UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011

OR

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

For the transition period from                      to                     .

Commission File Number: 001-34575

Cambium Learning Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware		27-0587428
(State or Other Jurisdiction of		(I.R.S. Employer Identification No.)
Incorporation or Organization)
17855 North Dallas Parkway, Suite 400, Dallas,		75287
Texas
(Address of Principal Executive Offices)		(Zip Code)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See 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 o		Non-accelerated filer þ		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 12b-2 of the Exchange Act). Yes o No þ

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of October 31, 2011 was 49,517,529.

 

 

TABLE OF CONTENTS

		Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements			1
Condensed Consolidated Statements of Operations (Unaudited) for the Three Months and Nine Months Ended September 30, 2011 and September 30, 2010			1
Condensed Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010			2
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2011 and September 30, 2010			4
Notes to the Condensed Consolidated Financial Statements (Unaudited)			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			32
Item 4. Controls and Procedures			32
PART II OTHER INFORMATION
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 6. Exhibits			34
SIGNATURE PAGE			35
EXHIBITS			36
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

Part I. Financial Information

Item 1.		Financial Statements.

Cambium Learning Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2011				2010				2011				2010
Net revenues		$	52,906			$	56,607			$	140,792			$	132,730
Cost of revenues:
Cost of revenues			16,318				18,021				45,104				44,550
Amortization expense			6,962				7,096				20,424				21,083
Total cost of revenues			23,280				25,117				65,528				65,633
Research and development expense			2,199				2,543				7,093				8,116
Sales and marketing expense			11,817				11,966				35,594				34,199
General and administrative expense			4,795				5,608				16,136				19,151
Shipping and handling costs			844				1,122				1,995				2,834
Depreciation and amortization expense			1,858				2,085				5,342				7,022
Embezzlement and related expense (recoveries)			(56	)			21				(2,452	)			51
Total costs and expenses			44,737				48,462				129,236				137,006
Income (loss) before interest, other income (expense) and income taxes			8,169				8,145				11,556				(4,276	)
Net interest expense			(4,950	)			(4,478	)			(14,237	)			(13,460	)
Other income, net			—				271				365				176
Income (loss) before income taxes			3,219				3,938				(2,316	)			(17,560	)
Income tax benefit (expense)			(155	)			8				(570	)			(111	)
Net income (loss)		$	3,064			$	3,946			$	(2,886	)		$	(17,671	)
Net income (loss) per common share:
Basic net income (loss) per common share		$	0.07			$	0.09			$	(0.06	)		$	(0.40	)
Diluted net income (loss) per common share		$	0.07			$	0.09			$	(0.06	)		$	(0.40	)
Average number of common shares and equivalents outstanding:
Basic			46,743				44,324				44,911				44,322
Diluted			47,130				44,395				44,911				44,322

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

Cambium Learning Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

		September 30,				December 31,
		2011				2010
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	53,812			$	11,831
Accounts receivable, net			30,972				31,627
Inventory			20,750				22,015
Deferred tax assets			3,703				3,703
Restricted assets, current			1,392				3,064
Assets held for sale			2,727				—
Other current assets			4,497				3,937
Total current assets			117,853				76,177
Property, equipment and software at cost			40,340				32,944
Accumulated depreciation and amortization			(11,420	)			(7,838	)
Property, equipment and software, net			28,920				25,106
Goodwill			151,915				151,915
Acquired curriculum and technology intangibles, net			25,538				33,063
Acquired publishing rights, net			29,822				38,707
Other intangible assets, net			18,910				22,132
Pre-publication costs, net			9,610				7,834
Restricted assets, less current portion			11,407				12,641
Other assets			22,177				15,487
Total assets		$	416,152			$	383,062

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

Cambium Learning Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share data)

		September 30,				December 31,
		2011				2010
		(unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	—			$	1,280
Current portion of capital lease obligations			823				378
Accounts payable			1,865				6,465
Contingent value rights, current			—				1,623
Accrued expenses			21,129				22,888
Deferred revenue, current			38,686				34,140
Total current liabilities			62,503				66,774
Long-term liabilities:
Long-term debt, less current portion			174,124				150,850
Capital lease obligations, less current portion			12,378				12,317
Deferred revenue, less current portion			4,793				3,416
Contingent value rights, less current portion			5,896				5,746
Other liabilities			19,238				19,947
Total long-term liabilities			216,429				192,276
Commitments and contingencies (See Note 14)
Stockholders’ equity:
Preferred stock ($.001 par value, 15,000 shares authorized, zero shares issued and outstanding at September 30, 2011 and December 31, 2010)			—				—
Common stock ($.001 par value, 150,000 shares authorized, 51,162 and 43,869 shares issued, and 49,518 and 43,869 shares outstanding at September 30, 2011 and December 31, 2010, respectively)			51				44
Capital surplus			280,905				259,887
Accumulated deficit			(138,104	)			(135,218	)
Treasury stock at cost (1,644 and zero shares at September 30, 2011 and December 31, 2010, respectively)			(4,931	)			—
Other comprehensive income (loss):
Pension and postretirement plans			(702	)			(702	)
Net unrealized gain on securities			1				1
Accumulated other comprehensive income (loss)			(701	)			(701	)
Total stockholders’ equity			137,220				124,012
Total liabilities and stockholders’ equity		$	416,152			$	383,062

