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EX-32.2 - EXHIBIT 32.2 - CAMBIUM LEARNING GROUP, INC.exhibit32_2.htm
EX-32.1 - EXHIBIT 32.1 - CAMBIUM LEARNING GROUP, INC.exhibit32_1.htm
EX-31.2 - EXHIBIT 31.2 - CAMBIUM LEARNING GROUP, INC.exhibit31_2.htm
EX-31.1 - EXHIBIT 31.1 - CAMBIUM LEARNING GROUP, INC.exhibit31_1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________
FORM 10-Q
_____________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
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 Dallas Parkway, Suite 400, Dallas, Texas
   
75287
(Address of Principal Executive Offices)
   
(Zip Code)
Registrant’s telephone number, including area code: (888) 399-1995
_____________________________________________
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  ý      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  ý      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
   
ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨      No  ý
The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of November 3, 2016 was 46,023,259.






TABLE OF CONTENTS
 
 
 
 
Page
PART I
 
FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
PART II
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 


2




Item 1. Financial Statements.
Cambium Learning Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income
(In thousands, except per share data)
(Unaudited)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Net revenues
 
$
42,113

 
$
40,339

 
$
114,871

 
$
109,264

Cost of revenues:
 
 

 
 

 
 

 
 

Cost of revenues
 
8,876

 
9,120

 
23,615

 
24,283

Amortization expense
 
4,780

 
4,434

 
12,905

 
12,712

Total cost of revenues
 
13,656

 
13,554

 
36,520

 
36,995

Research and development expense
 
3,301

 
2,935

 
9,440

 
7,827

Sales and marketing expense
 
12,152

 
11,722

 
36,309

 
32,845

General and administrative expense
 
5,872

 
5,120

 
15,976

 
15,537

Shipping and handling costs
 
380

 
457

 
760

 
879

Depreciation and amortization expense
 
875

 
1,001

 
2,572

 
2,994

Total costs and expenses
 
36,236

 
34,789

 
101,577

 
97,077

Income before interest, other income (expense) and income taxes
 
5,877

 
5,550

 
13,294

 
12,187

Net interest expense
 
(1,876
)
 
(3,575
)
 
(5,598
)
 
(10,875
)
Other income, net
 

 
204

 

 
679

Income before income taxes
 
4,001

 
2,179

 
7,696

 
1,991

Income tax expense
 
(173
)
 
(213
)
 
(206
)
 
(517
)
Net income
 
$
3,828

 
$
1,966

 
$
7,490

 
$
1,474

Other comprehensive income:
 
 

 
 

 
 

 
 

Amortization of net pension loss
 
38

 
56

 
112

 
168

Comprehensive income
 
$
3,866

 
$
2,022

 
$
7,602

 
$
1,642

Net income per common share:
 
 

 
 

 
 

 
 

Basic
 
$
0.08

 
$
0.04

 
$
0.16

 
$
0.03

Diluted
 
$
0.08

 
$
0.04

 
$
0.16

 
$
0.03

Average number of common shares and equivalents outstanding:
 
 

 
 

 
 

 
 

Basic
 
45,869

 
45,562

 
45,791

 
45,513

Diluted
 
47,285

 
47,103

 
47,157

 
46,744

 
 
 
 
 
 
 
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)
  
 
 
September 30, 2016
 
December 31, 2015
 
 
(Unaudited)
 
 
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
11,738

 
$
8,645

Accounts receivable, net
 
29,490

 
14,640

Inventory
 
3,111

 
4,694

Restricted assets, current
 
1,254

 
1,265

Other current assets
 
12,196

 
9,981

Total current assets
 
57,789

 
39,225

Property, equipment and software at cost
 
62,403

 
55,824

Accumulated depreciation and amortization
 
(37,864
)
 
(33,284
)
Property, equipment and software, net
 
24,539

 
22,540

Goodwill
 
47,842

 
47,842

Acquired curriculum and technology intangibles, net
 
1,589

 
2,731

Acquired publishing rights, net
 
804

 
1,459

Other intangible assets, net
 
2,393

 
3,231

Pre-publication costs, net
 
17,768

 
16,441

Restricted assets, less current portion
 
2,264

 
3,099

Other assets
 
4,481

 
4,817

Total assets
 
$
159,469

 
$
141,385

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
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)
  
 
 
September 30, 2016
 
December 31, 2015
 
 
(Unaudited)
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
2,822

 
$
1,993

Accrued expenses
 
14,056

 
14,224

Current portion of long-term debt
 
6,475

 
3,850

Deferred revenue, current
 
84,313

 
74,107

Total current liabilities
 
107,666

 
94,174

Long-term liabilities:
 
 

 
 

Long-term debt
 
93,057

 
97,872

Deferred revenue, less current portion
 
13,353

 
11,481

Other liabilities
 
10,885

 
12,027

Total long-term liabilities
 
117,295

 
121,380

 Commitments and contingencies (See Note 12)
 

 

Stockholders' equity (deficit):
 
 

 
 

Preferred stock ($.001 par value, 15,000 shares authorized, zero shares issued and outstanding at September 30, 2016 and December 31, 2015)
 

 

Common stock ($.001 par value, 150,000 shares authorized, 52,523 and 52,268 shares issued, and 45,991 and 45,736 shares outstanding at September 30, 2016 and December 31, 2015, respectively)
 
53

 
52

Capital surplus
 
286,380

 
285,306

Accumulated deficit
 
(336,485
)
 
(343,975
)
Treasury stock at cost (6,532 shares at September 30, 2016 and December 31, 2015)
 
(12,784
)
 
(12,784
)
Accumulated other comprehensive loss:
 
 

 
 

Pension and postretirement plans
 
(2,656
)
 
(2,768
)
Accumulated other comprehensive loss
 
(2,656
)
 
(2,768
)
Total stockholders' equity (deficit)
 
(65,492
)
 
(74,169
)
Total liabilities and stockholders' equity (deficit)
 
$
159,469

 
$
141,385

 
 
 
 
 
 
 
 
 
 
 
 
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) 
 
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
Net income
 
$
7,490

 
$
1,474

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization expense
 
15,477

 
15,706

Amortization of note discount and deferred financing costs
 
834

 
922

Stock-based compensation and expense
 
681

 
486

Other
 
3

 
5

Changes in operating assets and liabilities:
 
 

 
 

Accounts receivable, net
 
(14,850
)
 
(14,572
)
Inventory
 
1,583

 
583

Other current assets
 
(2,215
)
 
(2,582
)
Other assets
 
200

 
(799
)
Restricted assets
 
846

 
856

Accounts payable
 
829

 
1,949

Accrued expenses
 
(168
)
 
(1,329
)
Deferred revenue
 
12,078

 
12,998

Other long-term liabilities
 
(1,030
)
 
(450
)
Net cash provided by operating activities
 
21,758

 
15,247

Investing activities:
 
 

 
 

Cash paid for acquisitions
 

 
(400
)
Expenditures for property, equipment, software and pre-publication costs
 
(16,171
)
 
(15,107
)
Net cash used in investing activities
 
(16,171
)
 
