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EXCEL - IDEA: XBRL DOCUMENT - CAMBIUM LEARNING GROUP, INC.Financial_Report.xls
EX-31 - EXHIBIT 31.1 - CAMBIUM LEARNING GROUP, INC.abcd-ex31_201406306.htm
EX-32 - EXHIBIT 32.2 - CAMBIUM LEARNING GROUP, INC.abcd-ex32_201406309.htm
EX-32 - EXHIBIT 32.1 - CAMBIUM LEARNING GROUP, INC.abcd-ex32_201406308.htm
EX-31 - EXHIBIT 31.2 - CAMBIUM LEARNING GROUP, INC.abcd-ex31_201406307.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended June 30, 2014

OR

¨

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

For the transition period from                  to                 .

Commission File Number: 001-34575

 

Cambium Learning Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

   

27-0587428

(State or Other Jurisdiction of
Incorporation or Organization)

   

(I.R.S. Employer
Identification No.)

   

   

   

17855 North Dallas Parkway, Suite 400, Dallas, Texas

   

75287

(Address of Principal Executive Offices)

   

(Zip Code)

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

 

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

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

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

 

Large accelerated filer

   

¨

      

Accelerated filer

   

¨

 

 

 

 

 

 

 

Non-accelerated filer

   

¨  (Do not check if a smaller reporting company)

      

 

Smaller reporting company

   

x

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

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of July 31, 2014 was 44,909,873.

 

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

Page

PART I

 

FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements

3

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) for the Three and Six Months Ended June 30, 2014 and June 30, 2013

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2014 (Unaudited) and December 31, 2013

4

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2014 and June 30, 2013

6

 

 

 

 

 

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

7

 

 

 

 

Item 2.

 

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

18

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

30

 

 

 

 

Item 4.

 

Controls and Procedures

30

 

 

 

 

PART II

 

OTHER INFORMATION

32

 

 

 

 

Item 1.

 

Legal Proceedings

32

 

 

 

 

Item 1A.

 

Risk Factors

32

 

 

 

 

Item 6.

 

Exhibits

33

 

 

 

 

SIGNATURE PAGE

34

 

 

EXHIBITS

35

 

 

 

2


 

Item 1. Financial Statements.

Cambium Learning Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands, except per share data)

(Unaudited)

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net revenues

$

36,243

 

 

$

42,786

 

 

$

67,323

 

 

$

74,215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

9,930

 

 

 

12,647

 

 

 

18,941

 

 

 

24,050

 

Amortization expense

 

4,438

 

 

 

4,281

 

 

 

8,518

 

 

 

7,988

 

Total cost of revenues

 

14,368

 

 

 

16,928

 

 

 

27,459

 

 

 

32,038

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expense

 

2,598

 

 

 

2,528

 

 

 

5,345

 

 

 

4,859

 

Sales and marketing expense

 

10,083

 

 

 

11,715

 

 

 

20,665

 

 

 

22,048

 

General and administrative expense

 

4,457

 

 

 

4,880

 

 

 

9,637

 

 

 

11,673

 

Shipping and handling costs

 

404

 

 

 

399

 

 

 

600

 

 

 

698

 

Depreciation and amortization expense

 

1,036

 

 

 

1,220

 

 

 

2,100

 

 

 

2,436

 

Embezzlement-related expense

 

 

 

 

115

 

 

 

 

 

 

115

 

Total costs and expenses

 

32,946

 

 

 

37,785

 

 

 

65,806

 

 

 

73,867

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before interest, other income (expense)

   and income taxes

 

3,297

 

 

 

5,001

 

 

 

1,517

 

 

 

348

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest expense

 

(4,420

)

 

 

(4,679

)

 

 

(9,158

)

 

 

(9,255

)

Loss on extinguishment of debt

 

(357

)

 

 

 

 

 

(570

)

 

 

 

Other income, net

 

215

 

 

 

211

 

 

 

430

 

 

 

430

 

Income (loss) before income taxes

 

(1,265

)

 

 

533

 

 

 

(7,781

)

 

 

(8,477

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

(23

)

 

 

(102

)

 

 

(94

)

 

 

(170

)