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

Cambium Learning Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

		Nine Months Ended
		September 30,				September 30,
		2011				2010
Operating activities:
Net loss		$	(2,886	)		$	(17,671	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization expense			25,766				28,105
Gain from recovery of property held for sale			(2,727	)			—
Non-cash interest expense			1,078				1,585
Gain on derivative instruments			—				(992	)
Change in fair value of contingent value rights obligation			520				100
Loss on disposal of assets			—				38
Stock-based compensation and expense			953				778
Deferred income taxes			—				(606	)
Changes in operating assets and liabilities:
Accounts receivable, net			655				(14,946	)
Inventory			1,265				(3,782	)
Other current assets			(560	)			863
Other assets			316				(12,009	)
Restricted assets			2,906				8,573
Accounts payable			(4,600	)			3,046
Accrued expenses			(1,759	)			(2,977	)
Deferred revenue			5,923				9,120
Other long-term liabilities			(637	)			(1,638	)
Net cash provided by (used in) operating activities			26,213				(2,413	)
Investing activities:
Cash paid for acquisitions			(1,993	)			(1,106	)
Expenditures for property, equipment, software and pre-publication costs			(10,559	)			(8,843	)
Net cash used in investing activities			(12,552	)			(9,949	)
Financing activities:
Proceeds from debt			174,024				—
Repayment of debt			(152,130	)			(960	)
Deferred financing costs			(7,984	)			—
Principal payments under capital lease obligations			(659	)			(355	)
Borrowings under revolving credit agreement			—				19,000
Payment of revolving credit facility			—				(12,800	)
Stock repurchases			(4,931	)			—
Proceeds from issuance of common stock for subscription rights			20,000				—
Return of pre-merger member contributions			—				(30	)
Net cash provided by financing activities			28,320				4,855
Increase (decrease) in cash and cash equivalents			41,981				(7,507	)
Cash and cash equivalents, beginning of period			11,831				13,345
Cash and cash equivalents, end of period		$	53,812			$	5,838
Non-cash acquisition through capital leases		$	1,165			$	—

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

Cambium Learning Group, Inc. and Subsidiaries

Note 1 — Basis of Presentation

Cambium Learning Group, Inc. Cambium Learning Group, Inc. (the “Company”) was incorporated under the laws of the State of Delaware in June 2009. On December 8, 2009, the Company completed the mergers of Voyager Learning Company (“VLCY”) and VSS-Cambium Holdings II Corp. (“Cambium”) into two of its wholly-owned subsidiaries, resulting in VLCY and Cambium becoming wholly-owned subsidiaries of the Company. Following the completion of the mergers, all of the outstanding capital stock of VLCY’s operating subsidiaries, Voyager Expanded Learning, Inc. and LAZEL, Inc., was transferred to Cambium Learning, Inc., Cambium’s operating subsidiary (“Cambium Learning”).

The transaction was accounted for as an “acquisition” of VLCY by Cambium, as that term is used under United States Generally Accepted Accounting Principles (“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.

Presentation. The Condensed Consolidated Financial Statements include the accounts of the Company and are unaudited. The condensed balance sheet as of December 31, 2010 has been derived from audited financial statements. All intercompany transactions are eliminated.

As permitted under the Securities and Exchange Commission (“SEC”) requirements for interim reporting, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted. The Company believes that these financial statements include all necessary and recurring adjustments for the fair presentation of the interim period results. These financial statements should be read in conjunction with the Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010. Due to seasonality, the results of operations for the three and nine month periods ended September 30, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011.

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

Nature of Operations. The Company operates in three business segments: Voyager, a comprehensive intervention business; Sopris, a supplemental solutions education business; and Cambium Learning Technologies, a technology-based education business.

Note 2 — Accounts Receivable

Accounts receivable are stated net of allowances for doubtful accounts and estimated sales returns. The allowance for doubtful accounts and estimated sales returns totaled $1.1 million at September 30, 2011, compared to $0.6 million at December 31, 2010. The allowance for doubtful accounts is based on a review of the outstanding balances and historical collection experience. The reserve for sales returns is based on historical rates of return as well as other factors that in the Company’s judgment could reasonably be expected to cause sales returns to differ from historical experience.

