exv10w11





Exhibit
10.11



EXECUTION COPY




          PERMANENT WAIVER AND AMENDMENT NO. 2, dated as of August 22, 2008 (this “Permanent Waiver and
Amendment”), among CAMBIUM LEARNING, INC., a Delaware corporation and successor to VSS-CAMBIUM
MERGER CORP. (“Borrower”), BARCLAYS BANK PLC, as Administrative Agent, and the Required Lenders, in
each case listed on the signature pages hereto, to the Credit Agreement dated as of April 12, 2007
(as waived and amended by the Limited Waiver and Amendment (“Amendment No. 1”), dated as of May 20,
2008, such Amendment No. 1 as extended by the letter agreement dated July 15, 2008 (“Letter
Agreement”), as further amended, supplemented, amended and restated, extended or otherwise modified
from time to time) (the “Credit Agreement”) among Borrower, VSS-CAMBIUM HOLDINGS, LLC, a Delaware
limited liability company (“Holdings”), the Subsidiary Guarantors, each lender from time to time
party thereto (collectively, the “Lenders” and individually, a “Lender”), CREDIT SUISSE SECURITIES
(USA) LLC, as co-syndication agent (in such capacity, “Co-Syndication Agent”), BNP PARIBAS, as
co-syndication agent (in such capacity, “Co-Syndication Agent” and together with the other
Co-Syndication Agent, the “Syndication Agents”), TD Securities (USA) LLC, as documentation agent
(in such capacity, “Documentation Agent”), and BARCLAYS BANK PLC, as issuing bank (in such
capacity, “Issuing Bank”), as administrative agent (in such capacity, “Administrative Agent”) for
the Lenders and as collateral agent (in such capacity, “Collateral Agent”) for the Secured Parties
and the Issuing Bank. Capitalized terms used and not otherwise defined herein shall have the
meanings assigned to them in the Credit Agreement.




          WHEREAS, at the request of the Loan Parties, the Administrative Agent and the Required Lenders
have agreed to make certain amendments to and waive certain defaults by the Borrower of its
obligations under the Credit Agreement, but only on the terms and conditions set forth in this
Permanent Waiver and Amendment.




          NOW, THEREFORE, in consideration of the premises and covenants contained herein and for other
good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound hereby, agree as follows:




          Section 1. Waivers. Subject to the satisfaction of the conditions set forth in
Section 4 of this Permanent Waiver and Amendment, with respect to any Defaults or Events of
Default set forth on Schedule I hereto (the “Schedule I Defaults”), the Required Lenders
hereby waive such Schedule I Defaults; provided that if Borrower has not complied in all material
respects with the covenant set forth in Section 5(f) hereto, all waivers hereby shall be
immediately rescinded and the Schedule I Defaults shall be immediately reinstated with full force
and effect. Notwithstanding anything herein to the contrary, any material new information and/or
material change in existing information provided to the Lenders prior to the date hereof, in each
case with respect to the Schedule I Defaults waived hereby, may be the basis for any new Defaults
or Events of Default.




          Section 2. Amendment to the Credit Agreement. In connection with the waivers
hereinabove described, from the Permanent Amendment Effective Date (as defined below), the Credit
Agreement shall be deemed modified to reflect the following:




 









 





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     (i) Section 1.01 of the Credit Agreement is amended by including the following
defined terms therein in appropriate alphabetical order:




“Escrow and Settlement Agreement” shall mean the Escrow Settlement, Release, and
Indemnity Agreement dated as of July 10, 2008 by and among Holdings, Borrower,
VSS-Cambium Settlement Fund, LLC, Whitney & Co., LLC, Whitney V, L.P. and the other
persons party thereto.




“Insolvency or Liquidation Proceeding” shall mean, collectively, (a) any voluntary
or involuntary case or proceeding under the Bankruptcy Code or any similar federal,
state or foreign law for the relief of debtors or any arrangement, reorganization,
insolvency, moratorium, assignment for the benefit of creditors, any other
marshalling of the assets and liabilities of Borrower, (b) any other voluntary or
involuntary insolvency, reorganization or bankruptcy case or proceeding, or any
receivership, liquidation, reorganization or other similar case or proceeding with
respect to Borrower or with respect to any substantial part of its assets, (c) any
liquidation, dissolution or winding up of Borrower, whether voluntary or
involuntary and whether or not involving insolvency or bankruptcy, (d) any
assignment for the benefit of creditors or any other marshaling of assets and
liabilities of Borrower, and (e) Borrower ceases to operate its business.




“Moody’s” shall mean Moody’s Investors Service, Inc.




“Permanent Amendment Effective Date” shall mean August 22, 2008.




“Permanent Waiver and Amendment” shall mean the Permanent Waiver and Amendment No.
2 which amends this Agreement, dated as of the Permanent Amendment Effective Date,
among the Borrower, the Administrative Agent and the Lenders party thereto.




“Ratings” shall mean, as of any date of determination, the corporate family ratings
level assigned to Borrower as determined and published by Moody’s and S&P, as
applicable.




“Revolver Availability Date” shall have the meaning set forth in the
Permanent Waiver and Amendment.




“S&P” shall mean Standard & Poor’s Rating Services, a Division of the McGraw Hill
Companies, Inc.




“Windle Matter Event” shall mean any indemnity payment, insurance payment or any
other payment or recovery (including, without limitation, recoveries from Jeffrey
S. Windle’s estate) arising from or related to any judgment, arbitration, order,
decree, settlement negotiation or other proceeding, whether criminal or civil in
nature, in connection with the theft,




 









 





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fraud, malfeasance and other conduct committed by Jeffrey S. Windle or any other
person involved in such conduct against the Loan Parties. For purposes of Section
2.10(k), the Net Cash Proceeds from the Escrow and Settlement Agreement shall be
deemed to be $23 million and shall constitute a Windle Matter Event.




     (ii) Section 1.01 of the Credit Agreement is amended by amending or restating the
following defined terms as follows:




     (a) the definition of “Applicable Margin” shall be amended and restated in its entirety as follows:




“Applicable Margin” shall mean, for any day, (i) with respect to any
Tranche B Loan, the applicable percentage set forth in Annex I-A under the
columns “Eurodollar” or “ABR”, as applicable for the appropriate Type of
Tranche B Loan that is opposite the applicable “Level” of the Borrower as
of the date of such Borrowing and (ii) with respect to any Revolving Loan,
the applicable percentage set forth in Annex I-B under the columns
“Eurodollar” or “ABR”, as applicable for the appropriate Type of Revolving
Loan that is opposite the applicable “Level” of the Borrower as of the
date of such Borrowing; provided that, in each case of clause (i) and (ii)
above, from and including September 5, 2008 and until but excluding the
date Section 5(a) of the Permanent Waiver and Amendment has been
satisfied in all material respects, such Applicable Margin shall be
increased by an additional 1.00% per annum.”




     (b) the definition of “Base Rate” shall be amended by adding the following sentence
to the end of such definition: “Notwithstanding anything above to the contrary, at no
time shall the Base Rate be less than 4.0% per annum.”




     (c) the definition of “Consolidated EBITDA” shall be amended by deleting the word
“and” at the end of clause (x)(ii)(l) and adding new clauses (x)(ii)(m) and (x)(ii)(n) as
follows: “(m)(A) all losses incurred for such period in respect of any Windle Matter Event
(and/or the underlying embezzlement related thereto) and which shall not exceed $1,801,000
in the aggregate after December 31, 2007 and (B) all fees and expenses incurred for such
period in respect of any Windle Matter Event (and/or the underlying embezzlement related
thereto) not to exceed $9.5 million, and (n) the fees paid under Sections 4(c) and
7 of the Permanent Waiver and Amendment (and such substantially similar fees paid
pursuant to that certain amendment and waiver to the Senior Unsecured Note Purchase
Agreement dated as of the Permanent Amendment Effective Date) and the cost of funds paid
under item 3 of Schedule I to the Permanent Waiver and Amendment not in excess of
$125,000, and”



 









 





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     (d) the definition of “Equity Issuance” shall be amended by deleting the words
“(y) any Permitted Cure Securities”, and replacing the words “and (z)” with the words “and
(y)”.




     (e) the definition of “Excess Cash Flow” shall be amended by deleting the word “and”
at the end of clause (l), adding the word “and” at the end of clause (m) and adding new
clause (n) as follows: “(n) all fees, expenses and losses incurred in respect of clauses
(m) and (n) of the definition of Consolidated EBITDA that are paid in cash during such
Excess Cash Flow Period;”




     (f) the definition of “Extraordinary Event” shall be amended and restated in its
entirety as follows:




“Extraordinary Event” shall mean any purchase price adjustment, indemnity
payment, pension plan revision or a Windle Matter Event; provided that a
Windle Matter Event shall not be subject to Section 2.10(g), but
shall be subject to Section 2.10(k) of this Agreement. For the
avoidance of doubt, “Extraordinary Event” shall not include a Casualty
Event.”




     (g) the definition of “LIBOR Rate” shall be amended by adding the
following sentence to the end of such definition: “Notwithstanding anything
above to the contrary, at no time shall the LIBOR Rate be less than 3.0% per annum.”




     (h) the definition of “Net Cash Proceeds” shall be amended by amending and
restating subsection (d) of such definition as follows:




          “(d) with respect to any Extraordinary Event (including, without limitation, a Windle
Matter Event), the cash proceeds or other compensation received in respect thereof, net of
all reasonable costs and expenses incurred in connection with the collections of such
proceeds, awards or other compensation in respect of such Extraordinary Event.”




     (i) the definition of “Preferred Stock Issuance” shall be amended by inserting
the words “or any Permitted Cure Securities” immediately after the words “to the Equity
Investors”.




     (iii) Section 2.06 (c) of the Credit Agreement shall be amended and restated in
its entirety as follows:




“(c) Default Rate. Notwithstanding the foregoing, during an Event
of Default, all Obligations shall, to the extent permitted by applicable
law, bear interest, after as well as before judgment, at a per annum rate
equal to (i) in the case of principal and premium, if any, of or interest
on any Loan, 2% (or 1% to the extent such Event



 









 






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of Default relates solely to the failure of the Borrower to comply
with Section 5(a) of the Permanent Waiver and Amendment) plus the rate
otherwise applicable to such Loan as provided in the preceding paragraphs
of this Section 2.06 or (ii) in the case of any other amount, 2%
(or 1% to the extent such Event of Default relates solely to the failure
of the Borrower to comply with 

Section 5(a) of the Permanent Waiver and
Amendment) plus the rate applicable to ABR Revolving Loans as provided in
Section 2.06(a) (in either case, the “Default Rate”).”




     (iv) Section 2.10 of the Credit Agreement is amended by (x) amending and restating
Section 2.10(e) in its entirety as follows:




“(e) Equity Issuance. Not later than five Business Days
following the receipt of any Net Cash Proceeds of (i) any Equity Issuance
(other than with respect to any Permitted Cure Securities and other than
the Net Cash Proceeds of any Equity Issuance used to finance Capital
Expenditures), Borrower shall make prepayments in accordance with
Sections 2.10(i) and (j) in an aggregate amount equal to
50% of such Net Cash Proceeds (provided that such percentage shall be
reduced to 25% if, and for so long as, the Total Leverage Ratio as of the
end of the most recent Test Period is less than 4.0 to 1.0); and (ii) any
Permitted Cure Securities, Borrower shall make prepayments in accordance
with Section 2.10(i) and (j) in an aggregate amount equal to 100% of such
Net Cash Proceeds.”




     and (y) inserting Section 2.10(k) immediately after Section 2.10(j) as
follows:




“(k) Windle Matter Event. Not later than five Business Days
following the receipt of any Net Cash Proceeds from a Windle Matter Event
by Holdings, its Affiliates or any of their respective Subsidiaries or any
other Person acting on behalf of the foregoing, Borrower shall make a
prepayment of the Tranche B Loans in reverse order of the prepayments
required under Section 2.09, and otherwise in accordance with the
terms of the second paragraph of Section 2.10(i) and Section
2.10(j) in an aggregate amount equal to 100% of such Net Cash
Proceeds.”




     (v) Section 2.19(c)(iv) of the Credit Agreement is amended and restated in its
entirety as follows:




“the Applicable Margins for the Incremental Term Loans shall be determined
by Borrower and the Lenders of the Incremental Term Loans; provided that
in the event that the Applicable Margins for any Incremental Term Loans
are greater than the Applicable



 









 





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Margins for the Tranche B Loans, then the Applicable Margins for the Tranche
B Loans shall be increased to the extent necessary so that the Applicable
Margins for the Incremental Term Loans are equal to the Applicable Margins
for the Tranche B Loans; provided, further, that in determining the
Applicable Margins applicable to the Tranche B Loans and the Incremental
Term Loans, (x) original issue discount (“OID”) or upfront fees (which
shall be deemed to constitute like amounts of OID) payable by Borrower to
the Lenders of the Tranche B Loans or the Incremental Term Loans in the
primary syndication thereof shall be included (with OID being equated to
interest based on an assumed four-year life to maturity) and (y) customary
arrangement or commitment fees payable to the Arrangers (or their
respective affiliates) in connection with the Tranche B Loans or to one or
more arrangers (or their affiliates) of the Incremental Term Loans shall
be excluded.”




     (vi) Section 4.02 of the Credit Agreement is amended by inserting Section
4.02(e) immediately after Section 4.02(d) as follows:




“(e) Revolving Loan Credit Extension. Pursuant to any
Revolving Borrowing, the proceeds of which will be used, in whole or in
part, to fund a Permitted Acquisition, Borrower shall have delivered and
the Administrative Agent shall have received an Officer’s Certificate
certifying that based on the current financial forecast and performance of
Holdings and its Subsidiaries on a consolidated basis, such Officer has
determined that Holdings and its Subsidiaries on a consolidated basis has
sufficient liquidity to fund the Borrower’s business in the ordinary
course for the 12 month period commencing with the first calendar month
immediately following the consummation of such Permitted Acquisition.”




     (vii) Section 5.01(b) of the Credit Agreement is amended by inserting “and
Monthly” after the word “Quarterly” in the title of the Section, inserting “(i)” at the
beginning of the Section, and inserting a new subclause (ii) at the end of the Section as follows:




“and (ii) as soon as available and in any event (x) for the first full six
months after the Permanent Amendment Effective Date, within 45 days after
the end of each calendar month and (y) thereafter, within 30 days after
the end of each calendar month, (1) a calculation of Consolidated EBITDA
for such month, (2) the consolidated balance sheet of Holdings as of the
end of such month and related consolidated statements of income and cash
flows for such month and for the then elapsed portion of the fiscal year,
in comparative form with (i) the budgets provided in accordance with



 









 





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Section 5.01(g) and (ii) the consolidated statements of income and
cash flows for the comparable periods in the previous fiscal year, and
notes thereto (including a note with a consolidating balance sheet and
statements of income and cash flows separating out Holdings, the Borrower
and the Subsidiaries);”




     (viii) Section 5.02 of the Credit Agreement is amended by deleting the word “and” at
the end of clause (d), adding the word “and” at the end of clause (e) and adding new clause (f) as
follows:




“(f)” any public announcement by Moody’s or S&P of any change or possible
change in a Rating.




     (ix) Section 6.01(o) of the Credit Agreement is amended and restated in its
entirety as follows:




“(o) (x) from the Permanent Amendment Effective Date until the date
Section 5(e) of the Permanent Waiver and Amendment has been satisfied in
all respects, unsecured Indebtedness of any Company in an aggregate amount
not to exceed $8.0 million at any time outstanding; provided that such
Indebtedness shall be evidenced by a note in form and substance as set
forth in Exhibit I to the Limited Waiver and Amendment with
modifications to such terms, if any, not more adverse to the interest of
the Lenders than any other Indebtedness incurred under this clause (o) and
outstanding on May 20, 2008 (including, without limitation, the
subordination of such Indebtedness to the Obligations) nor more favorable
to the creditors of any other Indebtedness of any Company than to the
Lenders hereunder; provided, further, that such Indebtedness shall only
accrue interest (including any default interest) in the form of
pay-in-kind interest and such Indebtedness shall not have any sinking fund
or other principal payment and shall not be redeemable or prepayable
without the prior written consent of the Required Lenders and (y)
thereafter, unsecured Indebtedness of any Company in an aggregate amount
not to exceed $5.0 million at any time outstanding; provided, however,
that (A) upon the occurrence of an Insolvency or Liquidation Proceeding,
all Obligations shall be paid in full in cash prior to any payment,
whether in cash or in kind, by offset, securities or any other property,
being made on account of such Indebtedness (provided that, if the Equity
Investors are the holders of such unsecured Indebtedness, nothing herein
shall prohibit or prevent the Equity Investors from converting such
Indebtedness into or exchanging such Indebtedness for Qualified Capital
Stock of Holdings), (B) the cash portion payable with respect to such
Indebtedness shall not accrue at an interest rate in excess of 10% per



 









 





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annum and (C) such Indebtedness shall not be on terms more favorable to
the creditors of any other Indebtedness of the Loan Parties than to the
Lenders hereunder.”




     (x) The proviso at the end of Section 8.04 of the Credit Agreement is
amended and restated in its entirety as follows:




“provided that in each fiscal year there shall be no more than one fiscal
quarter in which a Cure Right is exercised.”