(15,507
)
Financing activities:
 
 

 
 

Principal payments under capital lease obligations
 

 
(802
)
Repayment of debt
 
(2,888
)
 

Borrowings under revolving credit facility
 
15,000

 

Payment of revolving credit facility
 
(15,000
)
 

Proceeds from exercise of stock options
 
394

 
188

Net cash used in financing activities
 
(2,494
)
 
(614
)
Change in cash and cash equivalents
 
3,093

 
(874
)
Cash and cash equivalents, beginning of period
 
8,645

 
34,387

Cash and cash equivalents, end of period
 
$
11,738

 
$
33,513

 
 
 
 
 
 
 
 
 
 

  
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 sheet as of December 31, 2015 has 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, 2015. Due to seasonality, the results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for any future interim period or for the year ending December 31, 2016.
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. The Company’s brands include: Learning A-Z®, Voyager Sopris Learning®, ExploreLearning®, and Kurzweil Education®. Together, these brands provide breakthrough technology solutions for online learning and professional support; best-in-class intervention and supplemental instructional materials; gold-standard professional development and school-improvement services; valid and reliable assessments; and proven materials to support a positive and safe school environment.
These brands comprise three reportable segments with separate management teams and infrastructures that offer various products and services. See Note 14 – Segment Reporting 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 $0.6 million and $0.2 million at September 30, 2016 and December 31, 2015, respectively. The allowance for doubtful accounts is based on a review of 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
Cambium Learning Group, Inc. 2009 Equity Incentive Plan
In 2009, the Company adopted the Cambium Learning Group, Inc. 2009 Equity Incentive Plan (“Incentive Plan”). Under the Incentive Plan, 5,000,000 shares of common stock were reserved for issuance of awards which may be granted in the form of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, conversion stock options, conversion stock appreciation rights, and other stock or cash awards. The Incentive Plan is administered by the board of directors which has the authority to establish the terms and conditions of awards granted under the Incentive Plan.

7



Stock-Based Compensation and Expense
The following table presents our stock-based compensation expense resulting from stock options that are recorded in our condensed consolidated statements of operations and comprehensive income for the periods presented:
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2016
 
2015
 
2016
 
2015
Cost of revenues
 
$
15

 
$
11

 
$
44

 
$
29

Research and development expense
 
43

 
37

 
129

 
98

Sales and marketing expense
 
50

 
42

 
150

 
113

General and administrative expense
 
126

 
102

 
358

 
246

Total
 
$
234

 
$
192

 
$
681

 
$
486

2016 Grants
In the first quarter 2016, the Company granted 290,000 options under the Incentive Plan with an exercise price of $4.50. The options vest in equal monthly installments on the last day of the month over a four-year period, with an initial vesting date of March 31, 2016. In the third quarter 2016, the Company granted 25,000 options under the Incentive Plan with an exercise price of $4.88. The options vest in equal monthly installments on the last day of the month over a four-year period, with an initial vesting date of July 31, 2016. As of September 30, 2016, the Company had 2,823,426 stock options outstanding.
 
 
Note 4 — Net Income per Common Share
Basic net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period, including potential dilutive shares of common stock assuming the dilutive effect of outstanding stock options and restricted stock awards using the treasury stock method. Weighted-average shares from common share equivalents in the amount of 534,726 and 448,666 for the three and nine months ended September 30, 2016, respectively, and 135,930 and 258,542 for the three and nine months ended September 30, 2015, respectively, were excluded from the respective dilutive shares outstanding because their effect was anti-dilutive.
The following table presents the calculation of basic and diluted net income per share:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except per share data)
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 

 
 

 
 

 
 

Net income
 
$
3,828

 
$
1,966

 
$
7,490

 
$
1,474

Denominator:
 
 

 
 

 
 

 
 

Basic:
 
 

 
 

 
 

 
 

Weighted-average common shares used in computing basic net income per share
 
45,869

 
45,562

 
45,791

 
45,513

Diluted:
 
 

 
 

 
 

 
 

Add weighted-average effect of dilutive securities:
 
 

 
 

 
 

 
 

Stock options and restricted stock awards
 
1,416

 
1,541

 
1,366

 
1,231

Weighted-average common shares used in computing diluted net income per share
 
47,285

 
47,103

 
47,157

 
46,744

Net income per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.08

 
$
0.04

 
$
0.16

 
$
0.03

Diluted
 
$
0.08

 
$
0.04

 
$
0.16

 
$
0.03

 
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

8



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.
At September 30, 2016, financial instruments include $11.7 million of cash and cash equivalents, restricted assets of $3.5 million, collateral investments of $1.8 million, and Senior Secured Credit Facility term loans, net of discount and deferred financing costs, of $99.5 million. At December 31, 2015, financial instruments include $8.6 million of cash and cash equivalents, restricted assets of $4.4 million, collateral investments of $1.8 million, and Senior Secured Credit Facility term loans, net of discount and deferred financing costs, of $101.7 million. 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. See Note 13 – Long-Term Debt for additional information regarding the Company’s term loans.
At September 30, 2016 and December 31, 2015, the carrying value of the Company’s Senior Secured Credit Facility term loans approximates the fair value, as the borrowings are tied to the London Interbank Offered Rate (“LIBOR”) and are market sensitive.
Assets and liabilities measured at fair value on a recurring basis are as follows:
 
(in thousands)
 
 
 
Fair Value at Reporting Date Using
Description
 
September 30, 2016
 
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
 
$
3,518

 
$
3,518

 
$

 
$

Collateral Investments:
 
 

 
 

 
 

 
 

Money Market
 
906

 
906

 

 

Certificates of Deposit
 
879

 
879

 

 

  
(in thousands)
 
 
 
Fair Value at Reporting Date Using
Description
 
December 31, 2015
 
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
 
$
4,364

 
$
4,364

 
$

 
$

Collateral Investments:
 
 
 
 

 
 
 
 
Money Market
 
905

 
905

 

 

Certificates of Deposit
 
878

 
878

 

 

 

9



(in thousands)
 
Total Gains (Losses) for the Nine Months Ended September 30,
Description
 
2016
 
2015
Restricted Assets:
 
 
 
 
Money Market
 
$

 
$

Collateral Investments:
 
 
 
 
Money Market
 

 

Certificates of Deposit
 

 

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)
 
 
 
Fair Value at Reporting Date Using
Description
 
September 30, 2016
 
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
 
24,539

 

 

 
24,539

Pre-publication costs, net
 
17,768

 

 

 
17,768

Acquired curriculum and technology intangibles, net
 
1,589

 

 

 
1,589

Acquired publishing rights, net
 
804

 

 

 
804

Other intangible assets, net
 
2,393

 

 

 
2,393

 
(in thousands)
 
 
 
Fair Value at Reporting Date Using
Description
 
December 31, 2015
 
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
 
22,540

 

 

 
22,540

Pre-publication costs, net
 
16,441

 

 

 
16,441

Acquired curriculum and technology intangibles, net
 
2,731

 

 

 
2,731

Acquired publishing rights, net
 
1,459

 

 

 
1,459

Other intangible assets, net
 
3,231

 

 

 
3,231

 
(in thousands)
 
Total Gains (Losses) for the Nine Months Ended September 30,
Description
 
2016
 
2015
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 nine months ended September 30, 2016 or 2015.
 

