 31, 2011, the Companys net intangible asset balances
decreased by $0.5 million due to amortization of $1.0 million offset by and increase due to change
in the foreign exchange rate between the U.S. Dollar and Great British Pound of $0.5 million.
6. COMMITMENTS AND CONTINGENCIES
The Company is obligated, as lessee, under non-cancelable operating leases for office space in
Dallas, Texas; Naperville, Illinois; and Rutland, United Kingdom expiring through 2020. As of March
31, 2011, the future minimum payments required under all operating leases with terms in excess of
one year are as follows (in thousands):
Remainder of 2011 |
$ | 1,250 | ||
2012 |
1,135 | |||
2013 |
1,109 | |||
2014 |
908 | |||
2015 |
931 | |||
Thereafter |
4,454 | |||
$ | 9,787 | |||
The Company also has a distribution agreement with a supplier which includes a minimum royalty
payment requirement to keep the contract in effect, which is not included in the table above. The
aggregate minimum requirement through December 31, 2020 under the contract totals $12.7 million.
7. EARNINGS PER SHARE
Earnings per share is computed using the two-class method, considering the restricted common
shares, due to their participation rights in dividends of the Company. Under this method, the
Companys net income is reduced by the portion of net income attributable to the restricted common
shares, and this amount is divided by the weighted average shares of common stock outstanding.
The components of earnings per share are as follows for the three months ended March 31 (in
thousands):
2011 | 2010 | |||||||||||||||
Net Income | Shares | Net Income | Shares | |||||||||||||
Net income |
$ | 989 | 26,337 | $ | 2,067 | 25,106 | ||||||||||
Less: Income attributable to restricted shares |
(36 | ) | (956 | ) | (103 | ) | (1,250 | ) | ||||||||
Net income available to common stockholders |
953 | 25,381 | 1,964 | 23,856 | ||||||||||||
Basic earnings per share |
$ | 0.04 | $ | 0.08 | ||||||||||||
Dilutive effect of restricted common stock |
248 | 396 | ||||||||||||||
Diluted earnings per share |
$ | 0.04 | 25,629 | $ | 0.08 | 24,252 | ||||||||||
For the three months ended March 31, 2011, 3,717 shares of restricted stock and options to
purchase 922,212 weighted-average shares of common stock were excluded from the diluted earnings
per share calculation, as their effect was antidilutive. For the three months ended March 31, 2010,
353 shares of restricted stock and options to purchase 588,371 weighted-average shares of common
stock, were excluded from the diluted earnings per share calculation, as their effect was
antidilutive.
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8. STOCK-BASED COMPENSATION
During the three months ended March 31, 2011, the Company issued stock options in the amounts
and for the periods shown in the following table. The fair value of each option was estimated on
the date of grant using the Black-Scholes option pricing model with the following assumptions:
Three Months | ||||
Ended March 31, | ||||
2011 | ||||
Number of options granted |
559,976 | |||
Weighted average exercise
price of options granted |
$ | 10.15 | ||
Weighted average grant date
fair value of options granted |
$ | 4.97 | ||
Expected term (in years) (1) |
6.25 | |||
Volatility (2) |
47.6 | % | ||
Risk free interest rate (3) |
2.4 | % | ||
Expected annual dividends |
None |
(1) | The expected term was calculated as the average between the vesting term and the contractual term. We used the simplified method discussed in ASC 718-10-S99-1, as we do not have sufficient historical data in order to calculate a more appropriate estimate. | |
(2) | Expected volatility was based on the historical volatility of guideline companies over a preceding period equal to the expected term of the award. | |
(3) | The risk free rate is based on the U.S. Treasury yield curve at the time of grant for periods consistent with the expected term of the options. |
We recognized $1.3 million and $0.4 million in share-based compensation expense related to
stock options and restricted stock awards during the three months ended March, 31, 2011 and 2010,
respectively. As of March 31, 2011, there was approximately $6.3 million of unrecognized
stock-based compensation expense related to unvested restricted common stock and options for common
stock that is expected to be recognized over a weighted average period of 3.4 years.
On January 6, 2011, the Company announced that Mr. James Walburg, the Companys former Chief
Financial Officer, would be retiring effective on January 31, 2011. Mr. Walburgs separation
agreement allowed for the acceleration of his restricted stock as follows: 50% of his restricted
common stock subject to time-based vested on January 10, 2011, 50% of his restricted common stock
subject to time-based will vest on January 10, 2012, and all of his restricted common stock subject
to vesting based on performance measures vested on January 10, 2011. This accelerated vesting
resulted in compensation expense of $0.7 million being recorded during the three months ended March
31, 2011.
9. BUSINESS SEGMENT DATA AND GEOGRAPHICAL INFORMATION
Pursuant to the acquisition of EducationCity on June 9, 2010, the Company has three operating
segments, Study Island, Educationcity Limited (a United Kingdom company), and Educationcity Inc.
(an Illinois company). The Company aggregates the three operating segments to one reportable
segment based on the similar nature of the products, content and technical production processes,
types of customers, methods used to distribute the products, and similar rates of profitability.
The three operating segments offer subscription-based online products that provide
instruction, practice, assessment and productivity tools for teachers and students. The content and
engineering teams operate in a similar
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manner to enhance and maintain the products. The primary customer bases for all three
operating segments are schools. The markets for the U.S. and U.K. are both English-speaking, which
is important from a product marketing and development perspective. The operating segments have
similar rates of profitability.