     (xi) Annex I to the Credit Agreement is amended and restated in its entirety as follows:



“Annex I-A




Applicable Margin




Tranche B Loans




	 	 	 	 	 	 	 	 	 
	Ratings Level by Moody’s and S&P	 	Eurodollar	 	ABR
	Level I
	 	 	5.00	%	 	 	4.00	%
	 
	 	 	 	 	 	 	 	 
	B3 or better and B- or better
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Level II
	 	 	5.625	%	 	 	4.625	%
	 
	 	 	 	 	 	 	 	 
	If Level I does not apply and
either (x) B3 or better or (y) B-
or better
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Level III
	 	 	6.50	%	 	 	5.50	%
	 
	 	 	 	 	 	 	 	 
	If Levels I and II do not apply
or no Rating otherwise available
	 	 	 	 	 	 	 	 







     Initially, the Applicable Margin shall be determined based upon the Ratings specified in a
certificate delivered by Borrower, or if such certificate is not delivered, the Ratings shall be
deemed to be at Level III. Thereafter, each change in the Applicable Margin resulting from a
publicly announced change in the Rating shall be effective, in the case of an upgrade, during the
period commencing on the date of delivery by Borrower to the Administrative Agent of notice thereof
pursuant to Section 5.02(f) and ending on the date



 









 





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immediately preceding the effective date of the next such change and, in the case of a
downgrade, during the period commencing on the date of the public announcement thereof and
ending on the date immediately preceding the effective date of the next such change.



Annex I-B




Applicable Margin




Revolving Loans




	 	 	 	 	 	 	 	 	 	 	 	 	 
	Ratings Level by Moody’s and S&P	 	Eurodollar	 	ABR	 	Applicable Fee
	Level I
	 	 	5.00	%	 	 	4.00	%	 	 	0.375	%
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	B3 or better and B- or
better
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Level II
	 	 	5.625	%	 	 	4.625	%	 	 	0.50	%
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	If Level I does not apply and either (x) B3 or
better or (y) B- or better
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Level III
	 	 	6.50	%	 	 	5.50	%	 	 	0.50	%
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	If Levels I and II do not
apply or no Rating
otherwise available
	 	 	 	 	 	 	 	 	 	 	 	 







     (xii) Initially, the Applicable Margin and Applicable Fee shall be determined based
upon the Ratings specified in a certificate delivered by Borrower, or if such certificate is
not delivered, the Ratings shall be deemed to be at Level III. Thereafter, each change in the
Applicable Margin or Applicable Fee resulting from a publicly announced change in the Ratings
shall be effective, in the case of an upgrade, during the period commencing on the date of
delivery by Borrower to the Administrative Agent of notice thereof pursuant to Section
5.02(f) and ending on the date immediately preceding the effective date of the next such
change and, in the case of a downgrade, during the period commencing on the date of the public
announcement thereof and ending on the date immediately preceding the effective date of the
next such change.”



 









 





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     (xiii) Schedule 3.21 to the Credit Agreement is amended by including therein
the Escrow and Settlement Agreement.




     (xiv) All references to Annex I in the Credit Agreement shall be to Annex I-A and/or
Annex I-B as applicable.



          Section 3. Representations and Warranties. Borrower represents and
warrants to the Lenders as of the date hereof that:





     (a) The execution, delivery and performance of this Permanent Waiver and Amendment have
been duly authorized by all necessary corporate action by Borrower, and (i) do not require
any consent or approval of, registration or filing with, or any other action by, any
Governmental Authority, (ii) will not violate the Organizational Documents of any Loan
Party, (iii) will not violate any Requirement of Law, (iv) will not violate or result in a
default or require any consent or approval under any indenture, agreement or other
instrument binding upon any Loan Party or its property, or give rise to a right thereunder
to require any payment to be made by any Loan Party, and (v) will not result in the creation
or imposition of any Lien on any property of any Loan Party, except Liens created by the
Loan Documents and Permitted Liens;




     (b) This Permanent Waiver and Amendment constitutes the legal, valid and binding
obligations of Borrower enforceable against Borrower and the other Loan Parties in
accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors’ rights generally and subject to general
principles of equity, regardless of whether considered in a proceeding in equity or at law;




     (c) On and as of the Permanent Amendment Effective Date (giving effect to this
Permanent Waiver and Amendment), each of the representations and warranties made by any Loan
Party contained in Article III of the Credit Agreement and each other Loan Document is true
and correct in all material respects (except that any representation and warranty that is
qualified as to “materiality” or “Material Adverse Effect” shall be true and correct in all
respects on and as of the Permanent Amendment Effective Date (giving effect to this waiver)
as if made on and as of such date and except to the extent that such representations and
warranties specifically relate to an earlier date);




     (d) On and as of the Permanent Amendment Effective Date (giving effect to this
Permanent Waiver and Amendment), Borrower and the other Loan Parties represent and warrant
that (x) no other event has occurred that would give rise to a mandatory prepayment event
under Section 2.10 of the Credit Agreement and (y) other than the Net Cash Proceeds
from the Escrow and Settlement Agreement applied to prepay the Tranche B Loan in accordance
with Section 5(f) below, there are no other proceeds from any source which are
subject to the mandatory prepayment provisions of Section 2.10 of the Credit
Agreement, except in each case as set forth on Schedule II hereto;




     (e) Borrower has delivered to the Administrative Agent and the Required Lenders
(i) the draft consolidated financial statements of Holdings and the footnotes



 









 





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thereto for the fiscal year ended December 31, 2007 as attached on Schedule III hereto,
(ii) the revised summary forecast of the financial performance of Holdings, Borrower and
their Subsidiaries and (iii) the final report dated August 5, 2008 prepared by FTI
Consulting, Inc., relating to the fraud and malfeasance perpetrated by Jeffrey S. Windle
against Holdings and its Subsidiaries (the “FTI Report”); and




     (f) At the time of and after giving effect to this Permanent Waiver and
Amendment, no Default or Event of Default has occurred and is continuing.



          Section 4. Conditions. This Permanent Waiver and Amendment shall become
effective as of the date (the “Permanent Amendment Effective Date”) when, and only when, each of
the following conditions precedent shall have been (or is or will be substantially concurrently
therewith) satisfied:





     (a) The Administrative Agent (or its counsel) shall have received from each of Borrower
and the Required Lenders either (i) a counterpart of this Permanent Waiver and Amendment
signed on behalf of Borrower and the Required Lenders or (ii) written evidence satisfactory
to the Administrative Agent (which may include facsimile transmission or other electronic
communication permitted under the Credit Agreement of a signed signature page of this
Permanent Waiver and Amendment) that each of Borrower and the Required Lenders has signed a
counterpart of this Waiver and Amendment;




     (b) The Administrative Agent and the Required Lenders shall have received evidence
satisfactory to the Administrative Agent that the Company (as defined in the Senior
Unsecured Note Purchase Agreement) and the Required Note-Holders (as defined in the Senior
Unsecured Note Purchase Agreement) shall have entered into a permanent waiver and amendment
of the Senior Unsecured Note Purchase Agreement in form and substance as set forth on
Schedule IV hereto; and




     (c) Borrower shall have paid to the Administrative Agent, for the benefit of each
Lender who consents to this Permanent Waiver and Amendment on or prior to 5:00 p.m., New
York City time, on August 27, 2008, a fee (in immediately available funds) on the Permanent
Amendment Effective Date in an amount equal to 50 basis points of each such Lender’s
outstanding Loans and unused Revolving Commitments as of the Business Day ending immediately
prior to the Permanent Amendment Effective Date.



          Section 5. Covenants.





     (a) On or prior to October 31, 2008, Borrower shall have delivered, and the
Administrative Agent and the Required Lenders shall have received the consolidated financial
statements of Holdings for the fiscal year ended December 31, 2007 accompanied by an
unqualified audit opinion of Ernst & Young LLP (the “Audited Financial Statements”) which
shall not differ in any materially adverse respect from the draft financial statements and
footnotes thereto for the fiscal year ended December 31, 2007 set forth on Schedule
III hereto.



 









 






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     (b) On or prior to the later of (i) September 12, 2008 and (ii) the date of the
delivery of the Audited Financial Statements, Borrower shall have delivered, and the
Administrative Agent and the Required Lenders shall have received a management report, a
narrative report, management’s discussion and analysis and all other deliverables required
under Sections 5.01(a), (c), (d) and (h) of the Credit
Agreement for such fiscal period.




     (c) No later than September 12, 2008, Borrower shall have delivered and the
Administrative Agent and the Required Lenders shall have received (x) the unaudited
consolidated financial statements of Holdings for the fiscal quarter ended June 30, 2008 and
(y) all other deliverables required to be delivered in accordance with Sections 5.01(b)
and (c) of the Credit Agreement for such fiscal period.




     (d) From the Permanent Amendment Effective Date until the covenants under this
Section 5 (other than this Subsection (d)) have been satisfied (the “Revolver
Availability Date”), no Credit Extensions shall be requested by the Borrower under the
Credit Agreement.




     (e) No later than three Business Days after the date hereof, all subordinated
Indebtedness held by Equity Investors shall have been converted into Qualified Capital Stock
of Holdings (provided that the terms of such Qualified Capital Stock shall not require any
dividends, payments or other distributions of cash or property other than payments in kind,
in each case prior to the payment in full of all obligations under the Loan Documents) and
no Indebtedness shall be outstanding under Section 6.01(o) of the Credit Agreement.
For the avoidance of doubt, the amount of such subordinated Indebtedness converted shall
have been not more than $7,000,000 and upon the satisfaction of this clause (e), all such
subordinated Indebtedness shall be deemed to have been repaid in full and retired on June
30, 2008.




     (f) No later than three Business Days after the date hereof, Borrower shall have
received, in immediately available funds, Net Cash Proceeds from the Escrow and Settlement
Agreement in an aggregate amount of not less than $23.0 million, and such Net Cash Proceeds
shall have been immediately applied to prepay the Tranche B Loan in reverse order of the
prepayments required under Section 2.09 of the Credit Agreement and otherwise in
accordance with the terms of the second paragraph of Section 2.10(i) and Section
2.10(j) of the Credit Agreement.



          Section 6. Event of Default. The failure of Borrower to comply with Section
5 hereto (other than clauses (c) (which shall have the applicable grace period afforded
to such deliverable by Section 8.01(e) of the Credit Agreement) and (d) thereto) shall
constitute an immediate Event of Default under the Credit Agreement.




          Section 7. Expenses. Borrower agrees to promptly reimburse the Administrative
Agent for its reasonable out-of-pocket expenses incurred in connection with this Permanent




 









 





 -13-



Waiver and Amendment, including the reasonable fees, charges and disbursements of Cahill
Gordon & Reindel llp.




          Section 8. Counterparts. This Permanent Waiver and Amendment may be executed in
any number of counterparts and by different parties hereto on separate counterparts, each of which
when so executed and delivered shall be deemed to be an original, but all of which when taken
together shall constitute a single instrument. Delivery of an executed counterpart of a signature
page of this Permanent Waiver and Amendment by facsimile transmission or electronic email
affirmation shall be effective as delivery of a manually executed counterpart hereof.




          Section 9. Applicable Law; Jurisdiction; Consent to Service of
Process.
THIS PERMANENT WAIVER AND AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW
OF THE STATE OF NEW YORK. The waiver of venue, waiver of jury trial, jurisdiction and consent to
service of process provisions set forth in Sections 10.09 and 10.10 of the Credit
Agreement are hereby incorporated by reference, mutatis mutandis, in this Permanent Waiver and
Amendment.




          Section 10. Headings. The headings of this Permanent Waiver and Amendment are for
purposes of reference only and shall not limit or otherwise affect the meaning hereof.




          Section 11. Effect of Permanent Waiver and Amendment. Except as expressly set
forth herein, this Permanent Waiver and Amendment shall not by implication or otherwise limit,
impair, constitute a waiver of or otherwise affect the rights and remedies of the Lenders or the
Agents under the Credit Agreement or any other Loan Document, and shall not alter, modify, amend or
in any way affect any of the terms, conditions, obligations, covenants or agreements contained in
the Credit Agreement or any other provision of the Credit Agreement or any other Loan Document, all
of which are ratified and affirmed in all respects and shall continue in full force and effect.
Amendment No. 1 and the Letter Agreement shall each hereby be superseded in their entirety by this
Permanent Waiver and Amendment and each of Amendment No. 1 and the Letter Agreement are of no
further force or effect. By executing and delivering a copy hereof, each applicable Loan Party
hereby agrees and confirms that all Loans and Obligations shall be guaranteed and secured pursuant
to the Loan Documents as provided therein.




 









 





          IN WITNESS WHEREOF, the parties hereto have caused this Permanent Waiver and Amendment to be
duly executed as of the date first above written.




	 	 	 	 	 
	 	          CAMBIUM LEARNING, INC.

 	 
	 	By:  	/s/ Eric Van Ert
 	 
	 	 	Name:  	Eric Van Ert 	 
	 	 	Title:  	Secretary 	 
	 







 









 





	 	 	 	 	 
	 	Very truly yours,



BARCLAYS BANK PLC, as Administrative Agent, Issuing Bank, Collateral Agent and Lender

 	 
	 	By:  	/s/ David Barton
 	 
	 	 	Name:  	David Barton  	 
	 	 	Title:  	Director 	 
	 






 









 








	 	 	 	 	 
	 	CREDIT SUISSE, CAYMAN ISLANDS

BRANCH, as a Lender

 	 
	 	By:  	/s/ Rianka Mohan
 	 
	 	 	Name:  	Rianka Mohan         	 
	 	 	Title:  	Vice President 	 
	 
	 	 	 
	 	By:  	/s/ Shaheen Malik
 	 
	 	 	Name:  	Shaheen Malik 	 
	 	 	Title:  	Associate 	 
	 







 









 








	 	 	 	 	 
	 	CIFC FUNDING 2007-II, LTD.,

CIFC FUNDING 2007-III, LTD.,

CIFC FUNDING 2007-IV, LTD.,

CIFC FUNDING 2007-50, LTD., as a Lender

 	 
	 	By:  	/s/ Steve Vaccaro
 	 
	 	 	Name:  	Steve Vaccaro 	 
	 	 	Title:  	Co-Chief Investment Officer and


Chief Risk Officer 	 
	 






 









 





	 	 	 	 	 
	 	ColumbusNova CLO Ltd. 2007-I



as a Lender

 	 
	 	By: 	/s/ Paul L. Cal
 	 
	 	Name: 	Paul L. Cal 	 	 
	 	Title: 	Associate Director 	 	 
	 
	 	ColumbusNova CLO IV Ltd. 2007-II



as a Lender

 	 
	 	By:  	/s/ Paul L. Cal
 	 
	 	Name: 	Paul L. Cal 	 	 
	 	Title: 	Associate Director 	 	 
	 






 









 









	 	 	 	 	 
	 	Knightsbridge CLO 2008- [ILLEGIBLE], as a Lender

 	 
	 	By:  	ACKB LLC, as its Investment Manager
 	 
	 	 	 	 
	 	By:  	
/s/ Marshall McFedors
 	 
	 	 	Name:  	Marshall McFedors 	 
	 	 	Title:  	Principal 	 
	 
	 	[If a second signature is necessary:]

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 






 









 









	 	 	 	 	 	 	 	 	 
	 	 	GoldenTree Multi Strategy Financing I, Limited
	 
	 	 	By: GoldenTree Asset Management, LP, as a Lender
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	By:	 	/s/ Karen Weber	 	 
	 

	 	 	 	 	 	 

Name: Karen Weber
	 	 
	 

	 	 	 	 	 	Title: Authorized Signatory	 	 







 









 








	 	 	 	 	 	 	 	 	 
	 	 	GoldenTree Multi Strategy Subsidiary, LLC
	 
	 	 	By: GoldenTree Asset Management, LP, as a Lender
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	By:	 	/s/ Karen Weber

	 	 
	 

	 	 	 	 	 	 

Name: Karen Weber
	 	 
	 

	 	 	 	 	 	Title: Authorized Signatory	 	 






 









 






	 	 	 	 	 	 	 	 	 
	 	 	GoldenTree Loan Opportunities IV, Limited
	 
	 	 	By: GoldenTree Asset
Management, LP, as a Lender
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	By:	 	/s/ Karen Weber	 	 
	 

	 	 	 	 	 	 

Name: Karen Weber
	 	 
	 

	 	 	 	 	 	Title: Authorized Signatory	 	 






 









 






	 	 	 	 	 	 	 	 	 
	 	 	GoldenTree Loan Opportunities III, Limited
	 
	 	 	By: GoldenTree Asset Management, LP, as a Lender
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	By:	 	/s/ Karen Weber	 	 
	 

	 	 	 	 	 	 

Name:
Karen Weber	 	 
	 

	 	 	 	 	 	Title: Authorized Signatory	 	 






 









 






	 	 	 	 	 	 	 	 	 
	 	 	GoldenTree Capital Opportunities, LP
	 
	 	 	By: GoldenTree Asset Management, LP, as a Lender
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	By:	 	/s/ Karen Weber	 	 
	 

	 	 	 	 	 	 

Name:  Karen Weber
		 
	 

	 	 	 	 	 	Title: Authorized Signatory	 	 






 









 





	 	 	 	 	 
	 	BNP PARIBAS, as a Lender

 	 
	 	By:  	/s/ Ola Anderssen
 	 
	 	 	Ola Anderssen  	 
	 	 	Director 	 
	 
	 	 	 
	 	By:  	                     /s/ Yung Wu
 	 
	 	 	Yung Wu  	 
	 	 	Vice President 	 
	 






 









 








	 	 	 	 	 	 	 	 	 
	 	 	Sargas CLO I Ltd.
	 	 	By Sargas Asset Management, LLC, its Portfolio Manager
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	By:
	 	/s/ Michael P. King	 	 
	 

	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	Name: Michael P. King

Title: Senior Managing Director	 	 








 









 






	 	 	 	 	 
	 	TORONTO DOMINION (TEXAS) LLC, as a Lender

 	 
	 	By:  	/s/ Jackie Barrett	 
	 	 	Name: 	Jackie Barrett	 
	 	 	Title: 	Authorized Signatory	 
	 
	 	[If a second signature is necessary:]

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 






 









 









SCHEDULE I





	1.	 	The Events of Default that have occurred due to the breach of Sections 3.04,
3.14, 3.21, 4.02, 5.01(a), 5.01(b), 5.01(c),
5.01(d), 5.01(h), 5.02(a), 5.07 and 5.08 of the Credit
Agreement resulting from the theft, fraud and malfeasance of Jeffrey S. Windle as disclosed
by Holdings to the Lenders in the FTI Report, or with respect to Sections 5.01(a), (b), (c),
(d) and (h), for all deliveries of financial statements for the periods ending from December
31, 2007 through and including June 30, 2008 and any management reports, certificates and
other documents or information to be delivered concurrently therewith.
	 