Net income (loss)

$

(1,288

)

 

$

431

 

 

$

(7,875

)

 

$

(8,647

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net pension loss

 

21

 

 

 

30

 

 

 

43

 

 

 

60

 

Comprehensive income (loss)

$

(1,267

)

 

$

461

 

 

$

(7,832

)

 

$

(8,587

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.03

)

 

$

0.01

 

 

$

(0.17

)

 

$

(0.18

)

Diluted

$

(0.03

)

 

$

0.01

 

 

$

(0.17

)

 

$

(0.18

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average number of common shares and equivalents

   outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

45,641

 

 

 

47,357

 

 

 

45,663

 

 

 

47,377

 

Diluted

 

45,641

 

 

 

47,637

 

 

 

45,663

 

 

 

47,377

 

 

 

 

 

 

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

 

 

 

3


 

Cambium Learning Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

 

 

As of

 

 

June 30,

2014

 

 

December 31,

2013

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

29,674

 

 

$

67,993

 

Accounts receivable, net

 

16,929

 

 

 

15,767

 

Inventory

 

7,468

 

 

 

9,221

 

Restricted assets, current

 

1,462

 

 

 

1,343

 

Other current assets

 

6,545

 

 

 

6,873

 

Total current assets

 

62,078

 

 

 

101,197

 

 

 

 

 

 

 

 

 

Property, equipment and software at cost

 

47,307

 

 

 

43,224

 

Accumulated depreciation and amortization

 

(26,936

)

 

 

(22,909

)

Property, equipment and software, net

 

20,371

 

 

 

20,315

 

 

 

 

 

 

 

 

 

Goodwill

 

47,842

 

 

 

47,842

 

Acquired curriculum and technology intangibles, net

 

6,924

 

 

 

8,719

 

Acquired publishing rights, net

 

3,734

 

 

 

4,705

 

Other intangible assets, net

 

5,242

 

 

 

6,251

 

Pre-publication costs, net

 

14,514

 

 

 

13,401

 

Restricted assets, less current portion

 

4,749

 

 

 

5,492

 

Other assets

 

9,746

 

 

 

8,288

 

Total assets

$

175,200

 

 

$

216,210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

4


 

Cambium Learning Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

 

 

As of

 

 

June 30,

2014

 

 

December 31,

2013

 

 

(Unaudited)

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Capital lease obligations, current

$

1,046

 

 

$

995

 

Accounts payable

 

2,192

 

 

 

1,301

 

Accrued expenses

 

17,743

 

 

 

25,279

 

Deferred revenue, current

 

37,791

 

 

 

53,532

 

Total current liabilities

 

58,772

 

 

 

81,107

 

 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

 

Long-term debt

 

164,596

 

 

 

174,491

 

Capital lease obligations, less current portion

 

1,488

 

 

 

2,019

 

Deferred revenue, less current portion

 

8,393

 

 

 

7,829

 

Other liabilities

 

12,982

 

 

 

13,954

 

Total long-term liabilities

 

187,459

 

 

 

198,293

 

 

 

 

 

 

 

 

 

Commitments and contingencies (See Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity (deficit):

 

 

 

 

 

 

 

Preferred stock ($.001 par value, 15,000 shares authorized, zero

   shares issued and outstanding at June 30, 2014 and

   December 31, 2013)

 

 

 

 

 

Common stock ($.001 par value, 150,000 shares authorized,

   51,244 and 51,208 shares issued, and  44,910 and 45,042 shares

   outstanding at June 30, 2014 and December 31, 2013,

   respectively)

 

51

 

 

 

51

 

Capital surplus

 

283,965

 

 

 

283,673

 

Accumulated deficit

 

(340,570

)

 

 

(332,695

)

Treasury stock at cost (6,334 and 6,166 shares at June 30, 2014

   and December 31, 2013, respectively)

 

(12,448

)

 

 

(12,147

)

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

Pension and postretirement plans

 

(2,029

)

 

 

(2,072

)

Accumulated other comprehensive loss

 

(2,029

)

 

 

(2,072

)

Total stockholders' equity (deficit)

 

(71,031

)

 

 

(63,190

)