10



Note 6 — Other Current Assets
Other current assets at September 30, 2016 and December 31, 2015 consisted of the following:
(in thousands)
 
September 30, 2016
 
December 31, 2015
Deferred costs
 
$
9,586

 
$
8,514

Prepaid expenses
 
2,245

 
1,367

Other
 
365

 
100

Other current assets
 
$
12,196

 
$
9,981


Note 7 — Other Assets
Other assets at September 30, 2016 and December 31, 2015 consisted of the following:
(in thousands)
 
September 30, 2016
 
December 31, 2015
Collateral investments
 
$
1,785

 
$
1,783

Deferred costs, less current portion
 
1,648

 
1,479

Deferred financing costs - revolving credit facility
 
756

 
892

Other
 
292

 
663

Other assets
 
$
4,481

 
$
4,817

 
Deferred Financing Costs
Deferred financing costs relate to costs incurred with the issuance of the Senior Secured Credit Agreement. See Note 13 – Long-Term Debt.
Collateral Investments
The Company maintains certificates of deposit to collateralize its outstanding letters of credit associated with credit collections and workers’ compensation activity. At September 30, 2016 and December 31, 2015, the Company had $0.9 million in certificates of deposit serving as collateral for its outstanding letters of credit.
Additionally, the Company maintains a money market fund investment to serve as collateral for a travel card program. The balance of the money market fund investment was $0.9 million at September 30, 2016 and December 31, 2015.
 
 
Note 8 — Accrued Expenses
Accrued expenses at September 30, 2016 and December 31, 2015 consisted of the following: 
(in thousands)
 
September 30, 2016
 
December 31, 2015
Salaries, bonuses and benefits
 
$
9,444

 
$
9,383

Pension and post-retirement benefit plans
 
1,093

 
1,093

Accrued royalties
 
723

 
1,201

Other
 
2,796

 
2,547

Accrued expenses
 
$
14,056

 
$
14,224

Pension and Post-Retirement Benefit Plans
See Note 10 – Pension Plan for additional information regarding the Company’s pension plan.
 
Note 9 — Other Liabilities
Other liabilities at September 30, 2016 and December 31, 2015 consisted of the following:
(in thousands)
 
September 30, 2016
 
December 31, 2015
Pension and post-retirement benefit plans, long-term portion
 
$
9,364

 
$
9,903

Deferred rent
 
731

 
881

Long-term income tax payable
 
449

 
896

Long-term deferred compensation
 
341

 
347

Other liabilities
 
$
10,885

 
$
12,027


11



 
Pension and Post-Retirement Benefit Plans
See Note 10 – Pension Plan for additional information regarding the Company’s pension plan.

Note 10 — Pension Plan
The net pension costs of the Company’s defined benefit pension plan were comprised primarily of interest costs and totaled $0.1 million and $0.2 million, respectively, for the three months ended September 30, 2016 and 2015 and $0.4 million and $0.5 million, respectively, for the nine months ended September 30, 2016 and 2015.  The net pension costs included the amortization of accumulated net loss of $38 thousand and $0.1 million, for the three months ended September 30, 2016 and 2015, respectively. The net pension costs included the amortization of accumulated net loss of $0.1 million and $0.2 million for the nine months ended September 30, 2016 and 2015, respectively. 
 

Note 11 — Uncertain Tax Positions and Income Taxes
The Company recognizes the financial statement impact 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 to Other Liabilities in the Condensed Consolidated Balance Sheets 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 $5.9 million at September 30, 2016 and $6.2 million at December 31, 2015.
Included in the balance of unrecognized tax benefits at September 30, 2016 are approximately $0.4 million of tax benefits that, if recognized, would affect the effective tax rate. The recognition of the remaining uncertain tax positions would not affect the effective tax rate, but would instead increase or would have increased available tax attributes. However, the recognition of the tax attribute would be offset by an increase in the deferred tax asset valuation allowance resulting in no net impact to the effective tax rate.
The Company recognizes interest accrued related to its UTBs and penalties as income tax expense. Related to the UTBs noted above, the Company recognized no penalties and immaterial interest during the three and nine months ended September 30, 2016. At September 30, 2016, the Company has liabilities of $0.1 million for penalties (gross) and $0.1 million for interest (gross). During the nine months ended September 30, 2016, UTBs were decreased by $0.5 million for effectively settled tax positions.
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 Voyager Learning Company 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. The Company has been audited by the various state tax authorities through 2007.
In September 2016, the Company entered into a Tax Asset Protection Rights Agreement (the “Rights Agreement”), between the Company and Wells Fargo Bank, National Association, as Rights Agent. The Rights Agreement is designed to preserve the Company’s substantial net operating loss carryforwards (NOLs) and other significant tax benefits which may be available to reduce potential future tax liabilities. The Rights Agreement is not intended to be an antitakeover measure or to deter offers that are fair and otherwise in the best interests of the Company’s stockholders.
 
Note 12 — Commitments and Contingencies
Legal Proceedings
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.
Purchase Commitments
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

12



year and require the Company to buy minimum quantities of materials with specific delivery dates at a fixed price over the term. These open purchase commitments totaled $0.1 million as of September 30, 2016.
Letters of Credit
The Company has letters of credit outstanding at September 30, 2016 in the amount of $0.9 million to support credit collections and workers’ compensation activity. The Company maintains certificates of deposit of $0.9 million as collateral for the letters of credit as well as an additional deposit to support Automated Clearing House processing and credit card collections. The Company also maintains a $0.9 million money market fund investment as collateral for a travel card program. The certificates of deposit and money market fund investment are included in Collateral Investments in Note 7 — Other Assets.

Note 13 — Long-Term Debt
Long-term debt at September 30, 2016 and December 31, 2015 consisted of the following: 
(in thousands)
 
September 30, 2016
 
December 31, 2015
Senior secured credit facility term loans maturing December 10, 2020
 
$
102,113

 
$
105,000

Less: Unamortized discount
 
(1,466
)
 
(1,856
)
Less: Unamortized deferred financing costs
 
(1,115
)
 