Note 3 — Stock-Based Compensation and Expense

The total amount of pre-tax expense for stock-based compensation recognized in the quarters ended September 30, 2011 and 2010 and the nine month periods ended September 30, 2011 and 2010 was allocated as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
(in thousands)		2011				2010				2011				2010
Cost of revenues		$	13			$	14			$	43			$	44
Research and development expense			23				30				88				93
Sales and marketing expense			32				34				110				102
General and administrative expense			281				167				712				539
Total		$	349			$	245			$	953			$	778

On February 1, 2011 and August 11, 2011, the Company granted 212,500 and 10,000 options, respectively, under the Cambium Learning Group, Inc. 2009 Equity Incentive Plan (the “Plan”) with a total grant date fair value, net of forecasted forfeitures, of $0.2 million. Seventy-five percent of these options have a per-share exercise price equal to $4.50 and twenty-five percent of these options have an exercise price equal to $6.50. These options vest equally over a four year service period and the term of the options is ten years from the date of grant.

The following assumptions were used in the Black-Scholes option-pricing model to estimate the fair value of these awards:

		2011				2010
Expected stock volatility			35.00	%			35.00	%
Risk-free interest rate			1.41% - 2.50	%			2.40% - 2.87	%
Expected years until exercise			6.25				6.25
Dividend yield			0.00	%			0.00	%

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

During the quarter ended September 30, 2011, 9,822 of the options granted on January 27, 2010 were forfeited. During the nine months ended September 30, 2011, 160,546 of the options granted on January 27, 2010, 1,507 of the options granted on May 25, 2010, and 10,000 of the options granted on February 1, 2011 were forfeited.

Restricted common stock awards of 53,755 shares were issued during the nine months ended September 30, 2011 in connection with the Company’s Board of Directors compensation program. The restrictions on the common stock awards will lapse on the one-year anniversary of the grant date or upon a change in control (as defined in the Plan) of the Company. Additionally, restricted common stock awards of 1,000 shares were issued during the nine months ended September 30, 2011. The restrictions on the common stock awards will lapse equally over a four-year period on the anniversary of the grant date or upon a change in control (as defined in the Plan) of the Company. Each of the restricted common stock awards issued was valued based on the Company’s closing stock price on the date of grant.

On May 17, 2011, as previously announced by the Company, Frederick J. Schwab tendered his resignation as a director of the Company. Mr. Schwab’s decision not to stand for reelection and submit his resignation was not the result of any disagreement with the Company on any matter, including those relating to the Company’s operations, policies or practices. As a result of this resignation, 8,771 of the restricted shares issued during the first nine months of 2011, which had been issued to Mr. Schwab, were cancelled.

During the first quarter of 2010, 10,000 shares of the Company’s stock were issued as restricted stock awards.

Note 4 — Net Income (Loss) per Common Share

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

		Three Months Ended September 30,								Nine Months Ended September 30,
(Shares in thousands)		2011				2010				2011				2010
Basic			46,743				44,324				44,911				44,322
Dilutive effect of awards			387				71				—				—
Diluted			47,130				44,395				44,911				44,322
Antidilutive securities:
Options			3,808				3,770				3,808				3,770
Warrants			—				—				141				72
Subscription rights			—				6,722				6,657				5,739

The subscription rights were exercised on August 11, 2011 and are included in basic shares outstanding from that time, however, they continue to have a potentially dilutive impact for the portion for the period they remained outstanding and unexercised.

Note 5 — Fair Value Measurements

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

•

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

•

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

•

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

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

As of September 30, 2011, financial instruments include $53.8 million of cash and cash equivalents, restricted assets of $12.8 million, collateral investments of $2.0 million, $174.1 million of senior secured notes, $0.4 million of warrants, assets held for sale of $2.7 million, and $5.9 million in contingent value rights (or “CVRs”) issued as part of the VLCY merger consideration. As of December 31, 2010, financial instruments included $11.8 million of cash and cash equivalents, restricted assets of $15.7 million, collateral investments of $2.0 million, the $95.4 million senior secured credit facility, $56.7 million in senior unsecured notes, $0.4 million of warrants, and $7.4 million in CVRs. The fair market values of cash equivalents and restricted assets are equal to their carrying value, as these investments are recorded based on quoted market prices and/or other market data for the same or comparable instruments and transactions as of the end of the reporting period. The fair values of the properties held for sale were determined by an independent appraisal conducted by a licensed realtor based on the values of similar properties in the area. These properties were acquired by the Company as a result of its recovery efforts in connection with the employee embezzlement matter described in Note 17 below.

As of September 30, 2011, the fair value of the senior secured notes was $168.0 million based on quoted market prices in active markets for these debt instruments when traded as assets.