Total liabilities and stockholders' equity (deficit)

$

175,200

 

 

$

216,210

 

 

 

 

 

 

 

 

 

 

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

 

 

 

5


 

Cambium Learning Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Six Months Ended June 30,

 

 

2014

 

 

2013

 

Operating activities:

 

 

 

 

 

 

 

Net loss

$

(7,875

)

 

$

(8,647

)

Adjustments to reconcile net loss

   to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization expense

 

10,618

 

 

 

10,424

 

Loss on extinguishment of debt

 

570

 

 

 

 

Loss from recovery of property held for sale

 

 

 

 

119

 

Gain on sale of IntelliTools product line

 

(289

)

 

 

 

Amortization of note discount and deferred financing

   costs

 

798

 

 

 

865

 

Stock-based compensation and expense

 

248

 

 

 

442

 

Michigan tax refund received

 

 

 

 

12,342

 

Other

 

51

 

 

 

174

 

 

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

(1,162

)

 

 

(3,087

)

Inventory

 

1,492

 

 

 

4,590

 

Other current assets

 

328

 

 

 

862

 

Other assets

 

(2,575

)

 

 

(493

)

Restricted assets

 

624

 

 

 

3,684

 

Accounts payable

 

891

 

 

 

(653

)

Accrued expenses

 

(3,536

)

 

 

512

 

Deferred revenue

 

(15,136

)

 

 

(9,529

)

Other long-term liabilities

 

(1,329

)

 

 

(645

)

Net cash provided by (used in) operating activities

 

(16,282

)

 

 

10,960

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

Cash paid for acquisitions

 

(3,600

)

 

 

 

Cash paid for contingent value rights obligation related to

   acquisition

 

 

 

 

(7,673

)

Expenditures for property, equipment, software and

   pre-publication costs

 

(8,360

)

 

 

(7,974

)

Proceeds from sale of IntelliTools product line

 

806

 

 

 

 

Net cash used in investing activities

 

(11,154

)

 

 

(15,647

)

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

Principal payments under capital lease obligations

 

(480

)

 

 

(702

)

Repayment of debt

 

(10,145

)

 

 

 

Proceeds from exercise of stock options

 

43

 

 

 

 

Share repurchases

 

(301

)

 

 

(244

)

Net cash used in financing activities

 

(10,883

)

 

 

(946

)

Decrease in cash and cash equivalents

 

(38,319

)

 

 

(5,633

)

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

67,993

 

 

 

51,904

 

Cash and cash equivalents, end of period

$

29,674

 

 

$

46,271

 

 

 

 

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

 

6


 

Cambium Learning Group, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1 — Basis of Presentation

Presentation. The Condensed Consolidated Financial Statements include the accounts of Cambium Learning Group, Inc. and its subsidiaries (the “Company”) and are unaudited. The condensed consolidated balance sheets as of December 31, 2013 have been derived from audited financial statements. All intercompany transactions have been 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 generally accepted accounting principles in the United States of America (“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 thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. Due to seasonality, the results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for any future interim period or for the year ending December 31, 2014.

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 is a leading educational solutions and services company that is committed to helping all students reach their full potential by providing evidence-based solutions and expert professional services to empower educators and raise the achievement levels of all students. The Company’s brands include: Voyager Sopris Learning, Learning A–Z, ExploreLearning and Kurzweil Education. Together, these business units provide best-in-class intervention and supplemental instructional materials; gold-standard professional development and school-improvement services; breakthrough technology solutions for online learning and professional support; valid and reliable assessments; and proven materials to support a positive and safe school environment.

These brands comprise four reportable segments with separate management teams and infrastructures that offer various products and services: Voyager Sopris Learning, Learning A-Z, ExploreLearning and Kurzweil Education. Prior to the sale of the IntelliTools product line in the second quarter of 2014, the Company referred to its Kurzweil Education segment as Kurzweil/IntelliTools. See Note 14 to the Condensed Consolidated Financial Statements for further information on the Company’s segment reporting structure.