Geographical areas are North America (which includes operations of the United States and
Canada) and United Kingdom. The following geographical area information includes revenues based on
the physical location of the operations (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Revenue: |
||||||||
North America |
$ | 15,835 | $ | 12,549 | ||||
United Kingdom |
1,468 | | ||||||
$ | 17,303 | $ | 12,549 | |||||
The following geographical area information includes total long-lived assets (which consist of all
non-current assets, other than goodwill, indefinite-lived intangible assets and deferred tax
assets) based on physical location (in thousands):
March 31 | December 31 | |||||||
2011 | 2010 | |||||||
Assets: |
||||||||
North America |
$ | 33,115 | $ | 33,134 | ||||
United Kingdom |
13,942 | 13,791 | ||||||
$ | 47,057 | $ | 46,925 | |||||
10. RELATED-PARTY TRANSACTIONS
The Company purchases equipment from an affiliate of Providence Equity Partners. Equipment
purchases with this supplier totaled $0.3 million and $0.2 million for the three months ended March
31, 2011 and 2010, respectively.
As part of the sale of TeacherWeb to Edline, the Company signed a transition services
agreement with Edline whereby the Company performs certain accounting and administrative functions
related to TeacherWeb for a period that has been subsequently extended until October 31, 2010. During the transition period, certain costs are paid by the Company on
behalf of TeacherWeb, which are billed to and reimbursed by Edline. The Company receives no fee for
the performance of these services. For the three months ended March 31, 2011 and 2010, the Company
paid $0.1 million and $0.3 million, respectively, to TeacherWeb vendors on behalf of Edline, of
which a total of $0.1 million was receivable from Edline as of March 31, 2011, and is recorded in
other current assets on the condensed consolidated balance sheet.
EducationCity U.K. leases office space in Rutland, U.K. which is owned by the pension funds of
two officers and stockholders of the Company. The Company made payments under this lease for $0.1
million for the three months ended March 31, 2011. The Company concluded during purchase
accounting that this lease is a market based lease.
In connection with the purchase of EducationCity, the Company incurred a $5.0 million note
payable to the sellers, payable in equal installments on December 31, 2010 and 2011. Upon the
purchase, the sellers became officers of the Company and stockholders. As of March 31, 2011, the
remaining balance to be paid under that note payable was $2.5 million.
11. SUBSEQUENT EVENTS
On April 21, 2011, in connection with obtaining additional financing from other lenders,
Edline refinanced its debt owed to the Company pursuant to two promissory notes. The principal
amount due under these notes remains $1.9 million, however the notes now bear interest at 12.5% per
annum payable in kind. The interest and principal on these notes receivable are due on June 30,
2016.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion is intended to assist in the understanding of our consolidated
financial position and our results of operations. This discussion should be read in conjunction
with our unaudited condensed consolidated financial statements and the related notes in Item 1 of
this report.
Overview
Archipelago Learning, Inc. (the Company, we, us, or our) is a leading
subscription-based, software-as-a-service (SaaS) provider of education products. We provide
standards-based instruction, practice, assessments, reporting and productivity tools that support
educators efforts to reach students in innovative ways and enhance the performance of students at
a low cost via proprietary web-based platforms. As of March 31, 2011, our product lines, which
include Study Island, EducationCity, Reading Eggs and Northstar Learning, were utilized by over
14.1 million students in approximately 37,600 schools in all 50 states, Washington, D.C., Canada,
and the United Kingdom (U.K.).
We were founded in 2000. In 2001, we launched our first Study Island products in two states.
By 2009, we had developed Study Island products for all 50 states, in the subject areas of reading,
writing, mathematics, social studies and science, and have grown from serving 57 schools in 2001 to
37,600 schools as of March 31, 2011 with our four product lines, Study Island, EducationCity,
Northstar Learning and Reading Eggs. Study Island helps students in K-12 master grade level
academic standards in a fun and engaging manner. We entered the postsecondary educational market
with the launch of Northstar Learning in April 2009, which uses the same web-based platform as our
Study Island products to provide various instruction, assessment and exam preparation content.
In June 2010, we entered the U.K. market with the acquisition of Educationcity Limited
(EducationCity), a leading developer and publisher of
EducationCity.com, an online Pre-K-6
educational content and assessment program for schools in the United Kingdom and United States.
Similar to Study Island, EducationCity maps to standards, combines rigorous content and interactive
animations, fun games, and motivational rewards to drive academic success in a fun and engaging
manner. Unlike Study Island, EducationCity core classroom and individualized instruction is geared
toward the initial teaching phases of academic content. EducationCity helps students learn basic
skills and concepts while Study Island helps assess, reinforce and master this knowledge. When used
in conjunction with one another, EducationCity and Study Island provide a powerful comprehensive
teaching and reinforcement solution to enhance student learning and teacher performance.
Pursuant to the acquisition of EducationCity, we operate as three operating segments, Study
Island (including the Study Island, Northstar Learning and Reading Eggs product lines),
Educationcity Limited (a U.K. company) and Educationcity Inc. (an Illinois company). We aggregate
the three operating segments into one reportable segment based on the similar nature of the
products, content and technical production processes, types of customers, methods used to
distribute the products, and similar rates of profitability. See Note 8 in our condensed
consolidated financial statements for further information on segments and geographic area
disclosures.
In August 2010, we began selling Reading Eggs, an online product focusing on teaching young
children to read. Reading Eggs is sold under a distribution agreement with Blake Publishing, which
requires us to pay a 35% royalty to Blake Publishing for every sale. Beginning in 2011, the Company
will be required to pay a minimum royalty each year of the agreement.
Subscriptions to our Study Island and EducationCity products generate the vast majority of our
revenue. Our products are sold as subscriptions through purchase orders. The average subscription
period for our products is 15 months, and we occasionally sell multi-year subscriptions. We rely
significantly on our ability to secure renewals for subscriptions to our products as well as sales
to new customers. We generally contact schools several months in advance of the expiration of their
subscription, to attempt to secure renewal subscriptions. If a school does not renew its
subscription within six months after its expiration, we categorize it as a lost school, and if a
school subsequently purchases a subscription after this renewal period, we consider it to be a new
subscription.