	2.	 	Any Event of Default that has occurred from the delivery of financial statements pursuant to
Section 5.01(b) and (c) of the Credit Agreement to the extent such Events of
Default relate to footnotes excluding the impact of the investigation into the into the theft,
fraud and malfeasance of Jeffrey S. Windle.
	 
	3.	 	Any Default or Event of Default that would occur under Section 2.10(d),
2.10(e), 6.01(o), 6.04, 6.08 or 6.09 as a result of
(i) any conversion of subordinated Indebtedness in accordance with Section 5(e) of
this Permanent Waiver and Amendment, (ii) the payment or reimbursement of any cost of funds to
Equity Investors not in excess of $125,000 relating to subordinated Indebtedness described in
Section 5(e) of this Permanent Waiver and Amendment, or (iii) reimbursement to Equity
Investors of fees and expenses paid by Equity Investors on behalf of Borrower or any other
Loan Party related to a Windle Matter Event not to exceed the total amount of fees and
expenses set forth in clauses (m)(B) and (n) of the definition of Consolidated EBITDA.








 









 








SCHEDULE II




Proceeds of Recoveries from the Estate of Jeffrey S. Windle




     Recoveries from proceeds of Jeffrey S. Windle’s estate, including without limitation, houses,
cars, boats and bank accounts by any Company or in connection with the foreclosure proceeding
brought by VSS-Cambium Maritime, LLC, an affiliate of Borrower. Upon the receipt of such recoveries
or the consummation of such foreclosure proceeding, the Net Cash Proceeds therefrom (x) to the
extent such recovery is not made by Borrower, will be promptly contributed to Borrower, and (y) and
will be promptly applied in accordance with the terms of the Credit Agreement (after giving effect
to the Permanent Waiver and Amendment).



 









 





SCHEDULE III




Draft Consolidated Financial Statements and Footnotes Thereto 

for the Fiscal Year Ended December 31, 2007




 









 







Consolidated Financial Statements

and Supplemental Information



Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)

Year Ended December 31, 2006 (Predecessor Period as

Restated)

Period from January 1, 2007 through April 11, 2007

(Predecessor Period); and

Period from January 29, 2007 (inception) through

December 31, 2007 (Successor Period)

With Report of Independent Auditors





 









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Consolidated Financial Statements and

Supplemental Information




Year Ended December 31, 2006 (Predecessor Period as Restated);




Period from January 1, 2007 through April 11, 2007 (Predecessor Period); and




Period from January 29, 2007 (Inception) through December 31, 2007 (Successor Period)




Contents




	 	 	 	 	 
	Report of Independent Auditors
	 	 	1	 
	 
	 	 	 	 
	Audited Consolidated Financial Statements
	 	 	 	 
	 
	 	 	 	 
	Consolidated Balance Sheets
	 	 	2	 
	Consolidated Statements of Operations
	 	 	4	 
	Consolidated Statements of Stockholders’/Members’ Equity
	 	 	5	 
	Consolidated Statements of Cash Flows
	 	 	7	 
	Notes to Consolidated Financial Statements
	 	 	8	 
	 
	 	 	 	 
	Supplemental Information
	 	 	 	 
	 
	 	 	 	 
	Consolidating Balance Sheet
	 	 	49	 
	Consolidating Statement of Operations
	 	 	51	 
	Consolidating Statement of Cash Flows
	 	 	52	 






 









 






OPINION PAGE




1









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Consolidated Balance Sheets




	 	 	 	 	 	 	 	 	 	 
	 	 	Predecessor	 	 	 
	 	 	(as restated)	 	 	Successor
	 	 	December 31	 	 	December 31
	 	 	2006	 	 	2007
	 	 	 	 	 	 
	Assets
	 	 	 	 	 	 	 	 	 
	Current assets:
	 	 	 	 	 	 	 	 	 
	Cash and cash equivalents
	 	$	1,641,831	 	 	 	$	1,206,246	 
	Accounts receivable, net of allowance for bad debt of $347,912 and
sales returns of $154,112 in 2006 and net of allowance for bad
debt of $489,695 and sales returns of $205,464 in 2007
	 	 	8,298,144	 	 	 	 	9,508,735	 
	Inventories
	 	 	8,331,856	 	 	 	 	9,698,171	 
	Deferred tax assets
	 	 	3,738,476	 	 	 	 	5,362,054	 
	Prepaid expenses and other current assets
	 	 	2,996,476	 	 	 	 	825,544	 
	 	 	 	 	 	 
	Total current assets
	 	 	25,006,783	 	 	 	 	26,600,750	 
	 
	 	 	 	 	 	 	 	 	 
	Property, plant, and equipment, net
	 	 	13,599,206	 	 	 	 	18,808,134	 
	Pre-publication costs
	 	 	3,866,614	 	 	 	 	2,685,338	 
	Author advances
	 	 	74,493	 	 	 	 	56,323	 
	Goodwill
	 	 	45,417,715	 	 	 	 	192,287,323	 
	Other intangible assets
	 	 	49,921,012	 	 	 	 	123,408,901	 
	Other long-term assets
	 	 	142,136	 	 	 	 	5,291,534	 
	 	 	 	 	 	 
	Total assets
	 	$	138,027,959	 	 	 	$	369,138,303	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 
	Liabilities and stockholders’ and members’ equity
	 	 	 	 	 	 	 	 	 
	Current liabilities:
	 	 	 	 	 	 	 	 	 
	Accounts payable
	 	$	3,302,943	 	 	 	$	5,976,467	 
	Royalties payable
	 	 	1,446,246	 	 	 	 	1,433,421	 
	Accrued salaries, bonus, and commissions
	 	 	4,157,539	 	 	 	 	2,234,239	 
	Note payable — line of credit
	 	 	5,000,000	 	 	 	 	—	 
	Interest payable — related party
	 	 	401,036	 	 	 	 	—	 
	Current portion of long-term debt
	 	 	—	 	 	 	 	1,280,000	 
	Income taxes payable
	 	 	—	 	 	 	 	298,893	 
	Deferred revenue
	 	 	1,555,293	 	 	 	 	1,429,521	 
	Deferred compensation
	 	 	7,623,394	 	 	 	 	100,000	 
	Other accrued expenses
	 	 	3,384,841	 	 	 	 	4,096,101	 
	 	 	 	 	 	 
	Total current liabilities
	 	 	26,871,292	 	 	 	 	16,848,642	 
	 
	 	 	 	 	 	 	 	 	 
	Long-term debt, net of current portion
	 	 	—	 	 	 	 	176,401,960	 
	Long-term debt — related party
	 	 	17,500,000	 	 	 	 	—	 
	Royalties payable
	 	 	29,602	 	 	 	 	—	 
	Co-development liability
	 	 	974,388	 	 	 	 	780,092	 
	Deferred tax liabilities
	 	 	3,698,259	 	 	 	 	29,436,235	 
	Deferred compensation
	 	 	390,724	 	 	 	 	269,020	 
	Accrued long-term building costs
	 	 	9,183,011	 	 	 	 	13,239,336	 
	Other
	 	 	485,352	 	 	 	 	2,083,011	 
	 	 	 	 	 	 
	Total liabilities
	 	 	59,132,628	 	 	 	 	239,058,296	 






Commitments and contingencies (Note 14)





2









 








VSS-Cambium Holdings, LLC (Successor)




Consolidated Balance Sheets (continued)




	 	 	 	 	 	 	 	 	 	 
	 	 	Predecessor	 	 	 
	 	 	(as restated)	 	 	Successor
	 	 	December 31	 	 	December 31
	 	 	2006	 	 	2007
	 	 	 	 	 	 
	Stockholders’ equity:
	 	 	 	 	 	 	 	 	 
	Series A convertible preferred stock, $0.01 par value:
	 	 	 	 	 	 	 	 	 
	Authorized — 100,000,000 shares; issued and outstanding —
84,700,000 in 2006 (liquidation preference $84,700,000 in
2006)
	 	$	84,655,093	 	 	 	 	 	 
	Common stock, $0.01 par value:
	 	 	 	 	 	 	 	 	 
	Authorized — 110,000,000 shares; issued and outstanding — 2,720,718
	 	 	27,207	 	 	 	 	 	 
	Additional paid-in capital
	 	 	6,894,953	 	 	 	 	 	 
	Accumulated deficit
	 	 	(12,681,922	)	 	 	 	 	 
	 	 	 	 	 	 
	Total stockholders’ equity
	 	 	78,895,331	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 
	Members’ equity:
	 	 	 	 	 	 	 	 	 
	Members’ interest
	 	 	 	 	 	 	$	144,023,857	 
	Accumulated deficit
	 	 	 	 	 	 	 	(13,943,850	)
	 	 	 	 	 	 
	Total members’ equity
	 	 	 	 	 	 	 	130,080,007	 
	 	 	 	 	 	 
	Total liabilities and stockholders’ members’ equity
	 	$	138,027,959	 	 	 	$	369,138,303	 
	 	 	 	 	 	 






See accompanying notes.




3









 





Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Consolidated Statements of Operations




	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Predecessor	 	 	Successor
	 	 	Predecessor	 	Period	 	 	Period
	 	 	Year Ended	 	from January 1	 	 	from January 29
	 	 	December 31	 	2007 through	 	 	2007 (inception) to
	 	 	2006 (as	 	April 11	 	 	December 31
	 	 	restated)	 	2007	 	 	2007
	 	 	 	 	 	 
	Net sales
	 	$	106,423,500	 	 	$	18,413,508	 	 	 	$	80,847,321	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cost and expenses:
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cost of sales, excluding pre-publication, publishing rights
and developed technology amortization, including
$381,850 of performance share plan expenses in 2006
	 	 	39,970,616	 	 	 	7,541,221	 	 	 	 	31,308,237	 
	Pre-publication, publishing rights and developed technology amortization
	 	 	11,335,271	 	 	 	3,511,795	 	 	 	 	12,842,070	 
	 	 	 	 	 	 
	Total cost of sales
	 	 	51,305,887	 	 	 	11,053,016	 	 	 	 	44,150,307	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Selling and administrative, including $1,668,904 of performance share plan expenses in 2006
	 	 	45,636,349	 	 	 	20,814,785	 	 	 	 	29,926,744	 
	Other intangible asset amortization
	 	 	1,013,098	 	 	 	310,918	 	 	 	 	7,228,665	 
	Acquired in-process research and development
	 	 	—	 	 	 	—	 	 	 	 	890,000	 
	Embezzlement and related expenses (Note 1)
	 	 	3,261,132	 	 	 	999,516	 	 	 	 	5,731,671	 
	 	 	 	 	 	 
	Total cost and expenses
	 	 	101,216,466	 	 	 	33,178,235	 	 	 	 	87,927,387	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Income (loss) from operations
	 	 	5,207,034	 	 	 	(14,764,727	)	 	 	 	(7,080,066	)
	Interest and other expenses
	 	 	(1,364,117	)	 	 	(741,522	)	 	 	 	(14,689,090	)
	 	 	 	 	 	 
	Income (loss) from operations before taxes
	 	 	3,842,917	 	 	 	(15,506,249	)	 	 	 	(21,769,156	)
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Income tax provision (benefit)
	 	 	3,403,242	 	 	 	(3,694,058	)	 	 	 	(7,838,647	)
	 	 	 	 	 	 
	Net income (loss)
	 	$	439,675	 	 	$	(l1,812,191	)	 	 	$	( 13,930,509	)
	 	 	 	 	 	 






See accompanying notes.




4









 





Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Consolidated Statements of Stockholders’/Members’ Equity




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Series A Convertible	 	Common	 	 	 	 	 	Additional	 	 	 	 	 	 	 	 
	 	 	Preferred Stock	 	Stock	 	Par	 	Paid-In	 	Accumulated	 	 	 	 	 	 
	 	 	Shares	 	Value	 	Shares	 	Value	 	Capital	 	Deficit	 	Total	 	 	 	 
	 	 	 
	Predecessor Period
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at December 31,
2005 as previously
reported
	 	 	73,050,000	 	 	$	73,005,093	 	 	 	2,720,718	 	 	$	27,207	 	 	$	2,693,511	 	 	$	(8,464,347	)	 	$	67,261,464	 	 	 	 	 
	Restatement adjustments
(Note 1)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(1,641,250	)	 	 	(1,641,250	)	 	 	 	 
	 	 	 
	Balance at
December 31, 2005, as
restated
	 	 	73,050,000	 	 	 	73,005,093	 	 	 	2,720,718	 	 	 	27,207	 	 	 	2,693,511	 	 	 	(10,105,597	)	 	 	65,620,214	 	 	 	 	 
	Beneficial conversion
related to preferred stock
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	3,016,000	 	 	 	(3,016,000	)	 	 	—	 	 	 	 	 
	Issuance of preferred stock
	 	 	11,650,000	 	 	 	11,650,000	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	11,650,000	 	 	 	 	 
	Stock-based compensation
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	1,185,442	 	 	 	 	 	 	 	1,185,442	 	 	 	 	 
	Net income, as restated
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	439,675	 	 	 	439,675	 	 	 	 	 
	 	 	 
	Balance at December 31,
2006
	 	 	84,700,000	 	 	 	84,655,093	 	 	 	2,720,718	 	 	 	27,207	 	 	 	6,894,953	 	 	 	(12,681,922	)	 	 	78,895,331	 	 	 	 	 
	Stock-based compensation
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(68,967	)	 	 	 	 	 	 	(68,967	)	 	 	 	 
	Conversion of preferred
stock to common stock
(Note 9)
	 	 	(84,700,000	)	 	 	(84,655,093	)	 	 	84,700,000	 	 	 	84,700	 	 	 	84,570,393	 	 	 	 	 	 	 	—	 	 	 	 	 
	Net loss
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(11,812,192	)	 	 	(11,812,192	)	 	 	 	 
	 	 	 
	Balance at April 11, 2007
	 	 	—	 	 	$	—	 	 	 	87,420,718	 	 	$	111,907	 	 	$	91,396,379	 	 	$	(24,494,114	)	 	$	67,014,172	 	 	 	 	 
	 	 	 






See accompanying notes.





5









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Consolidated Statements of Stockholders’/Members’ Equity (continued)




	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Members’	 	Accumulated	 	 
	 	 	Interest	 	Deficit	 	Total
	 	 	 
	Successor Period
	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at January 29, 2007 (inception)
	 	 	 	 	 	 	 	 	 	 	 	 
	Capital contribution by members
	 	$	144,023,857	 	 	$	—	 	 	$	144,023,857	 
	Distribution to members
	 	 	—	 	 	 	(13,341	)	 	 	(13,341	)
	Net loss
	 	 	—	 	 	 	(13,930,509	)	 	 	(13,930,509	)
	 	 	 
	Balance at December 31, 2007
	 	$	144,023,857	 	 	$	(13,943,850	)	 	$	130,080,007	 
	 	 	 






See accompanying notes.