(1,422
)
Total debt
 
99,532

 
101,722

Less: current portion of long-term debt
 
6,475

 
3,850

Long-term debt
 
$
93,057

 
$
97,872

 Senior Secured Credit Facility
On December 10, 2015, Cambium Learning, Inc. (the “Borrower”), a wholly-owned subsidiary of Cambium Learning Group, Inc., entered into a $135.0 million Senior Secured Credit Agreement (the “Credit Agreement”) among the Borrower, the Company, Webster Bank, N.A., as Administrative Agent, L/C Issuer and a Lender, and the other Lenders party thereto, with Webster Bank, N.A., as Joint Lead Arranger, the Governor and Company of the Bank of Ireland, as Joint Lead Arranger and Syndication Agent, and Capital One National Association, and Babson Capital Finance, LLC, as Co-Documentation Agents (the “Senior Secured Credit Facility”).  The Senior Secured Credit Facility consists of a term loan A which had an initial principal amount of $70.0 million (“Term Loan A”), a term loan B which had an initial principal amount of $35.0 million (“Term Loan B”) and a $30.0 million revolving credit facility (the “Revolving Credit Facility”), secured by a lien on substantially all assets and capital stock of the Company, the Borrower and the Borrower’s subsidiaries (collectively, the “Loan Parties”).  The Senior Secured Credit Facility matures on December 10, 2020.
Borrowings under the Senior Secured Credit Facility bear interest equal to either a Base Rate, as defined in the Credit Agreement, or the LIBOR rate (subject to a 1.0% floor), at the Borrower’s option, plus an applicable margin.  The applicable margin for the Term Loan A and Revolving Credit Facility ranges between 2.75% and 3.50% for Base Rate loans and 3.75% and 4.50% for LIBOR loans.  The applicable margin for the Term Loan A and Revolving Credit Facility is based on a leverage calculation.  The applicable margin for the Term Loan B is 4.25% for Base Rate loans and 5.25% for LIBOR loans.  From the inception of the Senior Secured Credit Facility to the end of the third quarter 2016, an interest rate of 5.5% applied to the Term Loan A and Revolving Credit Facility and an interest rate of 6.25% applied to the Term Loan B.  Additionally, unused borrowing capacity under the Revolving Credit Facility is subject to a commitment fee of 0.5%.  Interest is payable quarterly in arrears, or earlier for loans with shorter interest periods.
The Credit Agreement contains affirmative, negative and financial covenants customary for financings of this type, including, among other things, limits on the creation of liens, limits on the incurrence of indebtedness, restrictions on investments and dispositions, limitations on fundamental changes to the Loan Parties, a maximum consolidated net leverage ratio, and minimum fixed charge coverage ratio. Upon an event of default, and after any applicable cure period, the Administrative Agent can accelerate the maturity of the loan. Events of default include customary items, such as failure to pay principal and interest in a timely manner and breach of covenants.  At September 30, 2016, the Company was in compliance with all covenants related to the Credit Facility.  
The principal balances of the Senior Secured Credit Facility were issued at a discount, representing fees paid to lenders, which are amortized over the life of the debt using the effective interest rate method.  Unamortized discount at September 30, 2016 and December 31, 2015 was $1.5 million and $1.9 million, respectively.
The Company incurred debt issuance costs associated with the Senior Secured Credit Facility, which were deferred and are amortized over the term of the related debt using the effective interest method.  Unamortized deferred financing costs related to both Term Loan A and Term Loan B totaled $1.1 million and $1.4 million at September 30, 2016 and December 31, 2015, respectively, and are presented as a reduction to Long-term Debt in the Consolidated Balance Sheets.  Unamortized

13



deferred financing costs related to the Revolving Credit Facility totaled $0.8 million and $0.9 million at September 30, 2016 and December 31, 2015, respectively, and are classified as Other Assets in the Consolidated Balance Sheets.
At September 30, 2016, the Company had outstanding principal balances of $67.4 million of Term Loan A, $34.7 million of Term Loan B, and no borrowings under the Revolving Credit Facility, and had $30.0 million borrowing availability under the Revolving Credit Facility.
In February 2016, the Company paid $0.1 million to enter into interest rate cap agreements for approximately half of its outstanding Term Loan A and Term Loan B loans, less required amortization, for a three-year period.  Under the interest rate cap agreements, the Company will receive payments for any period that the three-month LIBOR rate exceeds 2.5%.
 
Note 14 — Segment Reporting
The Company operates in three reportable segments with separate management teams and infrastructures that offer various products and services.
Learning A-Z Segment
Learning A-Z is a PreK-6 education technology provider of digitally delivered resources and tools that support instruction and student growth in reading, writing, and science.  Founded in 2002, Learning A-Z believes that an enlightened approach to literacy —which starts with reading and writing, but also includes the development of key 21st century skills like communication, creativity, collaboration, and critical-thinking — is the foundation to all learning. With a robust library of incredibly effective and flexible curriculum resources, Learning A-Z provides the tools teachers need to deliver personalized instruction for a wide range of student needs, including English language learners, intervention, special education, and daily instruction. Learning A-Z’s resources are currently used in more than half the districts across the United States and Canada and in over 175 countries worldwide.  Learning A-Z is committed to:
Delivering unmatched value, whereby high-quality resources are affordable for every individual classroom
Making personalized learning easier, giving teachers what they need to deliver the just-right instructional resources to every student
Empowering teachers as the foundation of student achievement, ensuring that teachers are given the support they need to be effective and efficient
Learning A-Z operates seven subscription-based websites: Reading A-Z™, Raz-Kids®, Headsprout®, Science A-Z®, Writing A-Z™, Vocabulary A-Z™, and ReadyTest A-Z™.  These websites can be purchased stand-alone or in collections, for a comprehensive solution that provides online supplemental books, lessons, assessments and other instructional resources for individual classrooms, schools, and districts.
Voyager Sopris Learning Segment
The Voyager Sopris Learning segment includes the Company’s Voyager Sopris Learning and Kurzweil Education brands.
Voyager Sopris Learning Brand
The Voyager Sopris Learning brand is committed to partnering with school districts to meet and surpass their goals for student achievement.  The Voyager Sopris Learning suite of instructional and service solutions is not only research based, but also evidence based — proven to increase student achievement and educator effectiveness.  Voyager Sopris Learning’s solutions have been fully tested in the classroom, ensuring that they are easy to implement and teacher friendly.  They are innovative, both in overall instructional approach and in the strategic use of technology in blended and 100% online solutions and are supported by an unparalleled commitment to build local capacity for sustained success.  With a comprehensive suite of instructional resources, the Voyager Sopris Learning brand provides assessments, professional development and school improvement services, literacy and math instructional tools — both comprehensive intervention and supplemental — and resources to build a positive school climate.  
Kurzweil Education Brand
The Kurzweil Education brand delivers educational technology that solves real problems.  The Kurzweil Education literacy and learning solutions offer learners a way up and a path forward.  Students’ varying needs, their challenges, and their potential to achieve drive Kurzweil Education, which continues to develop literacy-boosting solutions that directly enhance opportunities to learn and achieve. Using the principles of Universal Design for Learning, Kurzweil’s solutions deliver content and tools that enable all learners to read, understand, and demonstrate their learning using technology-based tools.

14



ExploreLearning Segment
ExploreLearning develops online solutions to improve student learning in math and science.  ExploreLearning has two products: Gizmos®, which the Company believes is the world’s best library of interactive, online simulations for math and science in grades 3-12; and Reflex®, a powerful solution for math fact fluency development for grades 2-8.
Other
Other consists of unallocated shared services, such as accounting, legal, human resources and corporate related items, as well as depreciation and amortization expense, other income and expense, and income taxes.  The Company does not allocate any of these costs to its segments, and the chief operating decision maker evaluates performance of operating segments excluding these items.
The following tables present the net revenues, operating expenses, income from operations, and capital expenditures which are used by the Company’s chief operating decision maker to measure the segments’ operating performance.  The Company does not track assets directly by segment and the chief operating decision maker does not use assets to measure a segment’s operating performance, and therefore this information is not presented.
 