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

						Fair Value at Reporting Date Using
						Quoted Prices in												Year-to-Date
						Active Markets for				Significant Other				Significant				Total
(in thousands)		As of September 30,				Identical Assets				Observable Inputs				Unobservable Inputs				Gains
Description		2011				(Level 1)				(Level 2)				(Level 3)				(Losses)
Restricted Assets:
Money Market		$	12,799			$	12,799			$	—			$	—			$	—
Collateral Investments:
Money Market			901				901				—				—				—
Certificate of Deposit			1,065				1,065				—				—				—
Warrant			421				—				421				—				71
Assets held for sale			2,727				—				2,727				—				—
CVRs			5,896				—				—				5,896				(520	)
						Fair Value at Reporting Date Using
						Quoted Prices in								Significant				Year-to-Date
						Active Markets for				Significant Other				Unobservable				Total
(in thousands)		As of December 31,				Identical Assets				Observable Inputs				Inputs				Gains
Description		2010				(Level 1)				(Level 2)				(Level 3)				(Losses)
Restricted Assets:
Money Market		$	15,705			$	15,705			$	—			$	—			$	—
Collateral Investments:
Money Market			901				901				—				—				—
Certificate of Deposit			1,063				1,063				—				—				—
Warrant			360				—				360				—				23
Interest rate swap			—				—				—				—				992
CVRs			7,369				—				—				7,369				1,124

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

In accordance with the provisions in the accounting guidance for intangibles — goodwill and other, the Company’s goodwill balance of $151.9 million is tested annually for impairment. The most recent annual test was performed in the fourth quarter of 2010. In the first step of the annual impairment test for fiscal 2010, the fair market value of each reporting unit was determined using an income approach and was dependent on multiple assumptions and estimates, including future cash flow projections with a terminal value multiple and the discount rate used to determine the expected present value of the estimated future cash flows. Future cash flow projections were based on management’s best estimates of economic and market conditions over the projected period, including industry fundamentals such as the state of education funding, revenue growth rates, future costs and operating margins, working capital needs, capital and other expenditures, and tax rates. The discount rate applied to the future cash flows was a weighted-average cost of capital and took into consideration market and industry conditions, returns for comparable companies, the rate of return an outside investor would expect to earn, and other relevant factors. Based on the significant unobservable inputs used in this analysis, this valuation was considered a Level 3 valuation based on the fair value hierarchy described above. The first step of impairment testing for fiscal 2010 showed that the fair value of each reporting unit exceeded its carrying value by at least 10%; therefore, no second step of testing was required and no impairment was indicated. As the Company determined that no impairment indicators were present in the three and nine months ended September 30, 2011, no impairment analysis was conducted during the period.

During the nine month period ended September 30, 2011, revenues for the Voyager segment decreased $4.8 million, or 5.6%, as compared to the same period for 2010. Although the Voyager segment has seen an improved cost structure and stronger sales of services, it has experienced significant pressure on product sales. The pressure on Voyager segment product sales is expected to continue into the fourth quarter of 2011. Business visibility has been challenging concerning funding availability and depending on the magnitude and duration of this trend, there is a reasonable expectation that certain assumptions and estimates, including cash flow projections, used for the upcoming 2011 annual goodwill impairment analysis could be unfavorably impacted. Therefore, the Company has determined that there is a reasonable expectation that a goodwill impairment related to the Voyager segment may be recognized in the fourth quarter. The Company intends to complete its goodwill impairment analysis for all reporting units during the fourth quarter at its annual testing date as of December 1, 2011. The magnitude and duration of the product sales pressure the Voyager segment is experiencing is unknown at this time. Therefore, it is not possible at this time to determine whether a future goodwill impairment charge will be incurred or, if it is, the dollar value or significance of such a charge. Goodwill for the Voyager segment totals $76.1 million at September 30, 2011. At the most recent goodwill impairment testing date of December 1, 2010, the calculated fair value of the Voyager segment exceeded its carrying value by 16%.

The fair value of the liability for the CVRs is determined using a probability weighted cash flow analysis which takes into consideration the likelihood, amount and timing of cash flows of each element of the pool of assets and liabilities included in the CVR. The determination of fair value of the CVRs involves significant assumptions and estimates, which are reviewed at each quarterly reporting date. As of September 30, 2011, a fair value of $5.9 million has been recorded as a liability for the remaining CVR payments. The ultimate value of the CVRs is not known at this time; however, it is not expected to be more than $10 million and could be as low as the $3.1 million already distributed. Future changes in the estimate of the fair value of the CVRs will impact results of operations and could be material.

The first and second CVR payment dates were in September 2010 and June 2011, with $1.1 million and $2.0 million, respectively, distributed to the escrow agent at those times for distribution to holders of the CVRs. The next scheduled distribution, if any, will be made no later than October 2013 and relates to a potential tax indemnity obligation. Additionally, as described in Note 14 below, any amounts due to CVR holders as a result of refunds received related to the Michigan tax payment will be distributed upon the final resolution of this agreed contingency.

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

		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		CVRs
		(In thousands)
		Estimated Fair Value				Loss from Changes				Estimated Fair Value
Components of CVR Liability:		as of December 31, 2010				in Estimated CVR Liability				as of September 30, 2011
Tax refunds received before closing of the merger		$	1,583			$	—			$	1,583
Other specified tax refunds			4,501				296				4,797
Tax indemnity obligation			1,717				—				1,717
Legal receivable			2,400				—				2,400
Michigan state tax liability			(1,040	)			—				(1,040	)
Other specified tax related liabilities			(132	)			79				(53	)
Costs incurred to collect tax refunds and by stockholders’ representative			(554	)			145				(409	)
Estimated fair value of CVR liability			8,475				520				8,995
Payments to holders of CVRs			1,106								3,099
Remaining estimated CVR liability		$	7,369							$	5,896

As of September 30, 2011, restricted assets in an escrow account for the benefit of the CVRs were $3.0 million, with activity as detailed in the table below. The escrow account includes $3.0 million for a potential tax indemnity obligation, which, if such obligation is not triggered, will benefit the CVRs by $1.9 million with the remainder reverting back to the Company as unrestricted cash.