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Key Legislative Developments that May Impact Our Business and Operations
In the United States, the increased focus on higher academic standards and assessments as a
means to measure educator accountability is largely reflected in legislative efforts such as No
Child Left Behind, the common name for the 2001 reauthorization of the Elementary and Secondary
Education Act, or ESEA. ESEA required all states to have academic standards in place for K-12
students in reading, math and science, and to assess student achievement annually with end of
school year assessments.
The ESEA legislation was initially scheduled for reauthorization in October 2008, but has been
continually extended. In 2010, the Federal administration recommended significant changes to ESEA.
While many politicians believe that the nations primary education law needs to be revised, we
believe this will not happen until the second half of 2011 at the earliest. While uncertainty
continues to surround the substance and timing of ESEA reauthorization, we believe that higher
standards, more rigorous assessments and accountability will remain key components of the revised
ESEA.
In addition, most of our U.S. customers are public schools and school districts that have to
comply with state educational standards. As a result, our sales depend on the availability of
public funds, which have become more limited as many states or districts face budget cuts due to
decreases in their tax bases and rates. State and federal educational funding is primarily funded
through income taxes, and local educational funding is primarily funded through property taxes. As
a result of the ongoing recession, income tax revenue for the 2008 and 2009 tax years has
decreased, which has put pressure on state and federal budgets. However, according to the Nelson
A. Rockefeller Institute of Government, state tax revenues grew by 8% in the fourth quarter of
2010, representing the fourth consecutive quarter that states reported growth in collections on a
year-over-year basis. Despite four consecutive quarters of growth, state tax revenues were still
1% lower in the fourth quarter of 2010 than in the same quarter in 2007.
Also of note, the 2011 U.S. federal budget was passed by Congress during the fourth quarter of
2010, which is the official start date of the 2011 fiscal year. The budget provides a $3 billion
increase in funding for K-12 education programs authorized in ESEA, including $900 million for
School Turnaround Grants. President Obamas 2012 budget proposal includes a 4% increase in K-12
related program spending, including key funding sources that districts and schools use to purchase
instructional materials. However, the Presidents budget plan faces uncertain future as Congress
has proposed reducing fiscal 2011 spending by $100 billion, including $5 billion in education
funds.
In 2010, the U.S. Department of Education implemented its highly publicized Race to the Top
(RttT) competition whereby winning states were awarded funds totaling $3.4 billion in aggregate
for agreeing to implement bold educational reforms. States receiving these RttT funds are expected
to implement educational reforms over the next several years. A requirement for RttT applicants is
to signal their intent to officially adopt the Common Core Standards for K-12 in reading and
mathematics, released in June 2010. As of March 31, 2011, 43 states, the District of Columbia,
American Samoa Islands, Guam, Northern Mariana Islands, Puerto Rico and the U.S. Virgin Islands had
officially adopted the new standards, although adoption of the standards does not bring immediate
change in the classroom. We believe that implementation of the Common Core Standards will be a
long-term process, as states rethink their teacher training, curriculum, instructional materials
and testing. We continue to believe that Common Core Standards implementation will evolve in
different ways across the adopting states and will raise the overall rigor of curriculum and
assessments, but we increasingly believe that the Federal government will not mandate national
standards and assessments.
Study Island products are specifically built from the varying academic and assessment
standards in all 50 states, which we believe differentiates them from the products offered by our
competitors. However, given the uncertainty regarding the Common Core Standards movement, we have
invested both in development of new Common Core products for the 44 adopting states (including the
District of Columbia) as well as continued development of new products and enhancements for
existing state standards.
While the federal legislative efforts and budgetary challenges in schools could present
challenges to our future sales, we believe that we are positioned to perform well in the current
environment for various reasons: (1) we are well aligned with educational reform policies and
initiatives, including the Common Core Standards, (2) we make
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innovation easy as schools shift from print-based solutions to online digital content,
instruction, assessment and data reporting, (3) we have a proven model and track record for
engaging and improving learning outcomes, (4) we are affordable compared to other educational
product offerings and (5) we still have relatively low overall school penetration with room for
growth.
With the acquisition of EducationCity, the U.K. market and industry trends are also of
importance to our business. While the global economic recession has impacted the United Kingdom,
the new government under British Prime Minister, David Cameron, has attempted to protect education,
with the Department for Education budget rising from £35.4 billion to £39 billion over the next
four years. This is the money that goes directly to schools. In addition, teachers will be given
greater freedom from bureaucratic burdens to use their professional judgment to meet the needs of
their pupils. Head teachers will have increased flexibility over their budgets, including through
simpler, fairer and more transparent funding streams.