 

Note 2 — Accounts Receivable

Accounts receivable are stated net of allowances for doubtful accounts and estimated sales returns. The allowance for doubtful accounts and estimated sales returns totaled $0.5 million at June 30, 2014 and $0.7 million at December 31, 2013. 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 stock-based compensation and expense recorded was allocated as follows:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands)

2014

 

 

2013

 

 

2014

 

 

2013

 

Cost of revenues

$

9

 

 

$

12

 

 

$

18

 

 

$

24

 

Research and development expense

 

27

 

 

 

24

 

 

 

49

 

 

 

52

 

Sales and marketing expense

 

37

 

 

 

22

 

 

 

61

 

 

 

44

 

General and administrative expense

 

63

 

 

 

155

 

 

 

120

 

 

 

322

 

Total

$

136

 

 

$

213

 

 

$

248

 

 

$

442

 

 

7


 

2014 Grants

On March 14, 2014, the Company granted 559,000 options under the Cambium Learning Group, Inc. 2009 Equity Incentive Plan (“Plan”) with a total grant date fair value, net of forecasted forfeitures, of $0.7 million.  Each of these options have a per-share exercise price of $2.14 and vest in equal monthly installments on the last day of each month of the four year period beginning on the first day of the month of grant.  The term of each of the options is ten years from the date of grant.

On March 26, 2014, the Company granted 35,000 options under the Plan with a total grant date fair value, net of forecasted forfeitures, of $0.1 million.  Each of these options have a per-share exercise price of $2.06 and vest in equal monthly installments on the last day of each month of the four year period beginning on the first day of the month of grant.  The term of each of the options is ten years from the date of grant.

Valuation assumptions

The following assumptions were used in the Black-Scholes option-pricing model to estimate the fair value of the awards granted during the six month period ended June 30, 2014:

 

 

Six Months Ended

 

 

June 30, 2014

 

Expected stock volatility

 

64.00

%

Risk-free interest rate

1.91% - 2.05%

 

Expected years until exercise

 

6.25

 

Dividend yield

 

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.

Award activity

The following tables detail changes in the Company’s outstanding stock options during the three and six month periods ended June 30, 2014.  

 

 

 

Three Months Ended June 30, 2014

 

Grant Date

 

Beginning Outstanding

 

 

Granted

 

 

Exercised

 

 

Cancelled/Forfeited

 

 

Ending Outstanding

 

January 27, 2010

 

 

5,000

 

 

 

 

 

 

 

 

 

 

 

 

5,000

 

November 21, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 14, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 30, 2013

 

 

2,165,000

 

 

 

 

 

 

33,333

 

 

 

134,584

 

 

 

1,997,083

 

September 19, 2013

 

 

30,000

 

 

 

 

 

 

 

 

 

 

 

 

30,000

 

October 28, 2013

 

 

40,000

 

 

 

 

 

 

 

 

 

 

 

 

40,000

 

November 18, 2013

 

 

15,000

 

 

 

 

 

 

 

 

 

 

 

 

15,000

 

March 14, 2014

 

 

559,000

 

 

 

 

 

 

 

 

 

14,270

 

 

 

544,730

 

March 26, 2014

 

 

35,000

 

 

 

 

 

 

 

 

 

 

 

 

35,000

 

Total

 

 

2,849,000

 

 

 

-

 

 

 

33,333

 

 

 

148,854

 

 

 

2,666,813

 

 

 

 

 

Six Months Ended June 30, 2014

 

Grant Date

 

Beginning Outstanding

 

 

Granted

 

 

Exercised

 

 

Cancelled/Forfeited

 

 

Ending Outstanding

 

January 27, 2010

 

 

5,000

 

 

 

 

 

 

 

 

 

 

 

 

5,000

 

November 21, 2011

 

 

79,158

 

 

 

 

 

 

 

 

 

79,158

 

 

 

 

May 14, 2012

 

 

10,198

 

 

 

 

 

 

 

 

 

10,198

 

 

 

 

July 30, 2013

 

 

2,187,344

 

 

 

 

 

 

33,333

 

 

 

156,928

 

 

 

1,997,083

 

September 19, 2013

 

 

30,000

 

 

 

 

 

 

 

 

 

 

 

 

30,000

 

October 28, 2013

 

 

40,000

 

 

 

 

 

 

 

 