		CVR Escrow Trust
		(In thousands)
Balance as of December 31, 2010		$	4,179
Tax refunds received			1,053
Payments to holders of CVRs			(1,993	)
Costs incurred to collect tax refunds and by stockholders’ representative			(238	)
Balance as of September 30, 2011			3,001

Note 6 — Comprehensive Income (Loss)

The Company recorded no other comprehensive income or loss for the three and nine month periods ended September 30, 2011 and 2010. Therefore, comprehensive income (loss) is equal to the net income (loss) for these periods.

Note 7 — Other Current Assets

Other current assets at September 30, 2011 and December 31, 2010 consisted of the following:

		As of
		September 30,				December 31,
(in thousands)		2011				2010
Deferred costs		$	2,869			$	2,163
Prepaid expenses			1,628				1,463
Tax receivables			—				249
Other current assets			—				62
Total		$	4,497			$	3,937

Note 8 — Other Assets

Other assets at September 30, 2011 and December 31, 2010 consisted of the following:

		As of
		September 30,				December 31,
(in thousands)		2011				2010
Tax receivables		$	10,438			$	11,168
Deferred financing costs			8,104				1,542
Collateral investments			1,966				1,964
Other			1,669				813
Total		$	22,177			$	15,487

Note 9 — Accrued Expenses

Accrued expenses at September 30, 2011 and December 31, 2010 consisted of the following:

		As of
		September 30,				December 31,
(in thousands)		2011				2010
Salaries, bonuses and benefits		$	10,039			$	10,183
Accrued royalties			2,431				3,220
Accrued interest			2,219				—
Pension and post-retirement medical benefits			1,209				1,209
Deferred compensation			134				525
Other			5,097				7,751
Total		$	21,129			$	22,888

Note 10 — Other Liabilities

Other liabilities at September 30, 2011 and December 31, 2010 consisted of the following:

		As of
		September 30,				December 31,
(in thousands)		2011				2010
Pension and post-retirement medical benefits, long-term portion		$	10,355			$	10,847
Long-term deferred tax liability			4,529				4,529
Long-term income tax payable			817				847
Long-term deferred compensation			539				613
Other			2,998				3,111
Total		$	19,238			$	19,947

Note 11 — Pension Plan

The net pension costs of the Company’s defined benefit pension plan were comprised solely of interest costs and totaled $0.1 million for the three month periods ended September 30, 2011 and 2010 and $0.4 million for the nine month periods ended September 30, 2011 and 2010.

Note 12 — Restructuring

As a result of the merger with VLCY on December 8, 2009, the Company has acted upon plans to reduce its combined work force and has closed its Dallas, Texas distribution facility and transferred all inventory to its distribution facility in Frederick, Colorado. The following table summarizes the amounts incurred in connection with the restructuring plan:

		Total Amount				Total Incurred as				Incurred in Nine				Incurred in Year
		Expected to				of September				Months Ended				Ended December
(in thousands)		be Incurred				30, 2011				September 30, 2011				31, 2010
One-time termination benefits		$	1,260			$	1,260			$	(26	)		$	743
Warehouse move costs			570				570				—				570
		$	1,830			$	1,830			$	(26	)		$	1,313

The change in the accrual for one-time termination benefits, which does not impact a segment and so is included in unallocated shared services, for the nine months ended September 30, 2011 is as follows:

		One-Time
		Termination
(in thousands)		Benefits
Balance as of December 31, 2010		$	85
Accrual changes			(26	)
Payments made			(59	)
Balance as of September 30, 2011		$	—

Note 13 — Uncertain Tax Positions

The Company recognizes the financial statement impacts of a tax return position when it is more likely than not, based on technical merits, that the position will ultimately be sustained. For tax positions that meet this recognition threshold, the Company applies judgment, taking into account applicable tax laws, experience managing tax audits and relevant GAAP, to determine the amount of tax benefits to recognize in our financial statements. For each position, the difference between the benefit realized on the Company’s tax return and the benefit reflected in its financial statements is recorded on its condensed consolidated balance sheet as an unrecognized tax benefit (“UTB”). The Company updates its UTBs at each financial statement date to reflect the impacts of audit settlements and other resolution of audit issues, expiration of statutes of limitation, developments in tax law and ongoing discussions with tax authorities. The balance of UTBs was $7.1 million and $7.2 million at September 30, 2011 and December 31, 2010, respectively. The decrease was due primarily to the expiration of statutes of limitation.