 
Three Months Ended September 30, 2016
(in thousands)
 
Learning
A-Z
 
Voyager Sopris
Learning
 
ExploreLearning
 
Other
 
Consolidated
Net revenues
 
$
16,518

 
$
19,466

 
$
6,129

 
$

 
$
42,113

Cost of revenues
 
583

 
7,381

 
912

 

 
8,876

Amortization expense
 

 

 

 
4,780

 
4,780

Total cost of revenues
 
583

 
7,381

 
912

 
4,780

 
13,656

Other operating expenses
 
8,113

 
6,754

 
2,931

 
3,907

 
21,705

Depreciation and amortization expense
 

 

 

 
875

 
875

Total costs and expenses
 
8,696

 
14,135

 
3,843

 
9,562

 
36,236

 
 
 
 
 
 
 
 
 
 
 
Income before interest, other income (expense) and income taxes
 
7,822

 
5,331

 
2,286

 
(9,562
)
 
5,877

 
 
 
 
 
 
 
 
 
 
 
Net interest expense
 

 

 

 
(1,876
)
 
(1,876
)
Income tax expense
 

 

 

 
(173
)
 
(173
)
Segment net income
 
$
7,822

 
$
5,331

 
$
2,286

 
$
(11,611
)
 
$
3,828

Expenditures for property, equipment, software and pre-publication costs
 
$
2,491

 
$
2,090

 
$
819

 
$
5

 
$
5,405

 

15



 
 
Three Months Ended September 30, 2015
(in thousands)
 
Learning
A-Z
 
Voyager Sopris
Learning
 
ExploreLearning
 
Other
 
Consolidated
Net revenues
 
$
13,733

 
$
21,820

 
$
4,786

 
$

 
$
40,339

Cost of revenues
 
416

 
7,800

 
904

 

 
9,120

Amortization expense
 

 

 

 
4,434

 
4,434

Total cost of revenues
 
416

 
7,800

 
904

 
4,434

 
13,554

Other operating expenses
 
6,654

 
7,718

 
2,506

 
3,356

 
20,234

Depreciation and amortization expense
 

 

 

 
1,001

 
1,001

Total costs and expenses
 
7,070

 
15,518

 
3,410

 
8,791

 
34,789

 
 
 
 
 
 
 
 
 
 
 
Income before interest, other income (expense) and income taxes
 
6,663

 
6,302

 
1,376

 
(8,791
)
 
5,550

 
 
 
 
 
 
 
 
 
 
 
Net interest expense
 

 

 

 
(3,575
)
 
(3,575
)
Other income, net
 

 

 

 
204

 
204

Income tax expense
 

 

 

 
(213
)
 
(213
)
Segment net income
 
$
6,663

 
$
6,302

 
$
1,376

 
$
(12,375
)
 
$
1,966

Expenditures for property, equipment, software and pre-publication costs
 
$
2,276

 
$
2,195

 
$
683

 
$
121

 
$
5,275

 
 
Nine Months Ended September 30, 2016
(in thousands)
 
Learning
A-Z
 
Voyager Sopris
Learning
 
ExploreLearning
 
Other
 
Consolidated
Net revenues
 
$
48,127

 
$
49,252

 
$
17,492

 
$

 
$
114,871

Cost of revenues
 
1,801

 
19,103

 
2,711

 

 
23,615

Amortization expense
 

 

 

 
12,905

 
12,905

Total cost of revenues
 
1,801

 
19,103

 
2,711

 
12,905

 
36,520

Other operating expenses
 
22,379

 
20,419

 
8,387

 
11,300

 
62,485

Depreciation and amortization expense
 

 

 

 
2,572

 
2,572

Total costs and expenses
 
24,180

 
39,522

 
11,098

 
26,777

 
101,577

 
 
 
 
 
 
 
 
 
 
 
Income before interest, other income (expense) and income taxes
 
23,947

 
9,730

 
6,394

 
(26,777
)
 
13,294

 
 
 
 
 
 
 
 
 
 
 
Net interest expense
 

 

 

 
(5,598
)
 
(5,598
)
Income tax expense
 

 

 

 
(206
)
 
(206
)
Segment net income
 
$
23,947

 
$
9,730

 
$
6,394

 
$
(32,581
)
 
$
7,490

Expenditures for property, equipment, software and pre-publication costs
 
$
6,770

 
$
6,557

 
$
2,174

 
$
670

 
$
16,171

 
 

16



 
 
Nine Months Ended September 30, 2015
(in thousands)
 
Learning
A-Z
 
Voyager Sopris
Learning
 
ExploreLearning
 
Other
 
Consolidated
Net revenues
 
$
39,930

 
$
54,831

 
$
14,503

 
$

 
$
109,264

Cost of revenues
 
1,286

 
20,751

 
2,246

 

 
24,283

Amortization expense
 

 

 

 
12,712

 
12,712

Total cost of revenues
 
1,286

 
20,751

 
2,246

 
12,712

 
36,995

Other operating expenses
 
17,914

 
20,982

 
7,469

 
10,723

 
57,088

Depreciation and amortization expense
 

 

 

 
2,994

 
2,994

Total costs and expenses
 
19,200

 
41,733

 
9,715

 
26,429

 
97,077

 
 
 
 
 
 
 
 
 
 
 
Income before interest, other income (expense) and income taxes
 
20,730

 
13,098

 
4,788

 
(26,429
)
 
12,187

 
 
 
 
 
 
 
 
 
 
 
Net interest expense
 

 

 

 
(10,875
)
 
(10,875
)
Other income, net
 

 

 

 
679

 
679

Income tax expense
 

 

 

 
(517
)
 
(517
)
Segment net income
 
$
20,730

 
$
13,098

 
$
4,788

 
$
(37,142
)
 