6









 





Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Consolidated Statements of Cash Flows




	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Predecessor Period	 	 	Successor Period
	 	 	Predecessor Year	 	from January 1,	 	 	from January 29,
	 	 	Ended	 	2007 through	 	 	2007 (inception) to
	 	 	December 31,	 	April 11,	 	 	December 31,
	 	 	2006 (as restated)	 	2007	 	 	2007
	 	 	 	 	 	 
	Operating activities
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net income (loss)
	 	$	439,675	 	 	$	(11,812,191	)	 	 	$	(13,930,509	)
	Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Depreciation and amortization expense
on property, plant, and equipment
	 	 	678,447	 	 	 	300,778	 	 	 	 	986,651	 
	Amortization expense of pre-publication costs
and intangible assets
	 	 	12,348,369	 	 	 	3,822,713	 	 	 	 	20,070,735	 
	Acquired in-process research and development
	 	 	—	 	 	 	—	 	 	 	 	890,000	 
	Inventory step-up
	 	 	—	 	 	 	—	 	 	 	 	2,931,000	 
	Non-cash interest expense
	 	 	—	 	 	 	—	 	 	 	 	641,960	 
	Amortization of deferred financing costs
	 	 	—	 	 	 	—	 	 	 	 	679,333	 
	Loss on derivative instruments
	 	 	—	 	 	 	—	 	 	 	 	1,534,379	 
	Disposal of assets
	 	 	108,305	 	 	 	—	 	 	 	 	—	 
	Stock-based compensation
	 	 	1,185,442	 	 	 	(68,967	)	 	 	 	—	 
	Deferred taxes
	 	 	(4,243,540	)	 	 	(4,552,568	)	 	 	 	(8,364,668	)
	Changes in operating assets and liabilities:
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Accounts receivable
	 	 	255,683	 	 	 	(769,298	)	 	 	 	305,707	 
	Inventories
	 	 	(1,633,318	)	 	 	(499,290	)	 	 	 	(867,025	)
	Accounts payable
	 	 	(524,264	)	 	 	3,856,415	 	 	 	 	(1,182,890	)
	Royalties, net
	 	 	5,558	 	 	 	(674,865	)	 	 	 	650,609	 
	Other, net
	 	 	1,927,499	 	 	 	6,640,065	 	 	 	 	(7,773,964	)
	 	 	 	 	 	 
	Net cash provided by (used in) operating activities
	 	 	10,547,856	 	 	 	(3,757,206	)	 	 	 	(3,428,682	)
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Investing activities
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Acquisition of business, less cash acquired
	 	 	(29,660,538	)	 	 	—	 	 	 	 	(303,235,675	)
	Pre-publication expenditures
	 	 	(1,639,341	)	 	 	(416,870	)	 	 	 	(2,726,476	)
	Property, plant, and equipment expenditures
	 	 	(4,079,453	)	 	 	(683,534	)	 	 	 	(643,176	)
	 	 	 	 	 	 
	Net cash used in investing activities
	 	 	(35,379,332	)	 	 	(1,100,404	)	 	 	 	(306,605,327	)
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Financing activities
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Proceeds from capital contribution
	 	 	—	 	 	 	—	 	 	 	 	140,108,857	 
	Proceeds from the issuance of long-term financing
	 	 	—	 	 	 	—	 	 	 	 	172,104,739	 
	Payment of long-term financing
	 	 	—	 	 	 	—	 	 	 	 	(960,000	)
	Proceeds from the issuance of preferred stock
	 	 	11,650,000	 	 	 	—	 	 	 	 	—	 
	Borrowings under revolving credit facility
	 	 	7,000,000	 	 	 	3,600,000	 	 	 	 	4,500,000	 
	Payment of revolving credit facility
	 	 	(2,000,000	)	 	 	—	 	 	 	 	(4,500,000	)
	Distribution to members
	 	 	—	 	 	 	—	 	 	 	 	(13,341	)
	 	 	 	 	 	 
	Net cash provided by financing activities
	 	 	16,650,000	 	 	 	3,600,000	 	 	 	 	311,240,255	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Increase (decrease) in cash and cash equivalents
	 	 	(8,181,476	)	 	 	(1,257,610	)	 	 	 	1,206,246	 
	Cash and cash equivalents at the beginning of the year
	 	 	9,823,307	 	 	 	1,641,831	 	 	 	 	—	 
	 	 	 	 	 	 
	Cash and cash equivalents at end of year
	 	$	1,641,831	 	 	$	384,221	 	 	 	$	1,206,246	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Supplementary disclosure of cash flow information
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash paid (received) for income taxes
	 	$	8,427,128	 	 	$	277,854	 	 	 	$	(337,205	)
	 	 	 	 	 	 
	Cash paid for interest
	 	$	1,080,925	 	 	$	845,116	 	 	 	$	11,710,608	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Supplementary disclosure of non-cash financing
activities
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Assets acquired under build-to-suit lease
	 	$	8,261,367	 	 	$	—	 	 	 	$	—	 
	 	 	 	 	 	 
	Beneficial conversion related to preferred stock
	 	$	3,016,000	 	 	$	—	 	 	 	$	—	 
	 	 	 	 	 	 
	Rollover in capital contribution
	 	$	—	 	 	$	—	 	 	 	$	3,915,000	 
	 	 	 	 	 	 






See accompanying notes.




7









 





Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements




December 31, 2007




1. Basis of Presentation



VSS-Cambium Holdings, LLC (the Company or Holdings) was formed on January 29, 2007. Holdings was
formed to enter into a stock purchase agreement, dated as of January 29, 2007 by and among Cambium
Learning, Inc. (the Company or Cambium), the former shareholders of Cambium and Holdings, and to
acquire and all of the capital stock of Cambium.



On February 7, 2007, VSS-Cambium Management, LLC (Management LLC) was formed. Management LLC was
formed for the purpose of providing selected key employees of Cambium with an equity participation
in the future appreciation in the value of Cambium. Management LLC is a member of Holdings and
holds an equity interest in Holdings.



On April 12, 2007, Holdings acquired 100% of the capital stock of Cambium. The operating results
of Holdings include Cambium’s operating results from the acquisition date.



The consolidated financial statements present the Company as of December 31, 2007 (Successor basis
reflecting activity of Holdings from January 29, 2007 and Cambium from April 12, 2007) and the
period January 1, 2007 through April 11, 2007 and the year ended December 31, 2006 (predecessor
basis for the period prior to Holdings acquiring Cambium).



In accordance with the requirements of purchase accounting, the assets and liabilities of the
Company were adjusted to their estimated fair values and the resulting goodwill computed, as of the
acquisition date. The application of purchase accounting generally results in higher depreciation
and amortization expense in future periods. Accordingly, and because of other effects of purchase
accounting, the accompanying consolidated financial statements as of and for the period prior to
the Holdings acquisition are not comparable.



Cambium develops and markets comprehensive educational programs and technologies for the
pre-kindergarten through twelfth grade in the United Slates. Products and services include
instructional materials, technology-based products, teaching guides and other resources, and
teacher training and implementation services as part of a full-service offering to schools,
educators, and students.



The Company is subject to certain risks. Among these are the risks associated with managing
growth, dependence on key individuals, the need for successful marketing of products and services,
competition from larger companies, the ability to meet its debt service requirements and




8









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




1. Basis of Presentation (continued)



other obligations. The Company believes that based on the availability under the senior secured
revolving credit facility (Note 6) the effects of the debt amendments (Note 19), the additional
member (debt or equity) contribution in 2008 (Note 19) and anticipated cash flow from operations,
the Company will be able to maintain its debt compliance, make required principal and interest
payments on debt and fund its working capital and capital expenditure requirements through January
1, 2009.




Principles of Consolidation



The Successor consolidated financial statements of the Company include the accounts of Holdings as
of January 29, 2007 (inception), Management LLC from February 7, 2007 (inception) and Cambium and
its wholly owned subsidiaries, Cambium Learning (New York), Inc., Sopris West Educational Services,
Inc., Kurzweil Educational Systems, Inc. (Kurzweil), and IntelliTools, Inc., from April 12, 2007.
All inter-company accounts and transactions are eliminated in consolidation.



The Predecessor consolidated financial statements for the year ended December 31, 2006 and the
period from January 1, 2007 through April 11, 2007 include the accounts of Cambium and its wholly
owned subsidiaries described above. All inter-company accounts and transactions have been
eliminated in consolidation.




Restatement of 2006 Financial Statements



On April 26, 2008, the Company, began an internal investigation that revealed irregularities over
the control and use of cash and certain other general ledger accounts of the Company, resulting in
a misappropriation of assets. The Company believes these irregularities were perpetrated by a
former employee over more than a three year period beginning in 2004 and continuing through April
2008. The embezzlement incurred in each year, before the effect of income taxes, is as follows:




	 	 	 	 	 
	Year/Period	 	Amount	 
	2004

	 	$	1,912,795	 
	2005
	 	 	290,135	 
	2006
	 	 	3,261,132	 
	January 1, 2007 – April 11, 2007
	 	 	999,516	 
	 
	 	 	 
	Total - Predecessor
	 	 	6,463,578	 
	 
	 	 	 
	 	 	 	 	 
	April 12, 2007 – December 31, 2007
	 	 	5,731,671	 
	2008
	 	 	1,800,735	 
	 
	 	 	 
	Total - Successor
	 	 	7,532,406	 
	 
	 	 	 
	Total Embezzlement Loss
	 	$	13,995,984	 
	 	 	 	 






9









 






Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




1. Basis of Presentation (continued)



The misappropriation had a material effect on the Company’s current and previously issued
financial statements. As a result, the Company restated its 2006 financial statements in
accordance with Financial Accounting Standard No. 154, Accounting Changes and Error
Corrections. The amount of the loss attributable to 2006 is $3,261,132 and is shown separately
on the consolidated statement of operations. The previously issued 2006 financial statements
have also been restated for the effects of the correction of other errors. These other
adjustments relate primarily to the Company’s review of the underlying asset and liability
accounts examined in connection with its investigation of the misappropriation. A prior period
adjustment to retained earnings of $1,626,012, net of tax, was also made to account for the
misappropriation losses and other accounting errors that were incurred prior to January 1,
2006. No amounts that may be recoverable have been recorded as a receivable as of December 31,
2006 or 2007.



The following line items have accordingly been adjusted for the year ended December 31, 2006:




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	As Originally	 	Misappropriation	 	Correction of	 	 
	 	 	Reported	 	Loss	 	Errors	 	Restated
	 	 	 
	Income Statement
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net sales
	 	$	106,778,136	 	 	 	—	 	 	$	(354,636	)	 	$	106,423,500	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cost of sales
	 	 	40,067,698	 	 	 	—	 	 	 	(97,082	)	 	 	39,970,616	 
	Pre-publication, publishing rights
and
developed technology amortization
	 	 	11,370,463	 	 	$	(30,660	)	 	 	(4,532	)	 	 	11,335,271	 
	 	 	 
	Total cost of sales
	 	 	51,438,161	 	 	 	(30,660	)	 	 	(101,614	)	 	 	51,305,887	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Selling and administrative
	 	 	45,810,829	 	 	 	(55,000	)	 	 	(119,480	)	 	 	45,636,349	 
	Other intangible asset amortization
	 	 	1,013,098	 	 	 	—	 	 	 	—	 	 	 	1,013,098	 
	Tradename and intangible asset
impairment charge
	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	Acquired in-process research and
development
	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	Embezzlement expense
	 	 	—	 	 	 	3,261,132	 	 	 	—	 	 	 	3,261,132	 
	 	 	 
	Total cost and expenses
	 	 	98,262,088	 	 	 	3,175,472	 	 	 	(221,094	)	 	 	101,216,466	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Income (loss) from operations
	 	 	8,516,048	 	 	 	(3,175,472	)	 	 	(133,542	)	 	 	5,207,034	 
	Interest and other expenses
	 	 	(1,308,055	)	 	 	—	 	 	 	(56,062	)	 	 	(1,364,117	)
	 	 	 
	Income (loss) from operations before
taxes
	 	 	7,207,993	 	 	 	(3,175,472	)	 	 	(189,604	)	 	 	3,842,917	 
	Income tax provision (benefit)
	 	 	3,045,551	 	 	 	437,803	 	 	 	(80,112	)	 	 	3,403,242	 
	 	 	 
	Net income (loss)
	 	$	4,162,442	 	 	$	(3,613,275	)	 	$	(109,492	)	 	$	439,675	 
	 	 	 






10









 





Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




1. Basis of Presentation (continued)




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	As Originally	 	Misappropriation	 	Correction of	 	 
	 	 	Reported	 	Loss	 	Errors	 	Restated
	 	 	 
	Balance Sheet Items
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Assets
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Current assets:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash and cash equivalents
	 	$	1,840,872	 	 	$	(76,795	)	 	$	(122,246	)	 	$	1,641,831	 
	Accounts receivable
	 	 	8,380,209	 	 	 	—	 	 	 	(82,065	)	 	 	8,298,144	 
	Inventories
	 	 	10,436,799	 	 	 	(2,214,857	)	 	 	109,914	 	 	 	8,331,856	 
	Performance share plan
	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	Deferred tax benefit
	 	 	4,424,278	 	 	 	(705,123	)	 	 	19,321	 	 	 	3,738,476	 
	Prepaid expenses and other current
assets
	 	 	3,007,880	 	 	 	—	 	 	 	(11,404	)	 	 	2,996,476	 
	 	 	 
	Total current assets
	 	 	28,090,038	 	 	 	(2,996,775	)	 	 	(86,480	)	 	 	25,006,783	 
	 
	Property, plant and equipment, net
	 	 	13,578,306	 	 	 	—	 	 	 	20,900	 	 	 	13,599,206	 
	Pre-publication costs
	 	 	4,115,955	 	 	 	—	 	 	 	(249,341	)	 	 	3,866,614	 
	Author advances
	 	 	74,493	 	 	 	—	 	 	 	—	 	 	 	74,493	 
	Goodwill
	 	 	45,417,715	 	 	 	—	 	 	 	—	 	 	 	45,417,715	 
	Other intangible assets
	 	 	49,921,012	 	 	 	—	 	 	 	—	 	 	 	49,921,012	 
	Other long-term assets
	 	 	142,136	 	 	 	—	 	 	 	—	 	 	 	142,136	 
	 	 	 
	Total assets
	 	$	141,339,655	 	 	$	(2,996,775	)	 	$	(314,921	)	 	$	138,027,959	 
	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Liabilities and stockholders’
equity
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Current liabilities:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Accounts payable
	 	$	3,315,965	 	 	$	—	 	 	$	(13,022	)	 	$	3,302,943	 
	Royalties payable
	 	 	1,237,409	 	 	 	—	 	 	 	208,837	 	 	 	1,445,246	 
	Accrued salaries, bonus,
commissions
	 	 	4,107,606	 	 	 	—	 	 	 	49,933	 	 	 	4,157,539	 
	Note payable — line of credit
	 	 	2,000,000	 	 	 	3,000,000	 	 	 	—	 	 	 	5,000,000	 
	Interest payable — related party
	 	 	401,036	 	 	 	—	 	 	 	—	 	 	 	401,036	 
	Deferred revenue
	 	 	1,515,833	 	 	 	—	 	 	 	39,460	 	 	 	1,555,293	 
	Deferred compensation
	 	 	7,623,394	 	 	 	—	 	 	 	—	 	 	 	7,623,394	 
	Other accrued expenses
	 	 	3,290,726	 	 	 	—	 	 	 	94,115	 	 	 	3,384,841	 
	 	 	 
	Total current liabilities
	 	 	23,491,969	 	 	 	3,000,000	 	 	 	379,323	 	 	 	26,871,292	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Long-term debt — related party
	 	 	17,500,000	 	 	 	—	 	 	 	—	 	 	 	17,500,000	 
	Royalties payable
	 	 	29,602	 	 	 	—	 	 	 	—	 	 	 	29,602	 
	Co-development liability
	 	 	974,388	 	 	 	—	 	 	 	—	 	 	 	974,388	 
	Deferred income taxes
	 	 	5,063,563	 	 	 	(1,182,756	)	 	 	(182,548	)	 	 	3,698,259	 
	Deferred compensation
	 	 	352,422	 	 	 	—	 	 	 	38,302	 	 	 	390,724	 
	Building lease liability
	 	 	9,183,011	 	 	 	—	 	 	 	—	 	 	 	9,183,011	 
	Other
	 	 	485,352	 	 	 	—	 	 	 	—	 	 	 	485,352	 
	 	 	 
	Total liabilities
	 	 	57,080,307	 	 	 	1,817,244	 	 	 	235,077	 	 	 	59,132,628	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Stockholders’ equity:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Series A convertible preferred
stock
	 	 	84,655,093	 	 	 	—	 	 	 	—	 	 	 	84,655,093	 
	Common stock
	 	 	27,207	 	 	 	—	 	 	 	—	 	 	 	27,207	 
	Additional paid-in capital
	 	 	6,894,953	 	 	 	—	 	 	 	—	 	 	 	6,894,953	 
	Accumulated deficit
	 	 	(7,317,905	)	 	 	(4,814,019	)	 	 	(549,998	)	 	 	(12,681,922	)
	 	 	 
	Total stockholders’ equity
	 	 	84,259,348	 	 	 	(4,814,019	)	 	 	(549,998	)	 	 	78,895,331	 
	 	 	 
	Total liabilities and equity
	 	$	141,339,655	 	 	$	(2,996,775	)	 	$	(314,921	)	 	$	138,027,959	 
	 	 	 






11









 






Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




1. Basis of Presentation (continued)




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	As Originally	 	 	Misappropriation	 	 	Correction of	 	 	 	 
	 	 	Reported	 	 	Loss	 	 	Errors	 	 	Restated	 
	 	 	 
	Cash Flow Statement

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Operating activities
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net income
	 	$	4,162,442	 	 	$	(3,613,275	)	 	$	(109,492	)	 	$	439,675	 
	Adjustments to reconcile net income
to cash flows provided by (used in)
operating activities:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Depreciation and amortization
expense on property, plant and
equipment
	 	 	677,347	 	 	 	—	 	 	 	1,100	 	 	 	678,447	 
	Amortization expense on pre-publication costs and
intangible assets
	 	 	12,383,561	 	 	 	—	 	 	 	(35,192	)	 	 	12,348,369	 
	Disposal of assets
	 	 	108,305	 	 	 	—	 	 	 	—	 	 	 	108,035	 
	Stock-based compensation
	 	 	1,185,442	 	 	 	—	 	 	 	—	 	 	 	1,185,442	 
	Deferred taxes
	 	 	(4,855,618	)	 	 	437,803	 	 	 	174,275	 	 	 	(4,243,540	)
	Changes in operating assets and
liabilities:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Accounts receivable
	 	 	410,107	 	 	 	—	 	 	 	(154,424	)	 	 	255,683	 
	Inventories
	 	 	(4,039,792	)	 	 	2,011,472	 	 	 	395,002	 	 	 	(1,633,318	)
	Accounts payable
	 	 	(539,538	)	 	 	—	 	 	 	15,274	 	 	 	(524,264	)
	Royalties, net
	 	 	(144,763	)	 	 	—	 	 	 	150,321	 	 	 	5,558	 
	Other, net
	 	 	2,696,957	 	 	 	—	 	 	 	(769,458	)	 	 	1,927,499	 
	 	 	 
	Net cash provided by (used in)
operating activities
	 	 	12,044,450	 	 	 	(1,164,000	)	 	 	(332,594	)	 	 	10,547,856	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Investing activities
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Acquisition of business, less cash
acquired
	 	 	(29,660,538	)	 	 	—	 	 	 	—	 	 	 	(29,660,538	)
	Pre-publication expenditures
	 	 	(1,936,062	)	 	 	—	 	 	 	296,721	 	 	 	(1,639,341	)
	Property, plant and equipment
expenditures
	 	 	(4,057,453	)	 	 	—	 	 	 	(22,000	)	 	 	(4,079,453	)
	 	 	 
	Net cash used in investing activities
	 	 	(35,654,053	)	 	 	—	 	 	 	274,721	 	 	 	(35,379,332	)
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Financing activities
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Proceeds from the issuance of
preferred stock
	 	 	11,650,000	 	 	 	—	 	 	 	—	 	 	 	11,650,000	 
	Borrowings under revolving credit
facility
	 	 	7,000,000	 	 	 	—	 	 	 	—	 	 	 	7,000,000	 
	Payment of revolving credit facility
	 	 	(5,000,000	)	 	 	3,000,000	 	 	 	 	 	 	 	(2,000,000	)
	Payment of note payable —
EdNewco, LLC
	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	 	 	 
	Net cash flow provided by financing
activities
	 	 	13,650,000	 	 	 	3,000,000	 	 	 	—	 	 	 	16,650,000	 
	 	 	 
	Increase (decrease) in cash and cash
equivalents
	 	 	(9,959,603	)	 	 	1,836,000	 	 	 	(57,873	)	 	 	(8,181,476	)
	Cash and cash equivalents at the
beginning of the year
	 	 	11,800,475	 	 	 	(1,912,795	)	 	 	(64,373	)	 	 	9,823,307	 
	 	 	 
	Cash at end of the year
	 	$	1,840,872	 	 	$	(76,795	)	 	$	(122,246	)	 	$	1,641,831	 
	 	 	 






12









 






Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




1. Basis of Presentation (continued)




Reclassifications



Certain prior year account balances have been reclassified to conform with the current year’s
presentation. The Company has reclassified amortization expense of its developed technology from
other intangible asset amortization to pre-publication, publishing rights and developed technology
amortization.