 

 

 

 

40,000

 

November 18, 2013

 

 

15,000

 

 

 

 

 

 

 

 

 

 

 

 

15,000

 

March 14, 2014

 

 

 

 

 

559,000

 

 

 

 

 

 

14,270

 

 

 

544,730

 

March 26, 2014

 

 

 

 

 

35,000

 

 

 

 

 

 

 

 

 

35,000

 

Total

 

 

2,366,700

 

 

 

594,000

 

 

 

33,333

 

 

 

260,554

 

 

 

2,666,813

 

8


 

 

During the six months ended June 30, 2014, restricted common stock awards of 2,000 shares were issued.  The restriction on the common stock award lapses equally over a four-year period on the anniversary of the grant date or upon a change in control of the Company.  The award was valued based on the Company’s closing stock price on the date of grant.  During the three and six months ended June 30, 2014, the related restrictions lapsed on restricted common stock awards of 500 and 1,500 shares, respectively.

 

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 including a warrant for shares issuable for little or no cash consideration, which is considered a common share equivalent. 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 June 30,

 

 

Six Months Ended June 30,

 

(in thousands)

2014

 

 

2013

 

 

2014

 

 

2013

 

Basic

 

45,641

 

 

 

47,357

 

 

 

45,663

 

 

 

47,377

 

Dilutive effect of awards

 

 

 

 

280

 

 

 

 

 

 

 

Diluted

 

45,641

 

 

 

47,637

 

 

 

45,663

 

 

 

47,377

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Antidilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options

 

2,667

 

 

 

2,134

 

 

 

2,667

 

 

 

2,134

 

Warrants

 

 

 

 

 

 

 

 

 

 

282

 

Restricted stock

 

3

 

 

 

2

 

 

 

3

 

 

 

2

 

 

During the first quarter of 2014, the Company repurchased 167,961 shares of its outstanding common stock for $0.3 million.  After these transactions, the Company has $0.3 million remaining under its previously disclosed share repurchase authorization.

 

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 June 30, 2014, financial instruments include $29.7 million of cash and cash equivalents, restricted assets of $6.2 million, collateral investments of $4.1 million, and $164.6 million of senior secured notes.  As of December 31, 2013, financial instruments include $68.0 million of cash and cash equivalents, restricted assets of $6.8 million, collateral investments of $2.0 million, and $174.5 million of senior secured notes. The fair market values of cash equivalents, restricted assets and collateral investments 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.  

As of June 30, 2014, the senior secured notes, with aggregate outstanding principal amount of $165.0 million, had a fair value of $166.7 million, based on quoted market prices in active markets for these debt instruments when traded as assets.  As of December 31,

9


 

2013, the senior secured notes, with aggregate outstanding principal amount of $175.0 million, had a fair value of $166.5 million, based on quoted market prices in active markets for these debt instruments when traded as assets.

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

 

(in thousands)

 

 

 

 

 

Fair Value at Reporting Date Using

 

Description

 

As of

June 30, 2014

 

 

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Restricted Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market

 

$

6,211

 

 

$

6,211

 

 

$

 

 

$

 

Collateral Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market

 

 

904

 

 

 

904

 

 

 

 

 

 

 

Certificate of Deposit

 

 

3,199

 

 

 

3,199

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Fair Value at Reporting Date Using

 

Description

 

As of

December 31, 2013

 

 

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Restricted Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market

 

$

6,835

 

 

$

6,835

 

 

$

 

 

$

 

Collateral Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money Market

 

 

903

 

 

 

903

 

 

 

 

 

 

 

Certificate of Deposit

 

 

1,068

 

 

 

1,068

 

 

 

 

 

 

 

 

 

(in thousands)

 

Total Gains (Losses) for the

Six Months Ended June 30,

 

Description

 

2014

 

 

2013

 

Restricted Assets:

 

 

 

 

 

 

 

 

Money Market

 

$

 

 

$

 

Collateral Investments:

 

 

 

 

 

 

 

 

Money Market

 

 

 

 

 

 

Certificate of Deposit

 

 

 

 

 

 

Warrant

 

 

 

 

 

(42

)

Assets held for sale:

 

 

 

 

 

 

 

 

Recovered Properties

 

 

 

 

 

(119

)

CVRs

 

 

 

 

 

(74

)

 

The warrant was valued using the Black-Scholes pricing model which is considered level 3. Due to the low exercise price of the warrants, the model assumptions do not significantly impact the valuation.