$
1,474

Expenditures for property, equipment, software and pre-publication costs
 
$
5,973

 
$
6,869

 
$
1,931

 
$
334

 
$
15,107



17



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This section should be read in conjunction with the audited Consolidated Financial Statements of Cambium Learning Group, Inc. and its subsidiaries (the “Company,” “we,” “us,” or “our”) and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.
Cautionary Note Regarding Forward-looking Statements
This report contains forward-looking statements within the meaning of the federal securities laws that involve risks and uncertainties, and which are based on beliefs, expectations, estimates, projections, forecasts, plans, anticipations, targets, outlooks, initiatives, visions, objectives, strategies, opportunities, drivers and intents of our management. Such statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this report, including statements regarding our future financial condition, economic performance and results of operations, as well as our business strategy, objectives of management for future operations, and the information set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements.
Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements can, in some cases, be identified by, among other things, the use of forward-looking language, such as “believes,” “expects,” “estimates,” “projects,” “forecasts,” “plans,” “anticipates,” “targets,” “outlooks,” “initiatives,” “visions,” “objectives,” “strategies,” “opportunities,” “drivers,” “intends,” “scheduled to,” “seeks,” “may,” “will,” or “should,” or the negative of those terms, or other variations of those terms or comparable language, or by discussions of strategy, plans, targets, models or intentions. Forward-looking statements speak only as of the date they are made, and except for our ongoing obligations under the federal securities laws, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements. Accordingly, you are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Although we believe that the expectations reflected in such forward-looking statements are reasonable as of the date made, expectations may prove to have been materially different from the results expressed or implied by such forward-looking statements, as it is impossible for us to anticipate all factors that could affect our actual results. These risks and uncertainties include, but are not limited to, those described in “Risk Factors” in Part II, Item 1A and elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2015, and those described from time to time in our future reports filed with the SEC. Unless otherwise required by law, we also disclaim any obligation to update our view of any such risks or uncertainties or to announce publicly the results of any revisions to the forward-looking statements made in this report.
Overview
Cambium Learning® Group, Inc., a Delaware corporation, is a leading educational solutions and services company that is committed to helping all students reach their full potential. Our award winning brands include: Learning A–Z® (www.learninga-z.com), Voyager Sopris Learning® (www.voyagersopris.com), ExploreLearning® (www.explorelearning.com and www.reflexmath.com) and Kurzweil Education® (www.kurzweiledu.com). Together, these brands provide breakthrough technology solutions for online learning and professional support; best-in-class intervention and supplemental instructional materials; gold-standard professional development and school-improvement services; valid and reliable assessments; and proven materials to support a positive and safe school environment.
During 2016, our products have continued to receive awards and accolades from industry publications.
The 21st Annual Education Software Review Awards (“EDDIE”) presented by The ComputED Gazette
In October 2016, the Company was awarded 15 EDDIE awards from ComputED Gazette. The EDDIE Awards recognize innovative and content-rich programs and websites that augment the classroom curriculum and improve teacher productivity, providing parents and teachers with the technology to foster educational excellence. We won EDDIE Awards in the following categories:
Early Learning, Reading Website: Headsprout® by Learning A-Z
Early Learning, Online Classroom Library: Reading A-Z™ by Learning A-Z
Early Elementary, Online Classroom Library: Headsprout® by Learning A-Z

18



Upper Elementary, Science Website: Science A-Z® by Learning A-Z
Upper Elementary, Test Skills Website: ReadyTest A-Z™ by Learning A-Z
Upper Elementary, Writing Website: Writing A-Z™ by Learning A-Z
Multilevel, Reading Resource Website: Raz-Kids® by Learning A-Z
Teacher Tools, Educators Online Resource: Raz-Plus by Learning A-Z
Teacher Tools, Reading Resource Website: Reading A-Z by Learning A-Z
Early Elementary, Math Fluency Website: Reflex® by ExploreLearning
Multi-Level, Math & Science Online Simulations: Gizmos® by ExploreLearning
Upper Elementary, Literacy Website: Kurzweil 3000® by Kurzweil Education
Middle School, Literacy Website: Kurzweil 3000 by Kurzweil Education
High School, Literacy Website: Kurzweil 3000 by Kurzweil Education
Multi-Level, Literacy Website: Kurzweil 3000 by Kurzweil Education
2016 34th Annual Awards of Excellence by Tech & Learning Magazine
In October 2016, ExploreLearning was among the winners of Tech & Learning magazine’s 33rd Annual Awards of Excellence for Best Upgraded Product for its Gizmos product. The Tech & Learning Awards of Excellence recognize both new and upgraded education technology products. Judges evaluated more than 150 applicants using four criteria: quality and effectiveness, ease of use, creative use of technology, and suitability for use in an educational environment. Winners in the Best Upgraded Product category made significant enhancements in the past year to proven education tools.
2016 REVERE Award presented by the PreK-12 Learning Group of the Association of American Publishers
In June 2016, Voyager Sopris Learning received a 2016 REVERE Award for the content in its LANGUAGE!Live® product in the “Classroom Supplemental Resources for Learners with Additional Educational Needs” category. LANGUAGE!Live is a comprehensive English language arts curriculum for struggling adolescent readers and writers. The REVERE Awards are presented by the PreK-12 Learning Group of the Association of American Publishers to identify and honor excellence in educational materials.
2016 CODiE Awards
In May 2016, we received three 2016 CODiE Awards, representing the 5th consecutive year the Company has received at least one CODiE award. Since 1986, the Software and Information Industry Association (SIIA) CODiE Awards have recognized software and information companies for achievement and vision. It is the only peer-reviewed program in the content, education, and software industry. We won a 2016 award in the following categories:
Best Solution for Special Needs Students: Raz-Kids by Learning A-Z
Best PreK / Early Childhood Learning Solution: Headsprout by Learning A-Z
Best Educational App for a Mobile Device: Reflex by ExploreLearning
The 22nd Annual Best Educational Software Awards (“BESSIE”) presented by The ComputED Gazette
In April 2016, Learning A-Z, Voyager Sopris Learning, and ExploreLearning each received BESSIE Awards. The BESSIE Awards target innovative and content-rich programs and websites that provide parents and teachers with technology to foster educational excellence and are awarded to titles submitted by publishers worldwide. We won BESSIE Awards in the following categories:
Early Learning, Reading Website: Headsprout by Learning A-Z
Early Learning, Reading Skills Website: Raz-Kids by Learning A-Z

19



Early Elementary, Reading Website: Headsprout by Learning A-Z
Early Elementary, Science Website: Science A-Z by Learning A-Z
Early Elementary, Math Fluency Website: Reflex by ExploreLearning
Upper Elementary, Science Website: Science A-Z by Learning A-Z
Upper Elementary, Test Skills Website: ReadyTest A-Z by Learning A-Z
Upper Elementary, Reading Website: Reading A-Z by Learning A-Z
Upper Elementary, Writing Website: Writing A-Z by Learning A-Z
Multilevel, ESL Website: LANGUAGE! Live by Voyager Sopris Learning
Multilevel, Reading Resource Website: Raz-Kids by Learning A-Z
Multilevel, Math and Science Online Simulations: Gizmos by ExploreLearning
Teacher Tools, Reading Resource Website: Reading A-Z by Learning A-Z
Segment Information
We have three reportable segments with separate management teams and infrastructures that offer various products and services: Learning A-Z, Voyager Sopris Learning, and ExploreLearning. Segment results of operations include Other, which consists of unallocated shared services, such as accounting, legal, human resources and corporate related items, as well as depreciation and amortization expense, interest income and expense, other income and expense, and income taxes. We do not allocate any of these costs to our segments, and our chief operating decision maker evaluates performance of operating segments excluding these items.
Learning A-Z Segment
Learning A-Z is a PreK-6 education technology provider of digitally delivered resources and tools that support instruction and student growth in reading, writing, and science. Founded in 2002, Learning A-Z believes that an enlightened approach to literacy — which starts with reading and writing, but also includes the development of key 21st century skills like communication, creativity, collaboration, and critical-thinking — is the foundation to all learning. With a robust library of incredibly effective and flexible curriculum resources, Learning A-Z provides the tools teachers need to deliver personalized instruction for a wide range of student needs, including English language learners, intervention, special education, and daily instruction. Learning A-Z’s resources are currently used in more than half the districts across the United States and Canada and in over 175 countries worldwide. Learning A-Z is committed to:
Delivering unmatched value, whereby high-quality resources are affordable for every individual classroom 
Making personalized learning easier, giving teachers what they need to deliver the just-right instructional resources to every student
Empowering teachers as the foundation of student achievement, ensuring that teachers are given the support they need to be effective and efficient
Learning A-Z operates seven subscription-based websites: Reading A-Z™, Raz-Kids®, Headsprout®, Science A-Z®, Writing A-Z™, Vocabulary A-Z™, and ReadyTest A-Z™. These websites can be purchased stand-alone or in collections, for a comprehensive solution that provides online supplemental books, lessons, assessments and other instructional resources for individual classrooms, schools, and districts.