2. Significant Accounting Policies




Use of Estimates



The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires the use of estimates and assumptions by management that affect the
amounts reported in the financial statements and accompanying notes. On an ongoing basis, the
Company evaluates its estimates and assumptions including, but not limited to, sales returns,
allowance for bad debts, recoverability of advances to authors, valuation and recoverability of
inventory, depreciation and amortization periods, recoverability of long-term assets such as
property, plant, and equipment, capitalized pre-publication costs, other identified intangibles and
goodwill, and the recoverability of deferred tax assets. Actual results may differ from those
estimates.




Revenue Recognition



The Company derives revenue primarily from the sale of instructional materials, software licenses,
maintenance and support services, and training.



The Company recognizes revenue from instructional materials, software licenses, and multimedia
instructional materials when persuasive evidence of an arrangement exists, the products are
shipped, title and risk of loss transfer to the customer, all significant obligations have been
performed, and collection is reasonably assured. The persuasive evidence that an arrangement exists
includes customer-issued purchase orders or, in the case of credit card sales, the actual sales
transaction. For product sales, excluding software, that include multiple elements, the Company
recognizes revenue upon shipment when the product has standalone value to the customer and the
Company has objective evidence of fair value for any undelivered items.



Maintenance and support services include telephone support, bug fixes, and for certain products
rights to upgrades and enhancements on a when-and-if available basis. Revenues under multiple




13









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




2. Significant Accounting Policies (continued)



element software license arrangements, which may include several different software products and
services sold together, including training and maintenance and support, is allocated to each
element based on the residual method in accordance with the Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended.



The Company uses the residual method when vendor-specific objective evidence of fair value does not
exist for one of the delivered elements in the arrangement. Under the residual method, the fair
value of the undelivered elements is deferred, and subsequently recognized when the product or
service is delivered. The Company has established sufficient vendor-specific objective evidence for
maintenance and support services based on a price charged when this element is sold separately.
Accordingly, software license revenues are recognized under the residual method in arrangements in
which software is licensed with maintenance and support services. Revenues related to maintenance
and support are recognized on a straight-line basis over the period the maintenance is provided. In
certain instances, telephone support and bug fixes are provided for free, which is provided within
one year of licensing the software. The cost of providing this service is insignificant and is
accrued for at the time of revenue recognition.



As products are shipped with a right of return, generally 30 days, a provision for estimated
returns on these sales is made at the time of sale, based on historical experience in accordance
with Statement of Financial Accounting Standards (SFAS) No. 48, Revenue Recognition When Right of
Return Exists. The amounts have not been material to date. Shipping fees billed to customers are
included in net sales, and costs of shipping are included in selling and administrative expenses.
Shipping costs included in selling and administrative expense were $2,526,763, $444,846, and
$2,738,796 for the year ended December 31, 2006, the period from January 1, 2007 to April 11, 2007
and the period from January 29, 2007 to December 31, 2007, respectively.



Revenue for training is recognized when the services have been completed, the fee is fixed and
determinable, and collection is reasonably assured. Amounts billed and/or collected prior to the
completion of services are recorded as deferred revenue.



The Company enters into agreements to license certain book publishing rights and content. The
Company recognizes the revenue when all materials have been delivered to the customer, there are
no post-delivery obligations, and the cash has been received.




14









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




2. Significant Accounting Policies (continued)




Advertising and Promotion Costs



Advertising and promotion costs are charged to selling and administrative expenses as incurred,
and were $3,013,462, $2,407,933, and $2,488,193 for the year ended December 31, 2006, the period
from January 1, 2007 to April 11, 2007 and the period from January 29, 2007 to December 21, 2007,
respectively. The Company recognizes catalog expense when the catalog is mailed to potential
customers. The cost to print the catalog is recorded in prepaid expenses on the balance sheet
until such time that the catalog is mailed. At December 31, 2006, the Company had $596,431 in
pre-paid catalog expense, and the related catalogs were mailed in January, 2007.




Cash and Cash Equivalents



The Company maintains its cash in bank deposits accounts, which, at times, may exceed federally
insured limits. The Company has a cash management program which provides for the investment of
excess cash balances primarily in money market accounts. The Company considers such highly liquid
investments with original maturities of three months or less when purchased to be cash
equivalents. The carrying amounts of cash equivalents approximate their fair market value due to
the short-term maturity of these instruments.




Accounts Receivable



Accounts receivable are recorded net of allowances for doubtful accounts and reserves for sales
returns. In the normal course of business, the Company extends credit to customers that satisfy
pre-defined criteria. Allowances for doubtful accounts are established through the evaluation of
accounts receivable agings and prior collection experience to estimate the ultimate collectibility
of these receivables. Amounts deemed uncollectible are charged off against the allowance for
doubtful accounts. Reserves for sales returns are based on historical return rates and sales
patterns.




Inventories



Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO)
inventory method, and consist of finished goods. An estimate is made for inventory obsolescence
based on demand for products currently on hand.




Property, Plant, and Equipment



Property, plant, and equipment are stated at cost, or, in the case of assets acquired in business
combinations, at fair value as of the acquisition date, less accumulated depreciation and
amortization. Maintenance and repair costs are charged to expense as incurred, and renewals and improvements that extend the useful life of the assets are capitalized.



15









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




2. Significant Accounting Policies (continued)



Depreciation and amortization on property, plant, and equipment is calculated on the straight-line
method over the estimated useful lives of the assets.




Estimated useful lives of property, plant, and equipment are as follows:



	 	 	 	 	 
	 	 	Estimated Useful Life
	Building
	 	35 years
	Machinery and equipment
	 	 	8 to 15 years
	Furniture and fixtures
	 	8 years
	Computer equipment and software
	 	 	2 to 5 years
	Leasehold improvements
	 	Lesser of useful life or lease term






Capitalized Internal Use Software



Capitalized internal use software is included in property, plant, and equipment on the
consolidated balance sheet. The Company capitalizes certain costs related to obtaining or
developing computer software for internal use under SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. Costs incurred during the
application development stage, including external direct costs of materials and services, and
payroll and payroll-related costs for employees who are directly associated with the
internal-use
software project, are capitalized and amortized on a straight-line basis over the expected
useful
life of the related software of three to five years. The application development stage includes
design, software configuration and integration, coding, hardware installation, and testing.
Costs
incurred during the preliminary stage, as well as maintenance, training, and upgrades that do
not
result in additional functionality, are expensed as incurred.




Research and Development Costs



Software research and development costs are accounted for in accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed. The
Company will capitalize material software-development costs incurred after the technological
feasibility of software-development projects has been established. The Company determines
technological feasibility has been established at the time when a working model of the software
has been completed. Historically, the time incurred between when a working model of the
software has been completed and general release to customers has been short, and therefore, the
costs have been insignificant. As a result, for the year ended December 31, 2006, the period
from
January 1, 2007 to April 11, 2007, and the period from January 29, 2007 to December 21, 2007,
no software development costs met the criteria for capitalization.




16









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




2. Significant Accounting Policies (continued)



Research and development expense includes costs to develop manuscripts, which are expensed as
incurred.



The amount
of research and development costs that were expensed was $7,410,878,
$1,736,988, and
$5,246,586, for the year ended December 31, 2006, the period from January 1, 2007 to April 11,
2007, and the period from January 29, 2007 to December 31, 2007, respectively, and these expenses
are included in cost of sales in the accompanying financial
statements.




Royalty Advances



Royalty advances to authors are capitalized and represent amounts paid in advance of the sale of an
author’s product. These costs are amortized as the related publication is sold. Advances are
evaluated periodically to determine if they are expected to be recovered. Any portion of a royalty
advance that is not expected to be recovered is fully reserved.




Pre-Publication Costs



The
Company capitalizes the art, pre-press, and other costs incurred in the creation of the master
copy of a book or other media (the pre-publication costs). Pre-publication costs are amortized
over five years using the sum-of-the-years-digits method. The amortization methods and periods
chosen best reflect the expected sales generated from individual titles or programs. The Company
evaluates the remaining lives and recoverability of capitalized pre-publication costs.



Amortization expense related to pre-publication costs was $1,512,399, $487,488, and $99,636 for
the year ended December 31, 2006, the period from January 1, 2007 to April 11, 2007, and for the
period from January 29, 2007 to December 31, 2007, respectively.




Publishing Rights Intangible Assets



A publishing right allows the Company to publish and republish existing and future works, as well
as transform, adapt, or create new works based on previously published materials. The Company
determines the fair market value of the publishing rights arising from business combinations by
discounting the after-tax cash flows projected to be derived from the publishing rights and titles
to their net present value using a rate of return that accounts for the time value of money and the
appropriate degree of risk. The useful life of the publishing rights is based on the lives of the
various titles involved, which is generally 10 years. The Company calculates amortization using
either the straight-line method or the percentage of the projected discounted cash flows derived
from the titles in the current year as a percentage of the total estimated discounted cash flows
over the remaining useful life.




17









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




2. Significant Accounting Policies (continued)




Goodwill



In
accordance with SFAS No. 141, Business Combinations, the Company accounts for its business
combinations using the purchase method. In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, the Company does not amortize goodwill, but instead tests for impairment at
least annually, and more frequently upon the occurrence of certain events which may indicate that
impairment has occurred. Intangible assets acquired in conjunction with a business combination are
required to be separately recognized if the benefit of the intangible asset obtained is through
contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed,
rented, or exchanged, regardless of the acquirer’s intent to do so.



The provisions of SFAS No. 142 require that a two-step impairment test be performed on goodwill. In
the first step, the Company compares the fair value, which is determined by use of a discounted
cash flow technique, of the reporting unit to its carrying value. If the fair value of the
reporting unit exceeds the carrying value of the net assets of that reporting unit, goodwill is not
impaired, and the Company is not required to perform further testing. If the carrying value of the
net assets assigned to the reporting unit exceeds the fair value of that unit, then the Company
must perform the second step of the impairment test in order to determine the implied fair value of
the reporting entity’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its
implied fair value, then the Company records an impairment loss equal to the difference.



The Company has two reporting units: Publishing and Learning Technologies. Determining the fair
value of a reporting unit is judgmental in nature, and involves the use of significant estimates
and assumptions. These estimates and assumptions may include revenue growth rates and operating
margins used to calculate projected future cash flows, risk-adjusted discount rates, future
economic and market conditions, and determination of appropriate market comparables. The Company
bases its fair value estimates on assumptions it believes to be reasonable, but that are
unpredictable and inherently uncertain. Actual future results may differ from those estimates. In
addition, the Company may make certain judgments and assumptions in allocating shared assets and
liabilities to determine the carrying values of its reporting units.



The Company performs the annual goodwill impairment assessment as of December 1 of each year. For
the year ended December 31, 2006, the period from January 1, 2007 to April 11, 2007 and for the
period from January 29, 2007 to December 31, 2007, the Company performed the first step in the
impairment test and has determined that there is no impairment of its goodwill for its Publishing
and Learning Technologies reporting units.




18









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




2. Significant Accounting Policies (continued)




Long-Lived Assets and Intangible Assets



In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
the Company reviews the carrying value of its long-lived assets, including intangible assets
subject to amortization, for impairment whenever events and circumstances indicate that the
carrying value of the assets may not be recoverable. Recoverability of these assets is measured by
comparison of the carrying value of the assets to the undiscounted cash flows estimated to be
generated by those assets over their remaining economic life. If the undiscounted cash flows are
not sufficient to recover the carrying value of such assets, the assets are considered impaired,
and the impairment loss is measured by comparing the fair value of the assets to their carrying
values. Fair value is determined by either a quoted market price or a value determined by a
discounted cash flow technique, whichever is more appropriate under the circumstances involved.
Intangible assets with determinable lives are amortized over their useful lives, based upon the
pattern in which the expected benefits will be realized. For the year ended December 31, 2006 and
the period from January 1, 2007 to April 11, 2007 and for the period from January 29, 2007 to
December 31, 2007, the Company has determined there is no impairment of any of its long-lived
assets.




Income Taxes



The Company reports under the provisions of SFAS No. 109, Accounting for Income Taxes, which
requires an asset and liability approach to financial accounting and reporting for income taxes.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, as well as for operating loss and tax credit carryforwards. A
valuation allowance is applied against net deferred tax assets if, based on the weight of
available evidence, it is more likely than not some or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are measured using tax
rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.




Stock-Based Compensation



Through December 31, 2005, the Company accounted for its stock-based employee compensation plans
on the intrinsic value method under the recognition and measurement principles of Accounting
Principles Board (ABP) Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations under APB No. 25. Under the intrinsic value method, compensation expense is
measured on the date of grant as the difference between the deemed fair value of the Company’s
common stock and the exercise or purchase price multiplied by the




19









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




2. Significant Accounting Policies (continued)



number of stock options granted. The Company provided pro forma disclosures only of the
compensation expense determined under the fair value provisions of SFAS No. 123, Accounting for
Stock-Based Compensation.



SFAS No. 123 requires the measurement of the fair value of stock options to employees to be
included in the statements of operations or disclosed in the notes to financial statements. Through
December 31, 2005, the Company elected the disclosure-only alternative under SFAS No. 123, which
requires disclosure of the pro forma effects on earnings as if the fair value-based method of
accounting under SFAS No. 123 had been adopted, as well as certain other information. In accordance
with SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, the Company
has computed the pro forma disclosures required under SFAS No. 123 for options granted in the year
ended December 31, 2005 using the Black-Scholes option-pricing model prescribed by SFAS No. 123.



The Company adopted SFAS No. 123(R) effective January 1, 2006. SFAS No. 123(R) requires non-public
companies that used the minimum value method in SFAS No. 123 for either recognition or pro forma
disclosures to apply SFAS No. 123(R) using the prospective-transition method. As such, the Company
will continue to apply APB No. 25 in future periods to equity awards outstanding at the date of
SFAS No. 123(R) adoption that were measured using the minimum value method. In accordance with
SFAS No. 123(R), the Company recognizes the compensation cost of employee stock-based awards using
the straight line method over the vesting period of the award. Effective with the adoption of SFAS
No. 123(R), the Company has elected to use the Black-Scholes option pricing model to determine the
fair value of stock options granted.



As a result of the April 11, 2007 acquisition of Cambium by Holdings, all unvested stock options
outstanding on February 28, 2007 were accelerated and vested in full effective immediately prior
to the closing. At that time, all outstanding options were canceled and converted to the right to
receive a lump-sum cash payment in an amount equal to the excess of $2.5476 per share over the
exercise price for each option.



For the year ended December 31, 2006 and the period January 1, 2007 through April 11, 2007, the
Company recorded stock-based compensation of $260,422 and $2,872,650, respectively in connection
with stock-based awards accounted for in accordance with SFAS No. 123(R).




20









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




2. Significant Accounting Policies (continued)




Recent Accounting Pronouncements



In July 2006, the FASB issued Financial Accounting Standards Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, or FIN 48. FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN 48
prescribes a recognition and measurement method of a tax position taken or expected to be taken in
a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosures, and transitions. FIN 48 is effective for
fiscal years beginning after December 15, 2007. The Company is currently analyzing the effects of
FIN 48 on its consolidated financial position and its results of operations.



In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines
fair value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. This Statement applies under
other accounting pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, this Statement does not require any new fair value
measurements. This Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. The Company is
currently analyzing the effects of SFAS No. 157 on its consolidated financial position and its
results of operations.



In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities — Including an Amendment of FASB Statement No. 115. SFAS No. 159 permits
entities to choose to measure many financial instruments and certain other items at fair value and
is effective for the Company’s fiscal year beginning January 1, 2008. The Company is currently
analyzing the effects of SFAS No. 159 on its consolidated financial position and results of
operations.