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

Note 14 — Commitments and Contingencies

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

As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2010, the Company is involved in a tax litigation matter related to a Michigan state tax issue. The final resolution of the tax litigation or potential settlement could result in a refund ranging from zero to approximately $10.4 million, plus statutory interest, of which fifty percent (50%), net of expenses incurred, would be payable to the holders of the CVRs. If the Company’s position is not ultimately upheld, the Company could incur up to $10.4 million of indemnification expense in future periods on its Statements of Operations, partially offset by any reduction to the CVRs liability. Management believes it is more likely than not that the Company’s position will be upheld and a $10.4 million tax receivable for the expected refund is recorded in other assets on the Condensed Consolidated Balance Sheets as of September 30, 2011. A hearing on the Company’s motion for summary judgment is scheduled for the fourth quarter of 2011. Any decision reached at this hearing may be appealed by either party.

From time to time, the Company may enter into firm purchase commitments for printed materials included in inventory which the Company expects to use in the ordinary course of business. These commitments are typically for terms less than one year and require the Company to buy minimum quantities of materials with specific delivery dates at a fixed price over the term. As of September 30, 2011, these open purchase commitments totaled $1.1 million.

The Company has letters of credit outstanding as of September 30, 2011 in the amount of $2.9 million to support workers’ compensation insurance coverage, certain credit card programs, the build-to-suit lease, and performance bonds for certain contracts. The Company maintains a $1.1 million certificate of deposit as collateral for the workers’ compensation insurance and credit card program letters of credit and for Automated Clearinghouse (ACH) programs. The Company also maintains a $0.9 million money market fund investment as collateral for a travel card program. The certificate of deposit and money market fund investment are recorded in other assets.

Note 15 — Long-Term Debt

Long-term debt consists of the following at September 30, 2011 and December 31, 2010:

		September 30,				December 31,
(in thousands)		2011				2010
$175.0 million of 9.75% senior secured notes due February 15, 2017, interest payable semiannually		$	175,000			$	—
Less: Unamortized discount			(876	)			—
Total 9.75% senior secured notes			174,124				—
$128.0 million of floating rate senior secured notes due April 11, 2013, interest payable quarterly			—				95,408
$64.2 million of 13.75% senior unsecured notes due April 11, 2014, interest payable quarterly			—				56,722
			174,124				152,130
Less: Current portion of long-term debt			—				(1,280	)
Total long-term debt		$	174,124			$	150,850

On February 17, 2011, the Company closed an offering of $175 million aggregate principal amount of 9.75% senior secured notes due 2017 (the “Notes”) and entered into a new asset-based revolving credit facility with potential for up to $40 million in borrowing capacity. The Company used a portion of the net proceeds from the offering to repay in full outstanding indebtedness under the Company’s senior facility and senior unsecured notes that existed as of yearend 2010 and to pay related fees and expenses. Total fees incurred in the closing of the Notes and revolving credit facility totaled $9.1 million, including $1.75 million paid to an affiliate of Veronis Suhler Stevenson (“VSS”) pursuant to the consulting fee agreement between the Company and VSS. Deferred financing costs are capitalized in other assets in the condensed consolidated balance sheets, net of accumulated amortization, and are to be amortized over the term of the related debt using the effective interest method. Unamortized capitalized deferred financing costs at September 30, 2011 were $8.1 million.

The offering was a private placement exempt from the registration requirements under the Securities Act of 1933 (the “Securities Act”). However, pursuant to a registration rights agreement entered into with the offering, in May 2011 the Company filed with the SEC a registration statement under the Securities Act (the “Exchange Offer Registration Statement”), relating to an offer to exchange the Notes (the “Exchange Offer”) for new notes (the “Exchange Notes”) on terms substantially identical to the Notes, except that the Exchange Notes would not be subject to the same restrictions on transfer. The Exchange Offer Registration Statement was declared effective in August 2011 and the Exchange Offer was completed in September 2011. All of the outstanding Notes were exchanged for the Exchange Notes upon closing of the Exchange Offer.

Interest on the Notes will accrue at a rate of 9.75% per annum from the date of original issuance and will be payable semi-annually in arrears on each February 15 and August 15, commencing on August 15, 2011, to the holders of record of the Notes on the immediately preceding February 1 and August 1. No principal repayments are due until the maturity date of the Notes.

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

New Credit Facility (ABL Facility). On February 17, 2011, the Company’s wholly owned subsidiary, Cambium Learning, Inc. (together with its wholly owned subsidiaries, the “ABL Credit Parties”), entered into a new credit facility (the “ABL Facility”) pursuant to a Loan and Security Agreement (the “ABL Loan Agreement”), by and among the ABL Credit Parties, Harris N.A., individually and as Agent (the “Agent”) for any ABL Lender (as hereinafter defined) which is or becomes a party to said ABL Loan Agreement, certain other lenders party thereto (together with Harris N.A. in its capacity as a lender, the “ABL Lenders”), Barclays Bank PLC, individually and as Collateral Agent, and BMO Capital Markets and Barclays Capital, as Joint Lead Arrangers and Joint Book Runners. The ABL Facility consists of a four-year $40.0 million revolving credit facility, which includes a $5.0 million subfacility for swing line loans and a $5.0 million subfacility for letters of credit. In addition, the ABL Facility provides that the ABL Credit Parties may increase the aggregate principal amount of the ABL Facility by up to an additional $20.0 million, subject to the consent of the Agent (whose consent shall not be unreasonably withheld) and subject to the satisfaction of certain other conditions.