Results of Operations
Comparison of the Three Months Ended March 31, 2011 and 2010
The following table summarizes our consolidated operating results for the three months ended
March 31 (dollars in thousands):
Change | ||||||||||||||||
2011 | 2010 | Dollars | Percentage | |||||||||||||
Revenue |
$ | 17,303 | $ | 12,549 | $ | 4,754 | 37.9 | % | ||||||||
Cost of revenue |
1,707 | 913 | 794 | 87.0 | % | |||||||||||
Gross profit |
15,596 | 11,636 | 3,960 | 34.0 | % | |||||||||||
Operating expense: |
||||||||||||||||
Sales and marketing |
5,921 | 3,822 | 2,099 | 54.9 | % | |||||||||||
Content development |
1,707 | 1,041 | 666 | 64.0 | % | |||||||||||
General and administrative |
5,453 | 2,789 | 2,664 | 95.5 | % | |||||||||||
Total |
13,081 | 7,652 | 5,429 | 70.9 | % | |||||||||||
Operating income |
2,515 | 3,984 | (1,469 | ) | (36.9 | %) | ||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(1,094 | ) | (770 | ) | (324 | ) | (42.1 | %) | ||||||||
Interest income |
70 | 153 | (83 | ) | (54.2 | %) | ||||||||||
Foreign exchange loss |
(121 | ) | | (121 | ) | ** | ||||||||||
Derivative loss |
| (73 | ) | 73 | ** | |||||||||||
Total |
(1,145 | ) | (690 | ) | (455 | ) | (65.9 | %) | ||||||||
Income before tax |
1,370 | 3,294 | (1,924 | ) | (58.4 | %) | ||||||||||
Provision for income tax |
381 | 1,227 | (846 | ) | (68.9 | %) | ||||||||||
Net income |
$ | 989 | $ | 2,067 | $ | (1,078 | ) | (52.2 | %) | |||||||
** | Percentage not meaningful for analysis. |
Revenue.
We generate revenue from customer subscriptions to standards-based instruction, practice,
assessments and productivity tools; training fees for onsite or online training sessions that are
primarily provided to new customers; and individual buys, which are individual purchases for access
to a product (one subject in a specific state for a specific grade level). Customer subscriptions
provide the vast majority of our revenue.
Our subscription purchases are generally evidenced by a purchase order or other evidence of an
arrangement. We recognize an invoiced sale in the period in which the purchase order or other
evidence of an arrangement is received and the invoice is issued, which may be at a different time
than the commencement of the subscription. Revenue for invoiced sales is deferred and recognized
ratably over the subscription term beginning on the commencement date of the applicable
subscription.
Factors affecting our revenue include: (i) the number of schools, classes or students
purchasing our products; (ii) the term of the subscriptions; (iii) subscription renewals; (iv) the
number of states or geographies in which we offer products; (v) the number of products we offer in
a state or in a geographic region; (vi) the complexity and
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comprehensiveness of applicable standards, which impacts pricing; (vii) the effectiveness of
our regional field-based and inside sales teams; (viii) recognition of revenue in any period from
deferred revenue from subscriptions purchased or renewed during the current and prior periods; (ix)
federal, state and local educational funding levels; and (x) discretionary purchasing funds
available to our customers.
In the United States, seasonal trends associated with school budget years and state testing
calendars also affect the timing of our sales of subscriptions to new and existing customers. As a
result, most new subscriptions and renewals occur in the third quarter because teachers and school
administrators typically make purchases for the new academic year at the beginning of their
districts fiscal year, which is usually July 1. Our fourth quarter has historically produced the
second highest level of new subscriptions and renewals, followed by our second and first quarters.
In the United Kingdom, seasonal trends associated with school budget years affect the timing
of our sales of subscriptions to new and existing customers. As a result, there is a peak in new
subscriptions and renewals late in the first quarter because teachers and school administrators
often make purchases at the end of their fiscal year, which is usually April 5. The fourth quarter
is also typically strong, with some customers working to calendar year budget periods, while third
quarter is weakest due to the U.K. vacation period.
Because revenue from customer subscriptions is deferred over the course of the subscription
period and our customers pay for their subscriptions at the beginning of the subscription period,
this seasonality does not cause our revenue to fluctuate significantly, but does impact our cash
flow.
Revenue for the three months ended March 31, 2011 was $17.3 million, representing an increase
of $4.8 million, or 37.9%, as compared to revenue of $12.5 million for the three months ended March
31, 2010. Subscription and training revenue is recognized over the term of the subscription, which
averages 15 months. Consequently, our revenue in any month is impacted by invoiced sales from
subscriptions purchased or renewed during the current and prior periods. Of this increase, $2.6
million was due to the acquisition of EducationCity. The remaining increase in revenue during the
period is due to increased traction in states newly entered in the prior year, increased products
in our more mature states leading to additional sales to existing customers, our increased focus on
existing customers and renewal efforts, and our sales force expansion.
Pricing for Study Island subscriptions is based on a variety of factors. Study Island
subscriptions are priced on a fixed price per class or a variable price per school based on the
number of students per grade using the products. In addition, subscriptions are priced on a per
subject matter basis with discounts given if all of the subjects for a given grade are purchased.
Subscription prices also vary by state based on the number, complexity and comprehensiveness of the
applicable standards. Our Study Island products are specifically built from the varying assessment
standards in all 50 states, which we believe differentiates us from our competitors. For
EducationCity, schools and/or districts (local authorities) pay a fixed annual subscription fee for
each subject.
The following table sets forth information regarding our invoiced sales as well as other
metrics that impact our revenue for the three months ended March 31 (dollars in thousands):
2011 | 2010 | |||||||
Invoiced sales: |
||||||||
New customers |
$ | 3,917 | $ | 3,503 | ||||
Existing customers |
11,002 | 6,733 | ||||||
Other sales |
479 | 334 | ||||||
Total |
15,398 | 10,570 | ||||||
Royalties on invoiced sales |
(111 | ) | | |||||
Change in deferred revenue |
2,016 | 1,979 | ||||||
Revenue |
$ | 17,303 | $ | 12,549 | ||||
Other metrics: |
||||||||
U.S. schools using our products |
28,400 | 21,705 | ||||||
U.K. schools using our products |
9,200 | | ||||||
U.S. products available |
2,280 | 1,249 | ||||||
U.K. products available |
87 | | ||||||
States |
50 | 50 |
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We present invoiced sales data to provide a supplemental measure of our operating performance.