20



Voyager Sopris Learning Segment
The Voyager Sopris Learning segment includes our Voyager Sopris Learning and Kurzweil Education brands.
Voyager Sopris Learning Brand
The Voyager Sopris Learning brand is committed to partnering with school districts to meet and surpass their goals for student achievement. The Voyager Sopris Learning suite of instructional and service solutions is not only research based, but also evidence based — proven to increase student achievement and educator effectiveness. Voyager Sopris Learning’s solutions have been fully tested in the classroom, ensuring that they are easy to implement and teacher friendly. They are innovative, both in overall instructional approach and in the strategic use of technology in blended and 100% online solutions and are supported by an unparalleled commitment to build local capacity for sustained success. With a comprehensive suite of instructional resources, the Voyager Sopris Learning brand provides assessments, professional development and school improvement services, literacy and math instructional tools — both comprehensive intervention and supplemental — and resources to build a positive school climate.
Kurzweil Education Brand
The Kurzweil Education brand delivers educational technology that solves real problems. The Kurzweil Education literacy and learning solutions offer learners a way up and a path forward. Students’ varying needs, their challenges, and their potential to achieve drive Kurzweil Education, which continues to develop literacy-boosting solutions that directly enhance opportunities to learn and achieve. Using the principles of Universal Design for Learning, Kurzweil’s solutions deliver content and tools that enable all learners to read, understand, and demonstrate their learning using technology-based tools.
ExploreLearning Segment
ExploreLearning develops online solutions to improve student learning in math and science. ExploreLearning has two products: Gizmos®, which we believe is the world’s best library of interactive, online simulations for math and science in grades 3-12; and Reflex®, a powerful solution for math fact fluency development for grades 2-8.
Tax Asset Protection Rights Agreement
In September 2016, we entered into a Tax Asset Protection Rights Agreement (the “Rights Agreement”), between the Company and Wells Fargo Bank, National Association, as Rights Agent. The Rights Agreement is designed to preserve our substantial net operating loss carryforwards (NOLs) and other significant tax benefits which may be available to reduce potential future tax liabilities. The Rights Agreement is not intended to be an antitakeover measure or to deter offers that are fair and otherwise in the best interests of our stockholders.
Results of Operations
Bookings
Bookings is an internal, operational metric that measures the total dollar value of customer orders in a period, regardless of the timing of the related revenue recognition. We consider Bookings a leading indicator of revenues. During the nine months ended September 30, 2016, consolidated Bookings increased 3.8% to $127.1 million, compared to $122.4 million during the nine months ended September 30, 2015. Bookings by segment for the nine months ended September 30, 2016 and the percentage change from the same period of 2015 were as follows:
Learning A-Z: $54.8 million, increased 19.6% in the first nine months of the year compared to prior year, due to continued strong performance of all product lines, especially student-centric products, leading to third quarter growth of 23.5%.
Voyager Sopris Learning: $53.3 million, decreased 12.3% in the first nine months of the year, with a third quarter decrease of 6.8%. Bookings for the segment’s print and transactional solutions declined 16%, in line with expectations. Bookings for the segment’s technology-enabled solutions declined 3%, falling short of Company expectations for growth this year. LANGUAGE!Live, the segment’s flagship solution for technology-enabled adolescent intervention, had solid growth of 9%. However, overall segment Bookings were adversely impacted by sluggish performance by many of the segment’s older technology offerings and the use of pilot programs for the recently launched Velocity® product, which helps expand the pool of customer prospects for the long-term but does not immediately generate material top-line growth.
ExploreLearning: $19.0 million, increased 20.3% in the first nine months of the year, with a third quarter increase of 10.6%. This segment has seen strong momentum both in Reflex and in the Gizmos simulations which were upgraded to HTML5 in early 2016.

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We continue to execute our strategy to shift resources to subscription and technology-enabled products. For the nine months ended September 30, 2016, technology-enabled products represented approximately 71% of Bookings versus 65% for the same period of 2015. For purposes of this metric, technology-enabled products are defined as those products that are sold primarily as a technology-based solution or that could be used solely via a digital platform. For the Voyager Sopris Learning segment, several products classified as technology-enabled include supplemental print materials.
Restructuring
During the third quarter of 2016, management made some tactical decisions at the Voyager Sopris Learning segment to right-size costs and accelerate Voyager Sopris Learning's transformation from slower-growing legacy products toward newer and technology-enabled solutions. As a result, net income for the third quarter of 2016 includes restructuring costs of $0.9 million, representing severance charges. These restructuring costs are excluded from Adjusted EBITDA and Cash Income. The Voyager Sopris Learning restructuring costs were recorded as follows: cost of revenues of $0.4 million, research and development expense of $0.3 million, sales and marketing expense of $0.2 million, and general and administrative expense of $45 thousand.

Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015
 
 
Three Months Ended
 
Year Over Year Change
 
 
September 30, 2016
 
September 30, 2015
 
Favorable/(Unfavorable)
(in thousands)
 
Amount
 
% of Net
Revenues
 
Amount
 
% of Net
Revenues
 
$
 
%
Net revenues:
 
 

 
 

 
 

 
 

 
 

 
 

Learning A-Z
 
$
16,518

 
39.2
 %
 
$
13,733

 
34.0
 %
 
$
2,785

 
20.3
 %
Voyager Sopris Learning
 
19,466

 
46.2
 %
 
21,820

 
54.1
 %
 
(2,354
)
 
(10.8
)%
ExploreLearning
 
6,129

 
14.6
 %
 
4,786

 
11.9
 %
 
1,343

 
28.1
 %
Total net revenues
 
42,113

 
100.0
 %
 
40,339

 
100.0
 %
 
1,774

 
4.4
 %
Cost of revenues:
 
 

 
 

 
 

 
 

 
 

 
 

Learning A-Z
 
583

 
1.4
 %
 
416

 
1.0
 %
 
(167
)
 
(40.1
)%
Voyager Sopris Learning
 
7,381

 
17.5
 %
 
7,800

 
19.3
 %
 
419

 
5.4
 %
ExploreLearning
 
912

 
2.2
 %
 
904

 
2.2
 %
 
(8
)
 
(0.9
)%
Amortization expense
 
4,780

 
11.4
 %
 
4,434

 
11.0
 %
 
(346
)
 