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

As of September 30, 2011, the balances of accounts receivable and inventory collateralizing the ABL Facility were $31.0 million and $20.8 million, respectively. As of September 30, 2011, the Company had a borrowing base under the ABL Loan Agreement of up to $31.8 million.

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

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

Note 16 — Segment Reporting

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

Voyager:

Voyager offers reading, math and professional development programs targeted towards the at-risk and special education student populations. Voyager materials, offered online and via print, are tailored to meet the needs of these students and differ considerably from traditional instructional materials in design, approach and intensity. Lessons are based on scientific research and are carefully designed to effectively and efficiently address each of the strategies and skills necessary to improve the abilities of struggling students.

Sopris:

Sopris focuses on providing a diverse, yet comprehensive, collection of printed and electronic supplemental education materials to complement core programs and to provide intense remediation aimed at specific skill deficits. When compared to products offered by the Company’s other business units, Sopris products tend to be more narrowly-tailored and target a smaller, more specific audience.

Cambium Learning Technologies:

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

Other:

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

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

										Cambium
										Learning
		Voyager				Sopris				Technologies				Other				Consolidated
Quarter Ended September 30, 2011
Net revenues		$	31,080			$	9,556			$	12,270			$	—			$	52,906
Cost of revenues			11,745				3,276				1,217				80				16,318
Amortization			—				—				—				6,962				6,962
Total cost of revenues			11,745				3,276				1,217				7,042				23,280
Other operating expenses			8,169				2,564				5,538				3,384				19,655
Embezzlement and related expense (recoveries)			—				—				—				(56	)			(56	)
Depreciation and amortization			—				—				—				1,858				1,858
Net interest expense			—				—				—				4,950				4,950
Other income, net			—				—				—				—				—
Income tax expense			—				—				—				155				155
Segment net income (loss)		$	11,166			$	3,716			$	5,515			$	(17,333	)		$	3,064
Quarter Ended September 30, 2010
Net revenues			37,376				9,587				9,644				—				56,607
Cost of revenues			13,526				3,171				1,157				167				18,021
Amortization			—				—				—				7,096				7,096
Total cost of revenues			13,526				3,171				1,157				7,263				25,117
Other operating expenses			9,040				2,420				5,138				4,641				21,239
Embezzlement and related expense			—				—				—				21				21
Depreciation and amortization			—				—				—				2,085				2,085
Net interest expense			—				—				—				4,478				4,478
Other income, net			—				—				—				(271	)			(271	)
Income tax benefit			—				—				—				(8	)			(8	)
Segment net income (loss)		$	14,810			$	3,996			$	3,349			$	(18,209	)		$	3,946

										Cambium
										Learning
		Voyager				Sopris				Technologies				Other				Consolidated
Nine Months Ended September 30, 2011
Net revenues		$	81,026			$	22,111			$	37,655			$	—			$	140,792
Cost of revenues			33,685				7,514				3,672				233				45,104
Amortization			—				—				—				20,424				20,424
Total cost of revenues			33,685				7,514				3,672				20,657				65,528
Other operating expenses			24,989				7,474				16,510				11,845				60,818
Embezzlement and related expense (recoveries)			—				—				—				(2,452	)			(2,452	)
Depreciation and amortization			—				—				—				5,342				5,342
Net interest expense			—				—				—				14,237				14,237
Other income, net			—				—				—				(365	)			(365	)
Income tax expense			—				—				—				570				570
Segment net income (loss)		$	22,352			$	7,123			$	17,473			$	(49,834	)		$	(2,886	)
Nine Months Ended September 30, 2010
Net revenues		$	85,848			$	19,898			$	26,984			$	—			$	132,730
Cost of revenues			32,498				6,919				3,775				1,358				44,550
Amortization			—				—				—				21,083				21,083
Total cost of revenues			32,498				6,919				3,775				22,441				65,633
Other operating expenses			27,749				6,329				13,643				16,579				64,300
Embezzlement and related expense			—				—				—				51				51
Depreciation and amortization			—				—				—				7,022				7,022
Net interest expense			—				—				—				13,460				13,460
Other income, net			—				—				—				(176	)			(176	)
Income tax expense			—				—				—				111				111
Segment net income (loss)		$	25,601			$	6,650			$	9,566			$	(59,488	)		$	(17,671	)

Note 17 — Embezzlement

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

During the nine months ended September 30, 2011, the Company received cash recoveries of $0.5 million and title to two properties purchased by the former employee with embezzled funds that had an appraised fair value of approximately $2.6 million, net of estimated selling costs. These recoveries were recorded as reductions to Embezzlement and related expense (recoveries) in the condensed consolidated statements of operations and the properties were recorded in the condensed consolidated balance sheets as Assets held for sale. During the second and third quarters of 2011, a majority of the costs to prepare the properties for listing were incurred which resulted in an increase in the value of the Assets held for sale in the condensed consolidated balance sheets as the remaining costs to sell are now comprised solely of real estate agent commissions.