In December 2007, the FASB, issued SFAS No. 141 (revised 2007) (SFAS 141(R)), Business
Combinations. SFAS 141(R) makes significant changes to the accounting and reporting standards for
business acquisitions. SFAS 141(R) establishes principles and requirements for an acquirer’s
financial statement recognition and measurement of the assets acquired; the liabilities assumed,
including those arising from contractual contingencies; any contingent consideration; and any
non-controlling interest in the acquiree at the acquisition date. SFAS 141(R) amends SFAS No. 109,
Accounting for Income Taxes, to require the acquirer to recognize changes in the amount of its
deferred tax benefits that are recognizable as a result of a business combination




21









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




2. Significant Accounting Policies (continued)



either in income from continuing operations in the period of the combination or directly in
contributed capital, depending on the circumstances. The statement also amends SFAS No. 142,
Goodwill and Other Intangible Assets, to, among other things, provide guidance for the impairment
testing of acquired research and development intangible assets and assets that the acquirer
intends not to use. SFAS 141(R) is effective for the Company’s fiscal year beginning January 1,
2009 and may not be adopted early or applied retrospectively. The adoption of SFAS 141(R) will
have an impact on the accounting for business combinations occurring on or after the adoption
date, but the effect will be dependent on the acquisitions made at that time.



In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51. SFAS No. 160 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires that a noncontrolling interest, or minority
interest, be recognized as equity in the consolidated financial statements and that it be presented
separately from the parent’s equity. Also, the amounts of net income attributable to the parent and
to the noncontrolling interest must be included in consolidated net income on the face of the
income statement. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a
subsidiary are equity transactions if the parent retains its controlling financial interest. In
addition, this statement requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated, with such gain or loss measured using the fair value of the
noncontrolling equity investment on the deconsolidation date. SFAS No. 160 is effective for the
Company’s fiscal year beginning January 1, 2009 and requires retroactive adoption of the
presentation and disclosure requirements for existing minority interests; all other requirements
may only be applied prospectively. Adoption of SFAS No. 160 is not expected to have a material
impact on the Company’s financial position or results of operations.




3. Acquisitions




Acquisition of Cambium Learning, Inc.



On April 12, 2007, the Company acquired Cambium and its subsidiaries: Cambium Learning (New York),
Inc., Sopris West Educational Services, Inc. (Sopris West), Kurzweil Educational Systems, Inc.,
and IntelliTools, Inc. The Company determined that combining their media expertise and capital
with the strong growth potential that existed in the pre K-12 educational market place for the
types of products and services provided by Cambium would create a more competitive company. In
reaching its decision to acquire Cambium, which resulted in the recognition of $192,287,322 of
goodwill, there were a number of reasons why the Company believed the acquisition would be
beneficial. These potential benefits include:





	 	•	 	Capitalizing on a growing market and the need for accountability




22









 











Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




3. Acquisitions (continued)





	 	•	 	Increasing program penetration by expanding sales from current customers
	 
	 	•	 	Expanding geographic footprint in rural areas
	 
	 	•	 	Exploring acquisition opportunities in a fragmented market




The acquisition was funded through a combination of $140,108,857 of cash, $3,915,000 of executive
rollover shares and $172,104,739 of debt, net of issuance cost. The aggregate purchase price, net
of cash acquired and executive rollover shares, was $303,235,675, of which $21,000,000 was held in
escrow. The acquisition was accounted for as a purchase transaction in accordance with SFAS No.
141. The consolidated financial statements of Holdings include the results of Cambium from the date
of acquisition. The purchase price was allocated among tangible and intangible assets acquired and
liabilities assumed based on fair values at the transaction date. The excess of the purchase price
over the acquired tangible and intangible assets and liabilities was recorded as goodwill. The
Company acquired the stock and, therefore, the additional goodwill resulting from this transaction
is not expected to be tax deductible. The Company has established deferred taxes on the other
nondeductible intangible assets as part of the purchase price.



The amount remaining in escrow was $20,000,000 at December 31, 2007. The escrow will be
distributed the earlier of 30 days after the completion of the December 31, 2007 audit or May 31,
2008, unless certain claims remain outstanding, in which case, the amount in dispute shall remain
in escrow (See Note 19 — Subsequent Events).



The following represents the allocation of the purchase price:




	 	 	 	 	 
	Current assets
	 	$	30,259,364	 
	Property, plant and equipment
	 	 	19,151,609	 
	Other long-term assets
	 	 	234,660	 
	Goodwill
	 	 	192,287,323	 
	Other identified intangible assets
	 	 	143,380,000	 
	Current liabilities
	 	 	(23,891,415	)
	Long-term deferred tax liabilities
	 	 	(39,807,632	)
	Other liabilities
	 	 	(15,353,233	)
	In-process research and development
	 	 	890,000	 
	 
	 	 	 
	Purchase price
	 	$	307,150,676	 
	 
	 	 	 






23









 






Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




3. Acquisitions (continued)



Other identified intangibles acquired consist of the following:




	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Estimated Useful	 
	Asset
	 	Fair Value	 	 	Life	 
	 
	Publishing rights
	 	$	90,300,000	 	 	11 years	 
	Developed technology
	 	 	6,300,000	 	 	6 years	 
	Trademarks
	 	 	15,580,000	 	 	16 years	 
	Reseller networks
	 	 	12,300,000	 	 	11 years	 
	Customer relationships
	 	 	13,700,000	 	 	 	6 to 11 years	 
	Non-competes
	 	 	2,600,000	 	 	3 years	 
	Contracts
	 	 	2,100,000	 	 	4 years	 
	Conference attendee relationships
	 	 	500,000	 	 	8 years	 
	 
	 	 	 	 	 	 	 
	Total other identified intangibles
	 	$	143,380,000	 	 	 	 	 
	 
	 	 	 	 	 	 	 




Goodwill of $153,533,164 and $38,754,159 purchased in the acquisition has been allocated to the
Company’s Publishing and Learning Technologies reporting units, respectively, based on their
relative fair values.




Predecessor Acquisitions




Acquisition of IntelliTools, Inc.



On February 13, 2006, Cambium acquired IntelliTools, Inc. (IntelliTools), a California-based
provider of technology to struggling students with limited English proficiency or need additional
instructional support. Upon completing the acquisition, the Company combined IntelliTools with
Kurzweil to form the Cambium Learning Technologies Group (CLT). In reaching the decision to acquire
IntelliTools, which resulted in the recognition of $5,616,638 of goodwill, there were a number of
specific reasons why the Company believed the acquisition would be beneficial. These potential
benefits include the following:





	 	•	 	IntelliTools, combined into CLT, will be able to provide a more complete offering
to special needs students, generating additional sales.
	 
	 	•	 	IntelliTools, combined into CLT, will be able to achieve significant economies of
scale and greater market penetration by utilizing a single direct selling, marketing,
reseller network, and development team.
	 
	 	•	 	A belief that combining the back office administration and systems, the Company
will be able to reduce its costs.




24









 











Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




3. Acquisitions (continued)



The aggregate purchase price, net of cash acquired, was $9,340,829, of which $1,500,000 was
initially held in escrow, and as of December 31, 2006 and 2007, $1,000,000 and $500,000,
respectively, remains in escrow. The acquisition agreement allows for up to an additional $400,000
of consideration contingent upon the achievement of certain financial targets. As of December 2006,
the entire contingent payment of $400,000 was accrued, which resulted in additional goodwill. The
cash used to finance this acquisition was a $10,400,000 equity contribution. The acquisition was
accounted for as a purchase transaction in accordance with SFAS No. 141. The consolidated financial
statements include the results of IntelliTools from the date of acquisition. The purchase price was
allocated among tangible and intangible assets acquired and liabilities assumed based on fair
values at the transaction date. The excess of the purchase price over the acquired tangible and
intangible assets and liabilities was recorded as goodwill. The Company acquired the stock of
IntelliTools and both seller and buyer made an election under §338(h)(10) of the Internal Revenue
Code to treat the acquisition as an asset acquisition for tax purposes. Therefore, the goodwill and
other intangible assets resulting from this transaction will be tax deductible.



The following represents the allocation of the purchase price:




	 	 	 	 	 
	Current assets
	 	$	1,184,032	 
	Property, plant, and equipment
	 	 	88,234	 
	Other long-term assets
	 	 	22,087	 
	Goodwill
	 	 	5,616,638	 
	Other identified intangible assets
	 	 	4,130,000	 
	Current liabilities
	 	 	(1,700,162	)
	 
	 	 	 
	Purchase price
	 	$	9,340,829	 
	 
	 	 	 






Other identified intangibles acquired consist of the following:



	 	 	 	 	 	 	 
	 	 	 	 	 	 	Estimated Useful
	Asset	 	Fair Value	 	 	Life
	 
	Developed technology
	 	$	1,770,000	 	 	    4 years
	Trademarks and patents
	 	 	530,000	 	 	Indefinite
	Non-compete
	 	 	100,000	 	 	    3 years
	Customer relationships
	 	 	1,730,000	 	 	    9 years
	 
	 	 	 	 	 
	Total other identified intangibles
	 	$	4,130,000	 	 	 
	 
	 	 	 	 	 






25









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




3. Acquisitions (continued)




Acquisition of Certain Assets of Lexia Learning, Inc.



On March 10, 2006, Cambium acquired the certain publishing rights and inventory of the Lexia
Learning Systems, Inc., a Massachusetts corporation, for approximately $356,000. The cash used to
fund this acquisition came from the Company’s general working capital. Approximately $315,000 of
the purchase price was allocated to publishing rights and $41,000 to inventory. The publishing
rights will be amortized on an accelerated basis over its useful life of ten years.




Acquisition of Certain Assets from Jane Fell Greene



On September 29, 2006, Cambium acquired all the copyrights and trademarks for the LANGUAGE!
Product for $20,008,677. The cash used to fund this acquisition came from the Company’s general
working capital. The purchase price was allocated as follows:




	 	 	 	 	 	 	 
	 	 	 	 	Estimated Useful	 
	Asset	Fair Value	 	Life	 
	 
	Pre-paid expenses
	$	120,000	 	 	 	 
	Copyrights
	 	15,588,677	 	10 years
	Trademarks
	 	4,300,000	 	14 years
	 
	 	 	 	 	 
	Purchase price
	$	20,008,677	 	 	 	 
	 
	 	 	 	 	 





Concurrent with the acquisition of the copyrights and trademarks for LANGUAGE!, the Company entered
into a new Author Agreement with Jane Fell Greene, which cancelled all previous agreements between
the Company and Greene.




26









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




4. Balance Sheet Information




Property, Plant, and Equipment



Balances of major classes of assets and accumulated depreciation and amortization consist of the
following:




	 	 	 	 	 	 	 	 	 	 
	 	 	Predecessor	 	 	Successor
	 	 	December 31	 	 	December 31
	 	 	2006 (as restated)	 	 	2007
	Land and building
	 	$	8,709,224	 	 	 	$	13,360,000	 
	Furniture and fixtures
	 	 	434,809	 	 	 	 	287,410	 
	Machinery and equipment
	 	 	3,692,167	 	 	 	 	3,746,557	 
	Computer equipment and software
	 	 	2,294,089	 	 	 	 	2,261,116	 
	Leasehold improvements
	 	 	127,401	 	 	 	 	138,700	 
	 	 	 	 	 	 
	Total
	 	 	15,257,690	 	 	 	 	19,793,783	 
	 
	 	 	 	 	 	 	 	 	 
	Less: accumulated depreciation and
amortization
	 	 	1,658,484	 	 	 	 	985,649	 
	 	 	 	 	 	 
	Property, plant, and equipment, net
	 	$	13,599,206	 	 	 	$	18,808,134	 
	 	 	 	 	 	 





Depreciation and amortization expense was $678,447, $300,778 and $986,651 for the year ended
December 31, 2006, the period from January 1, 2007 to April 11, 2007 and the period from January
29, 2007 to December 31, 2007, respectively.




Performance Share Plan



At the time of the Cambium acquisition, the Company agreed to pay for a long-term incentive plan
for Sopris West employees. The Company recorded a liability at fair value on the date of
acquisition due to the commitment being fixed. The Company paid $220,865 in 2006 and the aggregate
amount accrued as of April 11, 2007 and paid on June 30, 2007 under this plan was $7,558,990. No
further amounts are due at December 31, 2007.




27









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




5. Goodwill and Other Intangible Assets


Goodwill and other intangible assets consist of the following:




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Predecessor	 	 	Successor
	 	 	December 31, 2006, as restated	 	 	December 31, 2007
	 	 	Gross	 	Accumulated	 	 	Gross	 	Accumulated
	 	 	Book Value	 	Amortization	 	 	Book Value	 	Amortization
	 	 	 	 	 	 
	Goodwill
	 	$	45,417,715	 	 	$	—	 	 	 	$	192,287,323	 	 	$	—	 
	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Publishing rights
	 	 	27,727,287	 	 	 	14,431,188	 	 	 	 	90,300,000	 	 	 	10,473,136	 
	Trademark
	 	 	6,130,000	 	 	 	28,158	 	 	 	 	15,580,000	 	 	 	1,130,290	 
	Customer relationships
	 	 	4,111,130	 	 	 	1,719,116	 	 	 	 	13,700,000	 	 	 	3,370,681	 
	Copyrights
	 	 	21,067,779	 	 	 	2,278,762	 	 	 	 	—	 	 	 	—	 
	Developed technology
	 	 	11,570,000	 	 	 	3,653,484	 	 	 	 	6,300,000	 	 	 	1,146,348	 
	Reseller network
	 	 	1,800,000	 	 	 	469,000	 	 	 	 	12,300,000	 	 	 	2,636,246	 
	Non-compete
	 	 	140,000	 	 	 	45,476	 	 	 	 	2,600,000	 	 	 	623,519	 
	Conference attendees
	 	 	—	 	 	 	—	 	 	 	 	500,000	 	 	 	151,041	 
	Customer contracts
	 	 	—	 	 	 	—	 	 	 	 	2,100,000	 	 	 	439,838	 
	 	 	 	 
	Total other intangible assets
	 	 	72,546,196	 	 	 	22,625,184	 	 	 	 	143,380,000	 	 	 	19,971,099	 
	 	 	 	 
	Total
	 	$	117,963,911	 	 	$	22,625,184	 	 	 	$	335,667,323	 	 	$	19,971,099	 
	 	 	 	 	 	 





In accordance with the provisions of SFAS No. 142, goodwill is not amortized.
Amortization expense for publishing rights, trademarks, customer relationship and
other intangible assets was $10,835,971, $3,335,225 and $19,971,099 for the year
ended December 31, 2006, the period from January 1, 2007 to April 11, 2007, and for
the period from January 29, 2007 to December 31, 2007, respectively.



Estimated aggregate amortization expense expected for each of the next five years
related to intangibles subject to amortization is as follows:




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Publishing	 	 	 	 	 	Customer	 	 	 	 	 	Developed	 	Reseller	 	Non-	 	Conference	 	 
	 	 	Rights	 	Trademark	 	Relationship	 	Contracts	 	Technology	 	Network	 	Compete	 	Attendees	 	Total
	 	 	 
	2008
	 	$	13,565,924	 	 	$	1,329,482	 	 	$	3,796,083	 	 	$	1,046,939	 	 	$	1,324,396	 	 	$	2,790,151	 	 	$	866,667	 	 	$	141,927	 	 	$	24,861,569	 
	2009
	 	 	13,948,499	 	 	 	1,340,210	 	 	 	2,848,417	 	 	 	554,816	 	 	 	1,185,081	 	 	 	2,132,331	 	 	 	866,666	 	 	 	85,938	 	 	 	22,961,958	 
	2010
	 	 	13,605,543	 	 	 	1,322,641	 	 	 	1,804,648	 	 	 	58,408	 	 	 	1,044,145	 	 	 	1,594,904	 	 	 	243,147	 	 	 	52,083	 	 	 	19,725,519	 
	2011
	 	 	11,846,195	 	 	 	1,281,816	 	 	 	932,544	 	 	 	 	 	 	 	878,975	 	 	 	1,135,671	 	 	 	 	 	 	 	32,553	 	 	 	16,107,754	 
	2012
	 	 	9,267,222	 	 	 	1,201,701	 	 	 	518,496	 	 	 	 	 	 	 	721,055	 	 	 	789,384	 	 	 	 	 	 	 	18,229	 	 	 	12,516,087	 
	Thereafter
	 	 	17,593,481	 	 	 	7,973,860	 	 	 	429,132	 	 	 	 	 	 	 	—	 	 	 	1,221,312	 	 	 	 	 	 	 	18,229	 	 	 	27,236,014	 
	 	 	 
	 
	 	$	79,826,864	 	 	$	14,449,710	 	 	$	10,329,320	 	 	$	1,660,163	 	 	$	5,153,652	 	 	$	9,663,753	 	 	$	1,976,480	 	 	$	348,959	 	 	$	123,408,901	 
	 	 	 






28









 






Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




6. Long-Term Debt



Long-term debt consists of the following:




	 	 	 	 	 	 
	 	 	Predecessor	 	 	Successor
	 	 	December 31	 	 	December 31
	 	 	2006	 	 	2007
	 	 	 	 	 	 
	$128,000,000 of floating rate senior secured
notes due 4/11/2013, interest payable
quarterly
	 	—	 	 	$127,040,000
	$56,602,254 of 11.75% senior unsecured notes
due 4/11/2014, interest payable quarterly
	 	—	 	 	50,641,960
	$17,500,000 of 5.5% unsecured notes issued
to the former owner of Sopris West due
January 30, 2009, interest payable
semi-annually
	 	$17,500,000	 	 	—
	 	 	 	 	 	 
	 
	 	17,500,000	 	 	177,681,960
	 
	 	 	 	 	 
	Less: current portion of long-term debt
	 	—	 	 	1,280,000
	 	 	 	 	 	 
	Total long-term debt
	 	$17,500,000	 	 	$176,401,960
	 	 	 	 	 	 






Credit Agreements of the Successor — Senior Secured Credit Facility



On
April 12, 2007, Cambium entered into a $158,000,000 Senior Secured Credit Facility (the Senior
Facility) with several banks for which Holdings is a Guarantor. The Senior Facility was comprised
of a $30 million revolving credit agreement (the Revolver) and a $128 million loan agreement. The
Senior Facility, including the Revolver for which Cambium pays annual commitment fees, expires on
April 11, 2013. The Senior Facility is collateralized by all of Cambium’s personal property. The
interest rate on the Senior Facility is based on either one-, three- or six-month LIBOR rate plus
2.75% and was 7.58% at December 31, 2007. The loan agreement requires quarterly principal payments
of $320,000. As of December 31, 2007, Cambium had no borrowings under the Revolver and subject to
certain borrowing base capacity limitations for outstanding letters of credit, had $28,545,000
available to borrow.