We believe the various invoiced sales metrics enable investors to evaluate our sales performance in
isolation and on a consistent basis without the effects of revenue deferral and revenue recognition
from sales in prior periods. In addition, invoiced sales to new customers and existing customers
and invoiced other sales provide investors with important information regarding the source of
orders for our products and services and our sales performance in a particular period. Invoiced
sales are not recognized under accounting principles generally accepted in the United States, or
GAAP, and should not be used an as indicator of, or an alternative to, revenue and deferred
revenue. Invoiced sales metrics have significant limitations as analytical tools because they do
not take into account the requirement to provide the applicable product or service over the
subscription period and they do not match the recognition of revenue with the associated cost of
revenue. Reconciliation is provided in the table above between invoiced sales and revenue, the
closest GAAP measure to invoiced sales.
Due to purchase accounting for the acquisition of EducationCity, we do not recognize the full
amounts paid by customers for acquired subscriptions prior to the acquisition. Consequently, the
deferred revenue balance at the date of acquisition was reduced from $15.6 million to $9.9 million.
The purchase accounting adjustment reduced our revenues by $0.7 million for the three months ended
March 31, 2011.
As of March 31, 2011, approximately 28,400 schools used our U.S. products and approximately
9,200 schools used our U.K. products. A school is considered to be using our products if it has an
active subscription for any or all of the products available to it. The number of schools using our
products will increase for sales to new schools and will decrease if schools do not renew their
subscriptions. We generally contact schools several months in advance of the expiration of their
subscription to attempt to secure renewal subscriptions. If a school does not renew its
subscription within six months after its expiration, we categorize it as a lost school. If the
school subsequently purchases a subscription to our products after this renewal period, we consider
it to be a new subscription.
Cost of Revenue.
Cost of revenue consists of the costs to host and make available our products and services to
our customers. A significant portion of the cost of revenue includes salaries and related expense
for our engineering employees and contractors who maintain our servers and technical equipment and
who work on our web-based hosted platform. Other costs include facility costs for our web platform
servers and routers, network monitoring costs, depreciation of network assets and amortization of
the technical development intangible assets.
Cost of revenue for the three months ended March 31, 2011 increased by $0.8 million, or 87.0%,
to $1.7 million from $0.9 million for the three months ended March 31, 2010. Of this increase, $0.5
million was due to the acquisition of EducationCity. The remainder of the increase in cost of
revenue was primarily attributable to increased costs for the Companys disaster recovery site.
Sales and Marketing Expense.
Our sales and marketing expense consists primarily of salaries, commissions and related
expense for personnel in our inside and field sales teams, marketing, customer service, training
and account management. Commissions are earned when sales are invoiced to customers. Other costs
include marketing costs, travel and amortization of customer relationship intangible assets.
Marketing expense consists of direct mail, email prospecting, pay per click advertising, search
engine optimization, printed material, marketing research, and trade shows. Marketing expense
generally increases as our sales efforts increase, both in new and existing markets. Our marketing
efforts are related to the launch of new product offerings, the introduction of our products and
services in new states and geographic regions, and opportunities within a selected market
associated with specific events such as timing for the standardized testing in a particular state
and upcoming trade shows.
Sales and marketing expense for the three months ended March 31, 2011 increased by $2.1
million, or 54.9%, to $5.9 million from $3.8 million for the three months ended March 31, 2010. Of
this increase, $1.9 million was due to the acquisition of EducationCity. The remainder of the
increase was primarily attributable to increases in salaries and related costs resulting from
increased headcount and annual salary increases.
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Content Development Expense.
Our content development expense primarily consists of salaries and related expense for our
content development employees, who are responsible for writing the questions for our Study Island,
Northstar Learning and EducationCity products, outsourced content writing costs, and amortization
of our program content intangible assets.
Content development expense for the three months ended March 31, 2011 increased by $0.7
million, or 64.0%, to $1.7 million from $1.0 million for the three months ended March 31, 2010. Of
this increase, $0.4 million was attributable to the acquisition of EducationCity. The remainder of
this increase was primarily attributable to increases in salaries and related costs of $0.4 million
related to increased headcount and annual salary increases and increased outsourced content writing
costs, primarily related to development of our new SAT and ACT products and to Northstar Learning.
General and Administrative Expense.
Our general and administrative expense includes salaries and related expense for our
executive, accounting, and other administrative employees, professional services, rent, insurance,
travel and other corporate expense.
General and administrative expense for the three months ended March 31, 2011 increased by $2.7
million, or 95.5%, to $5.5 million from $2.8 million for the three months ended March 31, 2010. Of
this increase, $1.0 million was related to the acquisition of EducationCity. The remainder of the
increase was primarily due to a $0.7 million increase in stock-based compensation expense from the
accelerated vesting of Mr. Walburgs restricted stock (see Note 7), a $0.4 million increase in
salary expense due to increased headcount, a $0.2 million increase in contract labor costs, and a
$0.1 million increase in corporate legal cost.
Other Income (Expense).
Our other income (expense) includes interest expense, interest income and derivative and
foreign currency losses.
Other income (expense) totaled $1.1 million of net expense for the three months ended March
31, 2011, which was an increase of expense of $0.4 million, or 65.9%, compared to net expense of
$0.7 million for the three months ended March 31, 2010. The increase was primarily due to increased
interest expense of $0.3 million during the period due to our additional loan on our term loan and
draw on our revolving credit facility and an increase of $0.1 million in foreign exchange loss,
which was partially offset by $0.1 million of increased interest income from our note receivable
from Edline and a $0.1 million reduction in the loss from derivatives.
Interest expense includes interest on our $70.0 million term loan and $10.0 million revolving
credit facility entered into in November 2007, interest on our $15.0 million supplemental term loan
entered into in June 2010, and amortization of debt financing costs. No amounts were outstanding
under the revolving credit facility during the three months ended March 31, 2011 or 2010. The
amounts borrowed under our term loan bear interest at rates based upon either a base rate or LIBOR,
plus an applicable margin.