(7.8
)%
Total cost of revenues
 
13,656

 
32.4
 %
 
13,554

 
33.6
 %
 
(102
)
 
(0.8
)%
Research and development expense
 
3,301

 
7.8
 %
 
2,935

 
7.3
 %
 
(366
)
 
(12.5
)%
Sales and marketing expense
 
12,152

 
28.9
 %
 
11,722

 
29.1
 %
 
(430
)
 
(3.7
)%
General and administrative expense
 
5,872

 
13.9
 %
 
5,120

 
12.7
 %
 
(752
)
 
(14.7
)%
Shipping and handling costs
 
380

 
0.9
 %
 
457

 
1.1
 %
 
77

 
16.8
 %
Depreciation and amortization expense
 
875

 
2.1
 %
 
1,001

 
2.5
 %
 
126

 
12.6
 %
Income before interest, other income
   (expense) and income taxes
 
5,877

 
14.0
 %
 
5,550

 
13.8
 %
 
327

 
5.9
 %
Net interest expense
 
(1,876
)
 
(4.5
)%
 
(3,575
)
 
(8.9
)%
 
1,699

 
47.5
 %
Other income, net
 

 
 %
 
204

 
0.5
 %
 
(204
)
 
(100.0
)%
Income tax expense
 
(173
)
 
(0.4
)%
 
(213
)
 
(0.5
)%
 
40

 
18.8
 %
Net income
 
$
3,828

 
9.1
 %
 
$
1,966

 
4.9
 %
 
$
1,862

 
94.7
 %
Net revenues
Net revenues increased during the three months ended September 30, 2016 by 4.4% to $42.1 million, compared to $40.3 million during the same period of 2015. Increased net revenues in Learning A-Z and ExploreLearning offset lower net revenues in Voyager Sopris Learning. Net revenues by segment were as follows:
Learning A-Z’s net revenues were $16.5 million, increasing $2.8 million, or 20.3%, in the quarter ended September 30, 2016 compared to the same period of 2015. The year-over-year growth in net revenues is the result of Learning A-Z’s ongoing strong Bookings trend.

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Voyager Sopris Learning’s net revenues were $19.5 million, decreasing $2.4 million, or 10.8%, during the quarter ended September 30, 2016 compared to the same period of 2015. The year-over-year decline in revenues is the result of Voyager Sopris Learning’s Bookings decline.
ExploreLearning’s net revenues were $6.1 million, increasing $1.3 million, or 28.1%, during the quarter ended September 30, 2016 compared to the same period of 2015. The increase in net revenues is a higher percentage than the increase in Bookings due to the recognition of prior period Bookings, which are recognized pro-rata over the applicable subscription periods.
Cost of revenues
Cost of revenues primarily include print and royalty costs, and expenses to purchase, handle and warehouse product, and to provide services and support to customers. Cost of revenues, excluding amortization, decreased $0.2 million, or 2.7%, to $8.9 million in the third quarter of 2016 compared to $9.1 million in the same period of 2015. Cost of revenues by segment were as follows:
Learning A-Z’s cost of revenues increased slightly by $0.2 million, to $0.6 million commensurate with higher net revenues, in the quarter ended September 30, 2016 compared to $0.4 million in the same period of 2015.
Voyager Sopris Learning’s cost of revenues decreased $0.4 million, or 5.4%, to $7.4 million in the quarter ended September 30, 2016 compared to $7.8 million in the same period of 2015. The decrease in cost of revenues was due to the year-over-year decline in revenue, partially offset by $0.4 million of restructuring costs.
ExploreLearning’s cost of revenues remained consistent at $0.9 million in the quarters ended September 30, 2016 and 2015.
Amortization expense
Amortization expense in cost of revenues includes amortization for acquired pre-publication costs and technology, acquired publishing rights, and developed pre-publication and technology product development. Amortization was $4.8 million in the third quarter of 2016, an increase of $0.3 million compared to the same period of 2015. The change was due to an increase in amortization of developed pre-publication and technology product development.
Research and development expense
Research and development expense includes costs to research, evaluate and develop educational products, net of capitalization. Research and development expense for the third quarter of 2016 increased $0.4 million to $3.3 million compared to $2.9 million for the third quarter of 2015. The increase is due to planned investments to support growth initiatives, primarily at Learning A-Z. Year-over-year savings at Voyager Sopris Learning were offset by the restructuring costs.
Sales and marketing expense
Sales and marketing expense includes all costs to maintain our various sales channels, including the salaries and commissions paid to our sales force, and costs related to our advertising and marketing efforts. Sales and marketing expense for the third quarter of 2016 increased $0.4 million to $12.2 million compared to $11.7 million for the third quarter of 2015. The increase is due to planned investments to support growth initiatives at Learning A-Z and ExploreLearning, partially offset by decreases in Voyager Sopris Learning. Year-over-year savings at Voyager Sopris Learning were partially offset by the restructuring costs.
General and administrative expense
General and administrative expenses increased by $0.8 million in the third quarter of 2016 to $5.9 million compared to $5.1 million for the third quarter of 2015. The quarterly variance primarily reflects timing of expenses; year-to-date, general and administrative costs as a percentage of net revenues are down slightly compared to 2015.
Shipping and handling costs
Shipping and handling costs for the quarter ended September 30, 2016 decreased slightly, by $0.1 million, to $0.4 million compared to $0.5 million the third quarter of 2015. Shipping and handling costs were 0.9% of net revenues for the three months ended September 30, 2016, down slightly from the 1.1% of net revenues for the same period of 2015 due to the higher mix of technology solutions.

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Net interest expense
Net interest expense decreased by $1.7 million, or 47.5%, to $1.9 million in the third quarter of 2016 compared to the same period in 2015 as a result of the debt refinancing completed in December 2015.
Other income, net
The Company had no Other income, net during the three months ended September 30, 2016 compared to $0.2 million for the same period in 2015. The decrease was due to the Company terminating a sublease agreement in October 2015.
Income tax expense
We recorded an income tax expense of $0.2 million for the third quarter of 2016 and 2015. We continue to maintain a valuation allowance against our deferred tax assets, which eliminates any non-current tax benefit generated.

Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015
 
 
Nine Months Ended
 
Year Over Year Change
 
 
September 30, 2016
 
September 30, 2015
 
Favorable/(Unfavorable)
(in thousands)
 
Amount
 
% of Net Revenues
 
Amount
 
% of Net Revenues
 
$
 
%
Net revenues:
 
 

 
 

 
 

 
 

 
 

 
 

Learning A-Z
 
$
48,127

 
41.9
 %
 
$
39,930

 
36.5
 %
 
$
8,197

 
20.5
 %
Voyager Sopris Learning
 
49,252

 
42.9
 %
 
54,831

 
50.2
 %
 
(5,579
)
 
(10.2
)%
ExploreLearning
 
17,492

 
15.2
 %
 
14,503

 
13.3
 %
 
2,989

 
20.6
 %
Total net revenues
 
114,871

 
100.0
 %
 
109,264

 
100.0
 %
 
5,607