The Senior Facility includes a financial covenant which is a total leverage ratio. The ratio is
calculated quarterly using EBITDA, which is defined as earnings before interest paid, taxes,
depreciation and amortization, and other adjustments allowed under the terms of the agreement, on
a rolling 12-month basis. It also contains customary covenants, including limitations on Cambium’s
ability to incur debt, and events of default as defined by the agreement. The Senior Facility also
limits Cambium’s ability to pay dividends, to make advances, and otherwise engage in inter-company
transactions. The Senior Facility requires the total leverage ratio to be no greater than 8.0:1 in
2007, 7.75:1 for the second quarter of 2008 and 7.50:1 starting the third quarter of 2008. See
Note 19, Subsequent Events, regarding the Company’s default and temporary waiver.




29









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




6. Long-Term Debt (continued)



In the event that Cambium fails to comply with the financial covenant, Holdings has the right to
make a cash contribution to the capital of Cambium, the aggregate amount not to be in excess of the
minimum amount necessary to cure the relevant failure to comply with the financial covenant. Upon
receipt by Cambium of such cash, the financial covenant will be recalculated giving effect to the
pro forma adjustments. EBITDA shall be increased by the amount of cash contributed, solely for the
purpose of measuring the financial covenant.




Credit Agreements of the Successor — Subordinated Notes



On April 12, 2007, Cambium entered into a Note Purchase Agreement and sold 11.75% notes due April
11, 2014 (the Subordinated Notes) generating gross proceeds of $50 million, in a private
placement. The Subordinated Notes are guaranteed by Holdings and pay cash interest equal to 10.0%
on a quarterly basis. The remaining 1.75% of interest is not due until April 11, 2014, at which
time the value of these notes including accrued interest will be $56,602,254. At December 31,
2007, the total outstanding balance and accrued interest on the Subordinated Notes was
$50,641,960.



The Note Purchase Agreement includes a financial covenant which requires that beginning with the
quarter ended March 31, 2009, Holdings maintains as of the end of each fiscal quarter a
consolidated EBITDA of not less than $25,000,000, which is defined as earnings before interest
paid, taxes, depreciation and amortization, and other adjustments allowed under the terms of the
agreement, on a rolling 12-month basis. It also contains customary covenants, including
limitations on Cambium’s ability to incur debt, and events of default as defined by the agreement.
See Note 19, Subsequent Events, regarding the Company’s default and temporary waiver.



Deferred financing costs are capitalized in other assets, net of accumulated amortization, and are
amortized over the term of the related debt, using the effective interest method. In connection
with the successor financings above, the Company incurred $5,895,261 in financing costs.
Capitalized deferred financing costs at December 31, 2007 were $5,198,568.




30









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




6. Long-Term Debt (continued)



At December 31, 2007, the future minimum repayments under long-term debt, including paid-in-kind
interest, are payable as follows:




	 	 	 	 	 
	2008
	 	$	1,280,000	 
	2009
	 	 	1,280,000	 
	2010
	 	 	1,280,000	 
	2011
	 	 	1,280,000	 
	2012
	 	 	1,280,000	 
	Thereafter
	 	 	177,242,254	 
	 
	 	 	 
	Total debt repayment
	 	$	183,642,254	 
	 
	 	 	 






Credit Agreement of the Predecessor



On March 7, 2005, Cambium had entered into a credit agreement that provided Cambium with a senior
secured revolving credit facility (the Predecessor Revolver) subject to borrowing base limitations.
On February 27, 2006, Cambium amended the line of credit agreement. The amendment increased the
Predecessor Revolver to $12,500,000, for which Cambium paid annual commitment fees, and extended
the expiration date to May 30, 2008. Borrowings under the Revolver were collateralized by all of
Cambium’s personal property and the Predecessor Revolver pledges all stock owned by Cambium and
EdNewco, LLC as additional security. As of December 31, 2006, the Company had $5,000,000 of
borrowings outstanding and $1,125,000 of outstanding letters of credit. On April 12, 2007, the
Predecessor Revolver was terminated and all borrowings under the Predecessor Revolver were paid in
full.




Predecessor Long-Term Debt — Related Party



Long-term debt — related party at December 31, 2006 consists of $17,500,000 of 5.5% unsecured
notes issued to the former owner of Sopris West due January 30, 2009. Interest on the notes was
payable semi-annually. The notes were repaid in full on April 12, 2007, concurrent with the
Holding’s acquisition of Cambium.




7. Derivative Financial Instruments



The Company uses interest rate derivative instruments to hedge its exposure to interest rate
volatility resulting from its Senior Facility (see Note 6). SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended (SFAS 133) requires that all derivative
instruments be reported on the balance sheet at fair value and establishes criteria for
designation and effectiveness of hedging relationships, including a requirement that all
designations must be made at the inception of each instrument. As such initial designations were
not made, SFAS 133 requires changes in the fair value of the derivative instrument to be
recognized in the current period statement of operations as other income or expense.




31









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




7. Derivative Financial Instruments (continued)



In June 2007, the Company entered into interest rate swap contracts in the notional amounts of
$39.0 million which expires in June 2010. Under the agreement, to the extent that LIBOR exceeds a
fixed maximum rate, the Company will receive payments on the notional amount. The total fair value
of this financial instrument at December 31, 2007 was approximately $1.5 million. During the period
from January 29, 2007 to December 31, 2007, the Company recognized a loss of $1,534,379 on changes
in fair market value of the interest rate swap, which has been included in interest and other
expenses in the accompanying consolidated statement of operations and in other long-term
liabilities in the accompanying consolidated balance sheet.




8. Income Taxes



Significant components of the provision (benefit) for income taxes attributable to income from
operations before taxes consist of the following:




	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Predecessor	 	 	Successor
	 	 	 	 	 	 	Period from	 	 	Period from
	 	 	Year Ended	 	January 1	 	 	January 29
	 	 	December 31	 	2007 to	 	 	2007 to
	 	 	2006,	 	April 11,	 	 	December 31,
	 	 	(as restated)	 	2007	 	 	2007
	 	 	 	 	 	 
	Current:
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Federal
	 	$	6,576,980	 	 	$	501,534	 	 	 	$	18,000	 
	State and other
	 	 	1,069,804	 	 	 	356,976	 	 	 	 	508,020	 
	 	 	 	 	 	 
	Total current
	 	 	7,646,784	 	 	 	858,510	 	 	 	 	526,020	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Deferred:
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Federal
	 	 	(3,932,925	)	 	 	(4,309,520	)	 	 	 	(7,109,967	)
	State and other
	 	 	(310,617	)	 	 	(243,048	)	 	 	 	(1,254,700	)
	 	 	 	 	 	 
	Total deferred
	 	 	(4,243,542	)	 	 	(4,552,568	)	 	 	 	(8,364,667	)
	 	 	 	 	 	 
	Total tax provision (benefit)
	 	$	3,403,242	 	 	$	(3,694,058	)	 	 	$	(7,838,647	)
	 	 	 	 	 	 





The Company has recorded a total tax benefit in the periods January 1, 2007 to April 11, 2007, and
from January 29, 2007 to December 31, 2008 as a result of deferred tax assets that are expected to
be realized in future periods.




32









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




8. Income Taxes



The significant components of the net deferred tax assets and liabilities are shown in the
following table:




	 	 	 	 	 	 	 	 	 	 
	 	 	Predecessor,	 	 	 
	 	 	December 31	 	 	Successor,
	 	 	2006 (as	 	 	December 31
	 	 	restated)	 	 	2007
	 	 	 	 	 	 
	Deferred tax assets:
	 	 	 	 	 	 	 	 	 
	Net operating and capital loss carryforwards
	 	$	726,438	 	 	 	$	2,652,843	 
	Deferred compensation
	 	 	3,192,730	 	 	 	 	147,607	 
	Depreciation and amortization
	 	 	2,629,540	 	 	 	 	31,379	 
	Intangible assets
	 	 	631,000	 	 	 	 	14,703,398	 
	Embezzlement Loss
	 	 	2,185,625	 	 	 	 	4,878,100	 
	Other, net
	 	 	1,008,211	 	 	 	 	3,491,236	 
	Reserves
	 	 	705,921	 	 	 	 	992,361	 
	Valuation allowance
	 	 	(2,325,966	)	 	 	 	(1,028,717	)
	 	 	 	 	 	 
	 
	 	 	8,753,499	 	 	 	 	25,868,207	 
	 
	 	 	 	 	 	 	 	 	 
	Deferred tax liabilities:
	 	 	 	 	 	 	 	 	 
	Intangible and fixed assets
	 	 	(8,706,000	)	 	 	 	(49,453,624	)
	Other, net
	 	 	(7,282	)	 	 	 	(488,764	)
	 	 	 	 	 	 
	Net deferred
tax assets (liabilities)
	 	$	40,217	 	 	 	$	(24,074,181	)
	 	 	 	 	 	 





The net deferred tax liabilities are stated at prevailing statutory income tax rates. Deferred tax
assets and liabilities are reflected on the Company’s consolidated balance sheet are as follows:




	 	 	 	 	 	 	 	 	 	 
	 	 	December 31	 	 	December 31,
	 	 	2006	 	 	2007
	 	 	 	 	 	 
	Current deferred tax assets
	 	$	3,738,476	 	 	 	$	5,362,054	 
	Non-current deferred tax liabilities
	 	 	(3,698,259	)	 	 	 	(29,436,235	)
	 	 	 	 	 	 
	Net deferred tax assets (liabilities)
	 	$	40,217	 	 	 	$	(24,074,181	)
	 	 	 	 	 	 





In 2006 the major components attributable to the difference between the federal statutory rate of
35% and the actual rate are valuation allowances state taxes, non-deductible meals and
entertainment, §199 manufacturer’s deduction, and the extraterritorial income exclusion. In the
period ended April 11, 2007, the major components attributable to the difference between the
federal statutory rate of 35% and the actual rate are valuation allowances state taxes,
non-deductible meals and entertainment, and non-deductible acquisition costs. In the period ended
December 31, 2007 the major components attributable to the difference between the federal statutory
rate of 35% and the actual rate are state taxes, non-deductible meals and entertainment, and
in-process R&D.




33









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




8. Income Taxes (continued)



As of December 31, 2007, the Company had federal consolidated net operating loss carryforwards of
approximately $4,100,000, which expire in 2027.



The deferred tax assets at December 31, 2006 and December 31, 2007 were each reduced by a
valuation allowance of $2,325,966 and $1,028,717, respectively, which in 2006 are related to the
tax benefits of the amortization of intangibles, capital losses and state net operating losses
that are not expected to be realized, and in 2007 related to capital losses and state net
operating loss not expected to be realized.




9. Stockholders’ Equity — Predecessor



The rights and preferences of each of the Company classes of stock are as follows:




Common Stock



At December 31, 2006 the Company had authorized 110,000,000 shares of common stock, of which
2,720,718 were issued, 100,000,000 were reserved for the conversion of preferred stock, and
7,000,000 shares were reserved for issuance upon exercise of common stock options, of which
5,860,750 options were issued.




Voting



Each share of common stock of the Company shall have identical rights and privileges in every
respect. The holders of shares of common stock are entitled to vote upon all matters submitted to a
vote of the stockholders of the Company, and shall be entitled to one vote for each share of common
stock held.




Dividends



Dividends may be declared on the shares of common stock by the Board of Directors in accordance
with the criteria set forth in the Series A Preferred Stock dividend rights.




Series A Preferred Stock



At December 31, 2006, the Company had authorized 100,000,000 shares of preferred stock, of which
100,000,000 have been designated as Series A Preferred Stock.



In February 2006, the Company issued and sold an aggregate of 10,400,000 shares of Series A
Preferred Stock at a price of $1.00 per share. The Company recorded a beneficial conversion
feature of $3,016,000 related to these shares.




34









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




9. Stockholders’ Equity (continued)



In May 2006, the Company issued and sold an aggregate of 1,250,000 shares of Series A Preferred
Stock to key senior management employees at a price of $1.00 per share. Related to these shares,
the Company recorded compensation expense of $1,703,277, including the gross-up of taxes, and
$925,000, excluding the gross-up of taxes.




Ranking



Series A Preferred Stock shall rank senior to all other equity securities of the Company,
including any other series or class of the Company’s preferred stock, common stock, or other
capital stock, now or hereafter authorized, unless by its terms such series or class of equity
securities ranks senior to or pari passu with the Series A Preferred Stock, and such series or
class of equity securities has been authorized and approved in accordance with the provisions of
the agreement by the holders of a majority of the then-outstanding shares of Series A Preferred
Stock.




Dividends and Distributions



Subject to the prior rights and preferences, if any, applicable to shares of the preferred stock or
any series thereof that ranks senior to or pari passu with the Series A Preferred Stock and that
has been authorized and approved in accordance with the provisions of the agreement by the holders
of a majority of the then-outstanding shares of Series A Preferred Stock, the Board of Directors
may declare and pay dividends (payable in cash, stock, or otherwise) at any time and from time to
time out of any funds the Company legally has available therefore in the following order of
priority:





	 	(i)	 	First, to the holders of Series A Preferred Stock, pro rata, in proportion to their
respective ownership of the Series A Preferred Stock until each such holder has received
100% of the original issue price such Series A Preferred Stock paid by such holder.
	 
	 	(ii)	 	Second, to the holders of Series A Preferred Stock, pro rata, in proportion to their
respective ownership of the Series A Preferred Stock until each such holder has received
cumulative dividends equal to a pre-tax annual rate of return of 8% of the original issue
compounded quarterly as such amount is determined in good faith by the Board.
	 
	 	(iii)	 	Thereafter to the holders of Series A Preferred Stock and common stock, pro rata, in
proportion to the number of shares of common stock each holder would be entitled to receive
upon conversion of all of the Series A Preferred Stock into common stock.




As of December 31, 2006 and through April 11, 2007, no dividends have been declared or paid.





35











 





Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




9. Stockholders’ Equity (continued)




Voting Rights



In addition to any voting rights provided by law, the holders of shares of Series A Preferred
Stock shall have the following voting rights:





Each share of Series A Preferred Stock shall entitle the holder thereof to vote, in person
or by proxy, on all matters voted on by holders of common stock, voting together as a
single class with the holders of the common stock, and with holders of all other shares
entitled to vote thereon.




Each share of Series A Preferred Stock shall entitle the holder to the number of votes
with respect to such share as is equal to the number of votes that such holder would be
entitled to cast assuming that such share of Series A Preferred Stock had been converted
on the record date into the number of shares of common stock then issuable upon conversion
of such share of Series A Preferred Stock.



Liquidation, Dissolution, or Winding Up




In the event of any liquidation, dissolution, or winding up of the Company, either voluntary or
involuntary, the assets of the Company shall be distributed to the holders of preferred stock and
common stock consistent with the distribution of dividends described above. If, upon any
liquidation, dissolution, or winding up of the Company, the assets of the Company available for
distribution to the holders of the Series A Preferred Stock shall be insufficient to permit payment
in full to such holders of the sums which such holders are entitled to receive in such case, then
all of the assets available for distribution to holders of the Series A Preferred Stock shall be
distributed among and paid to such holders ratably in proportion to the amounts that would be
payable to such holders if such assets were sufficient to permit payment in full. A consolidation
or merger of the Company resulting in the holders of the issued and outstanding voting securities
of the Company immediately prior to such transaction owning or controlling a majority of the issued
and outstanding voting securities of the continuing or surviving entity immediately following such
transaction shall not be deemed to be a liquidation, dissolution, or winding up of the Company.



Conversion




Each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof,
at any time or from time to time, into a number of shares of common stock equal to a fraction, the
numerator of which is the Series A Liquidation Preference and the denominator of which is the




36









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




9. Stockholders’ Equity (continued)




Adjusted Conversion Price then in effect. At April 11, 2007, just prior to the acquisition by
Holdings, each share of Series A Preferred Stock outstanding converted into one share of common
stock.



10. Members’ Equity




VSS-Cambium Holdings, LLC




Holdings was formed on January 29, 2007 and on that date entered into a stock purchase agreement
that provided for the purchase by Holdings of all of the outstanding stock of Cambium. Each
Investor and Executive Member (Member) contributed capital which totaled $144,023,857, including
cash and carryover interest, and was issued a membership interest in Holdings. The capital
contributed was then used to purchase the outstanding stock of Cambium on April 12, 2007. No future
capital contribution is required to Holdings by its Members.