Interest income includes income on our cash and cash equivalent investments and from our note
receivable from Edline.
Derivative loss included changes in the fair value and realized interest income and expense on
our interest rate swap, which was required by the terms of our credit facility and was part of our
overall risk management strategy. We entered into the swap arrangement in December 2007 with an
initial notional amount of $45.5 million. In June 2009, the notional amount of the interest rate
swap decreased to $40.5 million and continued to decrease in periodic amounts to a notional amount
of $30.5 million at the December 21, 2010 termination date. We swapped a floating rate payment
based on the three-month LIBOR for a fixed rate of 4.035% in order to minimize the variability in
expected future cash flow due to interest rate movements on our LIBOR-based variable rate debt. We
did not designate our interest rate swap as a cash flow hedge. The Company did not hold any
derivative positions at March 31, 2011.
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The foreign currency loss was primarily related to payments of intercompany transactions
between EducationCity in the United States and the United Kingdom.
Provision for Income Tax.
Our provision for income tax is comprised of federal, foreign, state and local taxes based on
our income in the appropriate jurisdictions. Upon our acquisition of EducationCity, we became a
taxpayer in the United Kingdom for the taxable income of Educationcity Limited. We recognized tax
expense using an effective rate of 27.8% for the three months ended March 31, 2011 as compared to
37.2% for the three months ended March 31, 2010. The effective tax rate for March 31, 2011
decreased due to a one-time tax benefit related to the decrease in the statutory tax rate in the
United Kingdom.
Liquidity and Capital Resources
Our primary cash requirements include the payment of our operating expense, interest and
principal payments on our debt, and capital expenditures. We do not anticipate paying any dividends
on our capital stock for the foreseeable future. We may also incur unexpected costs and operating
expenses related to any unforeseen disruptions to our servers, the loss of key personnel or changes
in the credit markets and interest rates, which could increase our immediate cash requirements or
otherwise impact our liquidity.
We finance our operations primarily through cash flow from operations. Several factors outside
of our control may impact our cash flow. For example, we believe that there is substantial
uncertainty around the substance and timing of the ESEA reauthorization. The terms of its
extension, reauthorization or new legislation that would replace it may materially impact the
demand for our products. If new legislation lessens the importance of standards, assessments and
accountability, or introduces national standards or assessments that would make it easier for
competitors to enter our markets, demand for our products may materially decrease, and we may
experience lower cash flows, which would affect our liquidity. In addition, if state and local
budget cuts in education continue, our public school and school district customers may lack funding
to buy our products which may result in fewer sales or require us to lower prices for our Study
Island products, either of which would have a negative impact on our cash flows.
Our primary sources of liquidity are our cash and cash equivalent balances as well as
availability under our revolving credit facility. As of March 31, 2011, we had cash and cash
equivalents of $33.6 million and $20.0 million of availability under our revolving credit facility.
Our total indebtedness was $75.5 million at March 31, 2011, including our additional term loan of
$15.0 million in connection with the acquisition of EducationCity and amended credit agreement. We
believe that our consistent cash flow and our $20.0 million availability under our revolving credit
facility, combined with our low capital expenditure costs will provide us with sufficient capital
to continue to grow our business. There can be no assurance, however, that cash resources will be
available to us in an amount sufficient to enable us to service our indebtedness or to fund our
other liquidity needs. Our ability to meet our debt service obligations and other capital
requirements, including capital expenditures and acquisitions, will depend upon our future results
of operations and our ability to obtain additional debt or equity capital and our ability to stay
in compliance with our financial covenants, which, in turn, will be subject to general economic,
financial, business, competitive, legislative, regulatory and other conditions, many of which are
beyond our control. We may also need to obtain additional funds to finance acquisitions, which may
be in the form of additional debt or equity. Although we believe we have sufficient liquidity under
our revolving credit facility, as discussed above, under extreme market conditions there can be no
assurance that such funds would be available or sufficient, and in such a case, we may not be able
to successfully obtain additional financing on favorable terms, or at all.
Cash Flows
Our net consolidated cash flows consist of the following, for the three months ended March 31
(in thousands):
2011 | 2010 | |||||||
Provided by (used in): | ||||||||
Operating activities |
$ | 2,085 | $ | 2,380 | ||||
Investing activities |
(1,020 | ) | (330 | ) | ||||
Financing activities |
(192 | ) | (1,635 | ) |
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Cash Flows from Operating Activities
Net cash provided by operating activities was $2.1 million for the three months ended March
31, 2011, compared to $2.4 million during the three months ended March 31, 2010. This $0.3 million
decrease was primarily due to a decrease in net income of $1.0 million offset by increases for
non-cash items.
Cash Flows from Investing Activities
Net cash used for investing activities for the three months ended March 31, 2011 included $1.0
million for the purchase of property and equipment. Net cash used for investing activities for the
three months ended March 31, 2010 was $0.3 million for the purchase of property and equipment.
Cash Flows from Financing Activities
Net cash provided by financing activities in the three months ended March 31, 2011 included
$0.2 million in principal payments on our term loan. Net cash used for financing activities in the
three months ended March 31, 2010 was $1.6 million, including $1.5 million for the payment of
offering costs accrued at December 31, 2009 and $0.2 million in principal payments on our term
loan.