Ongoing expenses incurred related to the Company’s recovery efforts totaled $0.2 million during the first nine months of 2011.

Warrants to purchase 36,531 shares of the Company’s common stock were issued to VSS-Cambium Holdings III, LLC as a result of the cash recoveries during the first quarter of 2011, in accordance with the terms of such warrants. Upon the sale of the recovered properties the Company will be required to issue additional warrants based on the amount of cash received, net of related expenses. The number of warrants to be issued will equal 0.45 multiplied by the quotient of the net cash recovery divided by $6.50. The Company will be obligated to issue these warrants upon the sale of the properties; therefore, an estimated liability of $0.5 million as of September 30, 2011 was recorded in Accrued expenses in the condensed consolidated balance sheets.

The charges incurred in the three and nine months ended September 30, 2010 relate solely to the Company’s ongoing recovery efforts.

Note 18 — Equity Transactions

On May 20, 2011, the Company entered into a stock purchase agreement with a group of investors. The transaction was settled the same day with the Company purchasing 1,643,507 shares for a total cost of $4.9 million. Upon repurchase these treasury shares were no longer registered under the Securities Act. These shares are recorded to the treasury stock line as an offset to common stock and additional paid in capital.

On August 11, 2011, VSS-Cambium Holdings III, LLC (the “Stockholder”), an affiliate of VSS, exercised its subscription rights to purchase 7,246,376 shares of common stock of the Company, at a purchase price of $2.76 per share, or an aggregate purchase price of $20.0 million. The purchase price per share was equal to 90% of the volume-weighted average price of the common stock measured over the ten-trading-day period immediately preceding the issuance and sale of the shares of common stock, in accordance with the terms of the Stockholders Agreement, dated as of December 8, 2009, and amended on April 12, 2011 (the “Stockholders Agreement”), by and among the Company, the Stockholder and Vowel Representative, LLC, as Stockholders’ Representative, entered into in connection with the mergers of VLCY and Cambium completed on December 8, 2009.

The shares of common stock issued upon exercise of the subscription rights have not been registered under the Securities Act and may not be offered or sold in the United States in the absence of an effective registration statement or an exemption from such registration requirements, and appropriate restrictive legends were affixed to the certificate representing the common stock purchased by the Stockholder.

Note 19 — Subsidiary Guarantors

The following tables present condensed consolidated financial information as of September 30, 2011 and December 31, 2010 and for the three and nine month periods ended September 30, 2011 and 2010 for: (a) the Company without its consolidated subsidiaries (the “Parent Company”); (b) on a combined basis, the guarantors of the Notes, which include Cambium Learning, Inc., Cambium Education, Inc., LAZEL, Inc., and Kurzweil/IntelliTools, Inc. (the “Subsidiary Guarantors”); and (c) Voyager Learning Company (the “Non-Guarantor Subsidiary”). Separate financial statements of the Subsidiary Guarantors are not presented because the guarantors are unconditionally, jointly, and severally liable under the guarantees, and the Company believes such separate statements or disclosures would not be useful to investors.

Condensed Consolidated Statement of Operations
Three Months Ended September 30, 2011
(In thousands)
(unaudited)

		Parent				Subsidiary				Non-Guarantor
		Company				Guarantors				Subsidiary				Eliminations				Consolidated
Net revenues		$	—			$	52,906			$	—			$	—			$	52,906
Total costs and expenses			427				44,128				182				—				44,737
Income (loss) before interest, other income (expense) and income taxes			(427	)			8,778				(182	)			—				8,169
Net interest expense			—				(4,941	)			(9	)			—				(4,950	)
Other income (expense), net			—				—				—				—				—
Income tax expense			—				(155	)			—				—				(155	)
Net income (loss)		$	(427	)		$	3,682			$	(191	)		$	—			$	3,064

Condensed Consolidated Statement of Operations
Three Months Ended September 30, 2010
(In thousands)
(unaudited)

		Parent				Subsidiary				Non-Guarantor
		Company				Guarantors				Subsidiary				Eliminations				Consolidated
Net revenues		$	—			$	56,607			$	—			$	—			$	56,607
Total costs and expenses			106				47,996				360				—				48,462
Income (loss) before interest, other income (expense) and income taxes			(106	)			8,611				(360	)			—				8,145
Net interest expense			—				(4,472	)			(6	)			—				(4,478	)
Other income, net			—				271				—				—				271
Income tax  benefit			—				8				—				—				8
Net income (loss)		$	(106	)		$	4,418			$	(366	)		$	—			$	3,946