Contingent Value Rights

As part of the 2009 merger with Voyager Learning Company (“VLCY”), each former VLCY shareholder received contingent value rights (“CVR”) to receive cash in an amount equal to the aggregate amount of specified tax refunds received after the closing of the mergers and various other amounts deposited in escrow on or after the closing date, reduced by any payments to be made under the escrow agreement entered into in connection with the mergers, with respect to agreed contingencies, a potential working capital adjustment and allowed expenses, divided by the total number of shares of VLCY common stock outstanding immediately prior to the effective time of the mergers.

The CVR payment dates were in September 2010, June 2011, and June 2013, with $1.1 million, $2.0 million, and $7.7 million, respectively, distributed to the escrow agent at those times for distribution to holders of the CVRs.  The final payment comprised $5.8 million related to a Michigan state tax matter and $1.9 million related to a potential tax indemnity obligation. Restricted cash in an escrow account for the benefit of the CVRs was $3.0 million for the potential tax indemnity obligation.  As the potential tax indemnity

10


 

obligation was not triggered, the remaining $1.1 million in the escrow account reverted back to the general cash of the Company in the second quarter of 2013.

Assets and liabilities measured at fair value on a non-recurring basis are listed below at their carrying values as of each reporting date:

 

(in thousands)

 

 

 

 

 

Value at Reporting Date Using

 

Description

 

As of

June 30, 2014

 

 

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Goodwill

 

$

47,842

 

 

$

 

 

$

 

 

$

47,842

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, equipment and software, net

 

 

20,371

 

 

 

 

 

 

 

 

 

20,371

 

Pre-publication costs, net

 

 

14,514

 

 

 

 

 

 

 

 

 

14,514

 

Acquired curriculum and technology

   intangibles, net

 

 

6,924

 

 

 

 

 

 

 

 

 

6,924

 

Acquired publishing rights, net

 

 

3,734

 

 

 

 

 

 

 

 

 

3,734

 

Other intangible assets, net

 

 

5,242

 

 

 

 

 

 

 

 

 

5,242

 

 

 

(in thousands)

 

 

 

 

 

Value at Reporting Date Using

 

Description

 

As of

December 31, 2013

 

 

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Goodwill

 

$

47,842

 

 

$

 

 

$

 

 

$

47,842

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, equipment and software, net

 

 

20,315

 

 

 

 

 

 

 

 

 

20,315

 

Pre-publication costs, net

 

 

13,401

 

 

 

 

 

 

 

 

 

13,401

 

Acquired curriculum and technology

   intangibles, net

 

 

8,719

 

 

 

 

 

 

 

 

 

8,719

 

Acquired publishing rights, net

 

 

4,705

 

 

 

 

 

 

 

 

 

4,705

 

Other intangible assets, net

 

 

6,251

 

 

 

 

 

 

 

 

 

6,251

 

 

 

(in thousands)

 

Total Gains (Losses) for the

Six Months Ended June 30,

 

Description

 

2014

 

 

2013

 

Goodwill

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

Property, equipment and software, net

 

 

 

 

 

 

Pre-publication costs, net

 

 

 

 

 

 

Acquired curriculum and technology intangibles, net

 

 

 

 

 

 

Acquired publishing rights, net

 

 

 

 

 

 

Other intangible assets, net

 

 

 

 

 

 

 

There were no significant remeasurements of these assets during the six months ended June 30, of 2014 or 2013.