Credit Facility
The Companys wholly-owned subsidiary, Study Island, LLC
(the Borrower) is the borrower under a
credit facility with General Electric Capital Corporation, as agent, composed of a $70.0 million
term loan and a $10.0 million revolving credit facility and the Companys wholly owned subsidiary,
AL Midco, LLC (AL Midco), is the guarantor under such credit facility. The term loan bears interest rates based
upon either a base rate or LIBOR (with a floor of 1.25%) plus an applicable margin (3.75% as of
March 31, 2011 and 3.25% as of March 31, 2010, in each case for a LIBOR-based term loan) determined
based on the Borrowers leverage ratio. Amounts under the revolving credit facility can be borrowed
and repaid, from time to time, at the Borrowers option, subject to the pro forma compliance with
certain financial covenants. If amounts are borrowed against the revolving credit facility in the
future, those amounts would bear interest based upon either a base rate or LIBOR (with a floor of
1.25%) plus an applicable margin determined based on the Borrowers leverage ratio. The credit
facility also provides for a letter of credit sublimit of $2.0 million.
The Credit Agreement has been amended from time to time, most recently in June 2010, to permit the acquisition
of EducationCity and to add a $15.0 million supplemental term loan and an additional $10.0 million
to the revolving credit facility, both of which were drawn in order to finance the acquisition. The
Borrower subsequently repaid the $10.0 million revolving credit facility during the quarter ended
September 30, 2010.
The Credit Agreement is secured on a first-priority basis by security interests (subject to
permitted liens) in substantially all tangible and intangible assets owned by the Borrower and AL
Midco. In addition, any future domestic subsidiaries of the Borrower will be required (subject to
certain exceptions) to guarantee the Credit Agreement and grant liens on substantially all of its
assets to secure such guarantee.
The Credit Agreement requires the Borrower to maintain certain financial ratios, including a
leverage ratio (based on the ratio of consolidated indebtedness, net of cash and cash equivalents
subject to control agreements, to consolidated EBITDA, defined in the Credit Agreement as
consolidated net income adjusted by adding back interest expense, taxes, depreciation expenses,
amortization expenses and certain other non-recurring or otherwise permitted fees and charges), an
interest coverage ratio (based on the ratio of consolidated EBITDA to consolidated interest
expense, as defined in the Credit Agreement) and a fixed charge coverage ratio (based on the ratio
of consolidated EBITDA to consolidated fixed charges, as defined in the Credit Agreement).
The Credit Agreement contains certain affirmative and negative covenants applicable to AL
Midco, the Borrower and the Borrowers subsidiaries that, among other things, limit the incurrence
of additional indebtedness,
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liens on property, sale and leaseback transactions, investments, loans and advances, merger or
consolidation, asset sales, acquisitions, dividends, transactions with affiliates, prepayments of
subordinated indebtedness, modifications of the Borrowers organizational documents and
restrictions on the Borrowers subsidiaries. The Credit Agreement contains events of default that
are customary for similar credit facilities, including a cross-default provision with respect to
any other indebtedness and an event of default that would be triggered by a change of control, as
defined in the Credit Agreement. As of March 31, 2011, the Borrower was in compliance with all
covenants. The Credit Agreement is secured on a first-priority basis by security interests (subject
to permitted liens) in substantially all of the assets of the Borrower and AL Midco.
The Borrower has the right to optionally prepay its borrowings under the Credit Agreement,
subject to the procedures set forth in the Credit Agreement. The Borrower may be required to make
prepayments on its borrowings under the Credit Agreement if it receives proceeds as a result of
certain asset sales, additional debt issuances, or events of loss. In addition, a mandatory
prepayment of borrowings under the Credit Agreement is required each fiscal year in an amount equal
to (i) 75% of excess cash flow (as defined by the Credit Agreement) if the leverage ratio as of the
last day of the fiscal year is greater than 4.00 to 1.00, (ii) 50% of excess cash flow if the
leverage ratio as of the last day of the fiscal year is less than or equal to 4.00 to 1.00 but
greater than 3.25 to 1.00, or (iii) 25% of excess cash flow if the leverage ratio as of the last
day of the fiscal year is less than or equal to 3.25 to 1.00. No mandatory prepayment is required
if the leverage ratio is less than or equal to 2.50 to 1.00 on the last day of the fiscal year. The
Borrower was not required to make a mandatory prepayment related to the year ended December 31,
2010.
As of March 31, 2011, $75.6 million of borrowings were outstanding under the term loans and no
amounts were outstanding under the revolving credit facility. As of December 31, 2010, $71.8
million of borrowings were outstanding under the term loans and no amounts were outstanding under
the revolving credit facility. For the three months ended March 31, 2011 and 2010, the weighted
average interest rate under the term loans was 5.00% and 4.56%, respectively, before giving effect
to the Borrowers interest rate swap. The rate on the interest rate swap was the difference between
the Borrowers fixed rate of 4.035% and the floating rate of three-month LIBOR. The interest rate
swap expired in December 2010.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our discussion and analysis of our consolidated financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared in accordance with
GAAP. The preparation of these financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenue and expense, and related
disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates
including those related to long-lived intangible and tangible assets, goodwill and stock-based
compensation. We base our estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. All intercompany balances and transactions
have been eliminated in consolidation.
The accounting policies we believe to be most critical to understanding our results of
operations and financial condition and that require complex and subjective management judgments are
discussed in our annual report on Form 10-K. We have not adopted any changes to such policies
during the three months ended March 31, 2011.
Recently Issued Accounting Standards
Adopted
In September 2009, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic 605) Multiple-Deliverable
Revenue Arrangements. The new standard modifies the revenue recognition guidance for arrangements
that involve the delivery of multiple elements to a customer at different times as part of a single
revenue generating transaction. The new standard also expands
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the disclosure requirements for multiple deliverable revenue arrangements. The new standard
will be effective for fiscal years beginning on or after June 15, 2010, with earlier adoption
permitted. The adoption of this new standard did not have a material impact on the financial
position, results of operations and cash flows of the Company.
In September 2009, the FASB also issued ASU No. 2009 14 Software (Topic 985) Certain
Revenue Arrangements That Include Software Elements. This standard removes tangible products from
the scope of software revenue recognition guidance and also provides guidance on determining
whether software deliverables in an arrangement that includes a tangible product, such as embedded
software, are within the scope of the software revenue guidance. The new standard will be
effective for fiscal years beginning on or after June 15, 2010, with earlier adoption permitted.
The adoption of this new standard did not have a material impact on the financial position, results
of operations and cash flows of the Company.
In December 2010, the FASB issued ASU 2010-29 which will change the disclosures of
supplementary pro forma information for business combinations. The new standard clarifies that if a
public entity completes a business combination and presents comparative financial statements, the
entity should disclose revenue and earnings of the combined entity as though the business
combination that occurred during the current year had occurred as of the beginning of the
comparable prior annual reporting period only. The amendments also expand the supplemental pro
forma disclosures under ASC topic 805 to include a description of the nature and amount of
material, nonrecurring pro forma adjustments directly attributable to the business combination
included in the reported pro forma revenue and earnings. ASU 2010-29 is effective for any business
combination we complete on or after January 1, 2011. The revised disclosure requirements will not
affect the Companys financial position, results of operations or cash flows.
Item 3. | Qualitative and Quantitative Disclosures about Market Risk |
We are exposed to market risks in the normal course of business due to changes in interest
rates and foreign currency exchange rates. Our exposures to market risk have not changed materially
since December 31, 2010. For quantitative and qualitative disclosures about market risk, see item
7A, Quantitative and Qualitative Disclosures about Market Risk, of our annual report on Form 10-K
for the year ended December 31, 2010.
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act),
as of the end of the period covered by this quarterly report, we have evaluated, with the
participation of our principal executive officer and principal financial officer, the effectiveness
of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Exchange Act). Based on their evaluation of these disclosure controls and procedures,
our chief executive officer and chief financial officer have concluded that the disclosure controls
and procedures were effective as of the date of such evaluation.
Changes in Internal Control over Financial Reporting
During the quarter ended March 31, 2011, there have been no changes in our internal control
over financial reporting identified in connection with the evaluation required by paragraph (d) of
Rule 13a-15 or Rule 15d-15 under the Exchange Act that has materially affected, or is reasonably
likely to materially affect our internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. | Legal Proceedings |
We currently are not subject to any material litigation or regulatory proceedings.
Item 1A. | Risk Factors |
There have been no material changes from the risk factors disclosed in Part I, Item 1A of our
Annual Report on Form 10-K for the year ended December 31, 2010.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
We have not sold any unregistered securities or purchased any of our equity securities during
the three months ended March 31, 2011.
Item 3. | Defaults Upon Senior Securities |
None.
Item 5. | Other Information |
None.
Item 6. | Exhibits |
See Index to Exhibits following the signature page of this Quarterly Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Dallas, State of Texas, on the 10th day of May, 2011.
ARCHIPELAGO LEARNING, INC.
By: | /s/ Tim McEwen | |||
Tim McEwen | ||||
Chairman, President and Chief Executive Officer | ||||
By: | /s/ Mark S. Dubrow | |||
Mark S. Dubrow | ||||
Executive Vice President, Chief Financial Officer and Secretary |
||||
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EXHIBIT INDEX
Exhibit | ||
Number | Description of Exhibits | |
4.1
|
Restricted Stock Unit Agreement dated as of February 24, 2011 between Archipelago Learning, Inc. and Timothy McEwen. (Filed as Exhibit 4.1 to Current Report on Form 8-K (File No. 001-34555) filed on February 28, 2011) | |
10.1
|
Employment Agreement between Archipelago Learning, Inc. and Mark S. Dubrow, dated as of January 3, 2011 (filed as Exhibit 10.1 to Current Report on Form 8-K (File No. 001-34555) filed on January 7, 2011) | |
10.2
|
Separation Agreement between Archipelago Learning, Inc. and James B. Walburg, dated as of January 7, 2011 (filed as Exhibit 10.1 to Current Report on Form 8-K/1 (File No. 001-34555) filed on January 10, 2011) | |
10.3
|
Lease Agreement between Archipelago Learning, LLC and Gaedeke Holdings II, Ltd. (filed as Exhibit 10.3 to Quarterly Report on Form 10-Q filed on May 12, 2011). | |
10.4
|
Service Agreement by and between Richard Whalley and Educationcity Limited dated as of March 1, 2011 (filed as Exhibit 10.1 to Current Report on Form 8-K (File No. 001-34555) filed on March 7, 2011) | |
10.5
|
Amendment, dated as of March 3, 2011, to the Service Agreement by and between Matthew Drakard and Educationcity Limited (filed as Exhibit 10.2 to Current Report on Form 8-K (File No. 001-34555) filed on March 7, 2011) | |
10.6
|
Amendment, dated as of March 4, 2011, to the Service Agreement by and between Simon Booley and Educationcity Limited (filed as Exhibit 10.2 to Current Report on Form 8-K (File No. 001-34555) filed on March 7, 2011) | |
10.7
|
Employment Agreement, dated as of March 15, 2011, between Archipelago Learning, LLC and Donna Regenbaum (filed as Exhibit 10.1 to Current Report on Form 8-K (File No. 001-34555) filed on March 18, 2011 | |
10.8*
|
Amended and Restated Employment Agreement between Archipelago Learning, Inc. and Mark Dubrow, dated as of April 19, 2011 | |
11.1*
|
Statement re computation of per share earnings (incorporated by reference to Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report). | |
31.1*
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2*
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1*
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Filed herewith. |
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