 

11


 

Note 6 — Other Current Assets

Other current assets at June 30, 2014 and December 31, 2013 consisted of the following:

 

 

As of

 

(in thousands)

June 30,

2014

 

 

December 31,

2013

 

Deferred costs

$

3,414

 

 

$

4,968

 

Prepaid expenses

 

2,423

 

 

 

1,369

 

Deferred taxes

 

536

 

 

 

536

 

Other current assets

 

172

 

 

 

 

Total

$

6,545

 

 

$

6,873

 

 

 

Note 7 — Other Assets

Other assets at June 30, 2014 and December 31, 2013 consisted of the following:

 

 

As of

 

(in thousands)

June 30,

2014

 

 

December 31,

2013

 

Collateral investments

$

4,103

 

 

$

1,971

 

Deferred financing costs

 

3,424

 

 

 

4,541

 

Deferred costs, less current portion

 

756

 

 

 

765

 

Other

 

1,463

 

 

 

1,011

 

Total

$

9,746

 

 

$

8,288

 

 

The deferred financing costs represent costs incurred in connection with the issuance of the 9.75% senior secured notes as described in Note 13 to the Condensed Consolidated Financial Statements.

During the first quarter of 2014, the Company purchased an additional $2.1 million certificate of deposit to serve as collateral for the outstanding letters of credit.  The letters of credit had previously been collateralized by the ABL Facility that was terminated on March 26, 2014 as described in Note 13 to the Condensed Consolidated Financial Statements.

 

Note 8 — Accrued Expenses

Accrued expenses at June 30, 2014 and December 31, 2013 consisted of the following:

 

 

As of

 

(in thousands)

June 30,

2014

 

 

December 31,

2013

 

Salaries, bonuses and benefits

$

5,505

 

 

$

9,687

 

Accrued interest

 

6,033

 

 

 

6,471

 

Pension and post-retirement medical benefits

 

1,172

 

 

 

1,214

 

Accrued royalties

 

1,549

 

 

 

1,649

 

Headsprout acquisition accrual

 

400

 

 

 

3,600

 

Other

 

3,084

 

 

 

2,658

 

Total

$

17,743

 

 

$

25,279

 

 

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

In December 2013, LAZEL, Inc., a wholly owned subsidiary of the Company, completed the acquisition of certain assets of Headsprout for $4.0 million.  Of the total purchase price, $3.6 million was paid in January 2014 with the remaining $0.4 million to be paid 18 months after the closing date, subject to the holdback provisions of the purchase agreement.  The remaining accrual of $0.4 million is included in Accrued Expenses.

 

12


 

Note 9 — Other Liabilities

Other liabilities at June 30, 2014 and December 31, 2013 consisted of the following:

 

 

As of

 

(in thousands)

June 30,

2014

 

 

December 31,

2013

 

Pension and post-retirement medical benefits, long-term

   portion

$

9,876

 

 

$

10,241

 

Deferred rent

 

1,105

 

 

 

1,201

 

Long-term income tax payable

 

926

 

 

 

902

 

Long-term deferred tax liability

 

570

 

 

 

570

 

Long-term deferred compensation

 

356

 

 

 

491

 

Headsprout acquisition accrual

 

 

 

 

400

 

Other

 

149

 

 

 

149

 

Total

$

12,982

 

 

$

13,954

 

 

 

Note 10 — Pension Plan

The net pension costs of the Company’s defined benefit pension plan were comprised primarily of interest costs and totaled $0.2 million and $0.1  million, respectively, for the three months ended June 30, 2014 and 2013 and $0.3 million and $0.2 million for the six months ended June 30, 2014 and 2013.  The net pension costs for the three and six months ended June 30, 2014 and 2013 also included immaterial accumulated net loss amortization.   

 

Note 11 — Uncertain Tax Positions

The Company recognizes the financial statement impacts of a tax return position when it is more likely than not, based on technical merits, that the position will ultimately be sustained. For tax positions that meet this recognition threshold, the Company applies judgment, taking into account applicable tax laws, experience managing tax audits and relevant GAAP, to determine the amount of tax benefits to recognize in its financial statements. For each position, the difference between the benefit realized on the Company’s tax return and the benefit reflected in its financial statements is recorded on the Condensed Consolidated Balance Sheet as an unrecognized tax benefit (“UTB”). The Company updates its UTBs at each financial statement date to reflect the impacts of audit settlements and other resolution of audit issues, expiration of statutes of limitation, developments in tax law and ongoing discussions with tax authorities. The balance of UTBs was $6.4 million at June 30, 2014 and December 31, 2013.