Holdings shall distribute cash and securities at the times determined by the Board at its sole
discretion. The amount of each Distribution shall be as follows:




	 	(a)	 	first, to the Members, in proportion to their membership interest, until the aggregate
amount equals the aggregate amount of their capital contributions;
	 
	 	(b)	 	second, to the Members, in proportion to their respective Percentages, a return on the
aggregate amount of their capital contributions from the date of the making of such
contributions at the rate of eight percent (8%) per year, compounded annually;
	 
	 	(c)	 	then, upon the occurrence of a Realization Event, to the Management LLC for the aggregate
amount of up to 17% of the remaining proceeds from the Realization Event;
	 
	 	(d)	 	the balance to the Members in proportion to their membership
interest.





No returns on capital have been accreted as of December 31, 2007.




37









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




10. Members’ Equity (continued)




The term “Realization Event” means the date upon which the Members of Holdings receive cash equal
to more than 50% of the total consideration to which they are entitled in connection with any of
the following transactions (with non-cash consideration valued at fair market value as reasonably
determined by the Board):




	 	(a)	 	a sale or assignment, in one transaction or in a series of related transactions, of more
than 50% of the percentage interests in Holdings (other than a sale or assignment to an
affiliate of an Investor Member or a sale or assignment in connection with one or more
public offerings);
	 
	 	(b)	 	a sale or other disposition, in one transaction or in a series of related transactions, of
assets of Holdings or of Cambium having a value equal to more than 50% of the total value of
the assets of Holdings and Cambium; or
	 
	 	(c)	 	a merger or consolidation involving Holdings or Cambium following which the Members of
Holdings prior to such transaction do not own in the aggregate, directly or indirectly, 50%
or more of the equity or voting interests in the surviving or successor entity.





Following a Realization Event, a sale of membership or any other sale of membership interests, or
a merger, Holdings shall have the right to withhold, and each of the selling Members shall
contribute and pay over from the proceeds received or receivable, a pro rata portion of the
proceeds payable in any such transaction equal to the amount necessary, as reasonably determined
by the Board, to satisfy any post-transaction indemnification, purchase price adjustment, or other
similar escrow or holdback obligation.



If an initial public offering of equity interests in any subsidiary of Holdings shall occur, the
Board may, in its sole discretion, cause Holdings to distribute its shares in the public
subsidiary to the Investor Members and the Executive Members in accordance with the Distribution.



If an Executive Member’s employment by Holdings or one of its subsidiaries is terminated for Cause
or is terminated by the Executive Member without good reason (each, a Trigger Termination), then,
Holdings shall have the option (but not the obligation), exercisable for 180 days after such
termination, to purchase the Executive Member’s membership interest in the Company, in whole or in
part, at the fair market value thereof as of the last day of the calendar month in which such
Trigger Termination occurs. Holdings may exercise this option upon determination of the Board. If
the Company exercises this option, the Company will accrete the difference and record the
obligation as a liability. The total executive members interest was subject to this provision at
December 31, 2007 was $2,915,000.




38









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




10. Members’ Equity (continued)




VSS-Cambium Management, LLC




VSS-Cambium Management, LLC (Management LLC) is a Delaware Limited Liability Company formed on
February 7, 2007. Management is a member and holds a $50,000 equity interest in Holdings. Its
members are Holdings and individuals admitted as Management Members. Management Members may
include employees of and consultants to Cambium. Management LLC is authorized to sell a total of
100,000 Management LLC units. Management Members are entitled to receive from Holdings following
the occurrence of a Realization Event, distributions in an aggregate amount of up to 17% of the
amount available for distribution to the Member of Holdings after repayment of all capital
contributions made by them plus an 8% compounded amount return on those contributions.



Upon the occurrence of a Realization Event, all of the authorized but un-issued LLC Units
automatically shall be issued pro rata to the Management Members of the Company who are active
employees, except that Holdings may, in its absolute discretion, allocate those LLC Units in some
of the member recommended by the Chief Executive Officer of Holdings.



Each Management Member units are subject to vesting, but upon the occurrence of Realization Event
each member of the Management LLC who is an active employee shall be deemed to be fully vested.
Each Management Member’s interest, in most cases, shall vest solely upon a Realization Event and
certain others vest over a four year period; however, the Management Member loses the right to the
vested shares in the case of a voluntary termination or a termination for cause. Upon a vesting or
Realization Event, the Company will record compensation expense and a related liability related to
the cash payable on distribution.



As of December 31, 2007, 65,761 units for a total of $32,881 have been sold and distributed to
certain employees of Cambium.



11. Defined Contribution Retirement Plan




Cambium has established a defined contribution retirement plan, the Cambium Learning
401(k)
Savings Plan, which conforms to Section
401(k) of the Internal Revenue Code, and covers
substantially all of Cambium’s eligible employees. Participants may elect to contribute a
percentage of their compensation subject to an annual limit. Cambium provides a matching
contribution in amounts up to 4.5% of employee compensation. The 401(k) matching contribution
expense was $695,642, $292,622, and $472,219 for the year ended December 31, 2006, the period from
January 1, 2007 to April 11, 2007 and for the period from January 29, 2007 to December 31, 2007,
respectively.




39









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




12. Disclosures About Fair Value of Financial Instruments




The fair value of a financial instrument is deemed to be the amount at which the instrument could
be exchanged in a current transaction between willing parties. As of December 31, 2007, the
financial instruments include cash and cash equivalents and the $127,040,000 Senior Secured Tranche
B Notes outstanding and the $50,641,960 senior unsecured subordinated Notes. The fair market values
of cash and cash equivalents are equal to their carrying value. The fair market value of the Notes
are subject to market conditions; however, a limited trading market restricts the ability to freely
trade the debt. Based on the limited trading market, the Company is unable to determine the fair
value of the Notes.



13. Stock Option Plan — Predecessor




2004 Stock Compensation Plan




The Company adopted the Cambium Learning 2004 Stock Compensation Plan (the 2004 Option Plan) on
April 28, 2004. A total of 7,000,000 shares of common stock have been authorized and reserved for
issuance under the 2004 Option Plan. Under the terms of the 2004 Option Plan, the Company is
authorized to grant incentive stock options as defined under the Internal Revenue Code,
non-qualified options, restricted stock, bonus stock, performance awards, and cash awards to
employees, officers, directors, consultants, and advisors. Options granted under the 2004 Option
Plan typically expire ten years from the date of grant.



The 2004 Option Plan is administered by the compensation committee of the Board of Directors, which
selects the individuals to whom equity-based awards will be granted and determines the option
exercise price and other terms of each award, subject to the provisions of the 2004 Option Plan.
The 2004 Option Plan provides that at the sole discretion of the compensation committee upon an
acquisition of the Company, all options to purchase common stock will become exercisable, all
restrictions on restricted stock will lapse, and/or all performance share awards will be paid out
pro-rata based on the level of performance attained as of such date. Options granted under the 2004
Option Plan typically vest over a four- to six-year period. At April 11, 2007, there was no
restricted or bonus stock issued under the 2004 Option Plan, and there were no performance awards
or cash awards issued under the 2004 Option Plan. At
December 31, 2006 and April 11, 2007,
1,139,250 shares were available for future grant under the 2004 Option Plan.




40









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




13. Stock Option Plan (continued)




The Company uses the Black-Scholes option pricing model to calculate the grant date fair value of
an award. The fair value of options granted were calculated using the following estimated
weighted-average assumptions:



	 	 	 	 	 
	 	 	Year Ended
	 	 	December 31
	 	 	2006
	Risk-free interest rate
	 	 	4.8% – 4.87	%
	Expected dividend yield
	 	 	0	%
	Volatility factor
	 	 	55.43% – 56.06	% 
	Expected lives
	 	 	6.25 years	 
	Weighted-average fair value of options granted
	 	$	0.63	 






As there is no public market for the Company’s common stock, the volatility for options granted in
2006 has been determined based on the analysis of reported data for a peer group of companies that
issued options with substantially similar terms. The expected life of options has been determined
utilizing the “simplified” method as prescribed by the SEC’s Staff Accounting Bulletin No. 107,
Share-Based Payment. The risk-free interest rate is based on a zero coupon United States Treasury
instrument whose term is consistent with the expected life of the stock options. The Company has
not paid, and does not anticipate paying, cash dividends on its shares of common stock; therefore,
the expected divided yield is assumed to be zero. SFAS No. 123(R) requires companies to utilize an
estimated forfeiture when calculating the expense for the period. As a result, the Company applied
an estimated forfeiture rate of 0% in the year ended December 31, 2006.




41









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




13. Stock Option Plan (continued)




Information with respect to activity under the 2004 Option Plan is as follows:



	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Weighted-
	 	 	Number of	 	Average
	 	 	Shares	 	Exercise Price
	Outstanding at December 31, 2005
	 	 	3,927,465	 	 	$	2.31	 
	Granted
	 	 	2,325,000	 	 	 	2.00	 
	Exercised
	 	 	—	 	 	 	—	 
	Canceled
	 	 	(391,715	)	 	 	2.15	 
	 	 	   
	Outstanding at December 31, 2006
	 	 	5,860,750	 	 	$	2.20	 
	Granted
	 	 	—	 	 	 	—	 
	Exercised
	 	 	—	 	 	 	—	 
	Canceled
	 	 	5,860,750	 	 	$	2.20	 
	 	 	   
	Outstanding
at April 11, 2007
	 	 	—	 	 	 	—	 
	 	 	 






In February 2007, in connection with the acquisition of Cambium, all outstanding stock options were
modified such that they became fully vested, prior to the effective time of the acquisition. All
outstanding options prior to the effective time of the acquisition were canceled in exchange for
cash in an amount equal to the excess, if any, of the fair value over the exercise price of the
option, multiplied by the number of shares of common stock underlying the option. Cambium has
recorded and expensed $2,872,650 in its consolidated statement of operations for the period from
January 1, 2007 through April 11, 2007 as a result of the modification.



14. Commitments and Contingencies




Leases




Cambium has operating leases for various office and warehouse equipment and office and warehouse
facilities that expire at various dates through 2016. Certain leases contain renewal and escalation
clauses for a proportionate share of operating expenses.



Cambium has a build-to-suit lease for warehouse space in Frederick, Colorado. The lease requires
minimum monthly rents that expire on October 31, 2016. The lease is renewable at the Company’s
option for two additional periods of five years each. The Company has an outstanding letter of
credit in the amount of $1,000,000 to secure the lease.




42









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




14. Commitments and Contingencies (continued)




The Company evaluated the provisions of Emerging Issues Task Force (EITF) 97-10, The Effect of
Lessee Involvement in Asset Construction, and SFAS No. 98, Accounting for Leases, and concluded
that due to the Company’s collateral to the landlord, in the form of the $1,000,000 letter of
credit, that it is deemed the owner of the land and building for accounting purposes. As a result,
the related capitalized costs for the warehouse space in Frederick, Colorado are now classified as
“land and building” and are included in property, plant, and equipment, net, in the accompanying
balance sheets. A liability for the same amount appears as other accrued expenses and accrued
long-term building costs, representing the short- and long-term components. Due to the acquisition
of Cambium, the Company recorded an increase of $4,747,587 in purchase accounting related to the
fair market value of land and building for the warehouse space on the date of acquisition. The
related liability has been adjusted accordingly. The cost of the building is being depreciated over
a 35-year useful life. The amount of the depreciation expense was $36,079, $60,732, and $264,604
for the year ended December 31, 2006, the period from January 1, 2007 through April 11, 2007, and
the period April 12, 2007 through December 31, 2007, respectively. Additionally, the obligation
will be reduced over the life of the lease at an interest rate of 5.54%. At the end of the original
lease term, the land and building, net of accumulated depreciation, will be equal to the remaining
liability.



The future minimum lease commitment under this build-to-suit lease is payable as follows:



	 	 	 	 	 
	2008
	 	$	966,024	 
	2009
	 	 	1,006,108	 
	2010
	 	 	1,026,150	 
	2011
	 	 	1,037,173	 
	2012
	 	 	1,092,289	 
	Thereafter
	 	 	4,357,465	 
	 
	 	 	 
	Total minimum lease payments
	 	$	9,485,209	 
	 
	 	 	 






The future minimum rental commitments under all remaining noncancelable leases for real estate
operating leases are payable as follows:



	 	 	 	 	 
	2008
	 	$	1,250,911	 
	2009
	 	 	1,084,094	 
	2010
	 	 	649,356	 
	2011
	 	 	649,356	 
	2012
	 	 	649,356	 
	Thereafter
	 	 	270,565	 
	 
	 	 	 
	Total minimum lease payments
	 	$	4,553,638	 
	 
	 	 	 







43









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




14. Commitments and Contingencies (continued)




Operating rent expense was $1,905,554, $375,144, and $939,208 for the period from January 1, 2006
to December 31, 2006, January 1, 2007 to April 11, 2007 and for the period from January 29, 2007
to December 31, 2007, respectively.



Contingencies




Cambium is involved in ordinary and routine litigation and matters incidental to its business.
There are no such matters pending that Cambium expects to be material in relation to its financial
condition, results of operations, or cash flow.



Cambium is contingently liable for $1,455,000 of letters of credit, performance bonds and surety
bonds posted as security for its operating activities. The full amount is backed by letters of
credit from the Revolver. Under the terms of the Revolver, outstanding letters of credit are
deducted from the unused borrowing capacity.



Indemnification Provisions




Except as limited by Massachusetts law, the by-laws of the Company require it to indemnify certain
current or former directors, officers, and employees of the Company against expenses incurred by
them in connection with each proceeding in which he or she is involved as a result of serving or
having served in certain capacities. Indemnification is not available with respect to a proceeding
as to which it has been adjudicated that the person did not act in good faith in the reasonable
belief that the action was in the best interests of the Company. The maximum potential amount of
future payments the Company could be required to make under these provisions is unlimited. The
Company has never incurred significant costs related to these indemnification provisions. As a
result, the Company believes the estimated fair value of these provisions is minimal.



The Company accepts standard limited indemnification provisions in the ordinary course of business,
whereby it indemnifies its customers for certain direct damages incurred in connection with
third-party patent or other intellectual property infringement claims with respect to the use of
the Company’s products. The term of these indemnification provisions generally coincides with the
customer’s use of the Company’s products. The maximum potential amount of future payments the
Company could be required to make under these provisions is always subject to fixed monetary
limits. The Company has never incurred significant costs to defend lawsuits or settle claims
related to these indemnification provisions. As a result, the Company believes the estimated fair
value of these provisions is minimal.




44









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




15. Related Party Transactions




Veronis Suhler Stevenson LLC




Cambium entered into an advisory fee agreement with Veronis Suhler Stevenson LLC (VSS LLC),
effective on April 12, 2007. Under the term of the agreement, VSS LLC provides Cambium the
following services: (i) advice in connection with the negotiation of agreements, contracts,
documents, and instruments necessary to provide Cambium with financing from banks on terms and
conditions satisfactory to Cambium; and (ii) financial, managerial, and operational advice in
connection with its day-to-day operations, including, without limitation, advice with respect to
the development and implementation of strategies for improving the operating, marketing, and
financial performance of Cambium. Cambium has agreed to pay VSS LLC an advisory fee of $200,000,
plus out-of-pocket expenses, annually, payable quarterly in arrears, in exchange for these
services. The Company expensed $144,658 in 2007 for management fees. At December 31, 2007,
$100,685 was due to VSS LLC, and $100,000 was included in accounts payable and $685 in other
accrued expenses on the accompanying consolidated balance sheet.



In each instance that an additional equity investment is made in Holdings (regardless of whether
such investment is such Member’s initial equity investment or a subsequent equity investment) and
in each instance that Holdings obtains debt financing from any party, Veronis Suhler Stevenson LLC
(VSS LLC) or its designee, shall be entitled to investment banking fees from Holdings at the time
of any such investment or financing in an aggregate amount of 1.0% of the gross proceeds of such
investment or financing. Upon each acquisition or disposition of any business or entity by
Holdings or any of its subsidiaries or affiliates, Holdings shall pay VSS LLC, or its designee, an
investment banking fee in an amount equal to 1.0% of the enterprise value of that business or
entity. Holdings shall promptly reimburse VSS LLC for all out-of-pocket fees and expenses incurred
by it in performing any investment banking services or any other services for or on behalf of the
Company, including, without limitation, any legal, financial or tax advisor fees, and travel,
hotel and meal expenses incurred. Holdings paid to VSS Fund Management LLC a one-time transaction
fee of $3,200,000 in cash at the closing of the acquisition of Cambium; of this, $500,000 was
allocated to deferred financing costs and $2,700,000 was allocated to purchase price.



Whitney




Cambium entered into a management services agreement with Whitney V Management Co., LLC (Whitney),
effective on January 1, 2004. Under the terms of the agreement, Whitney provided Cambium the
following services: (i) advice in connection with the negotiation of agreements, contracts,
documents, and instruments necessary to provide Cambium with financing from banks on terms and
conditions satisfactory to Cambium; and (ii) financial,




45









 










Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




15. Related Party Transactions (continued)




managerial,
and operational advice in connection with its day-to-day operations, including, without
limitation, advice with respect to the development and implementation of strategies for improving
the operating, marketing, and financial performance of Cambium. Cambium has agreed to pay Whitney a
management fee of not less than $250,000, plus out-of-pocket expenses, annually, payable quarterly
in arrears, in exchange for these services. The Company expensed $324,314 for the period January 1,
2006 through December 31, 2006 and $92,500 for period January 1, 2007 to April 11, 2007 for
management fees. Furthermore, the Company has agreed to pay Whitney a transaction fee equal to 1%
of the enterprise value of assets or securities acquired from third parties by Cambium. In 2006,
the Company paid Whitney a fee of $104,000 in connection with the acquisition of IntelliTools, Inc.
This agreement was terminated on April 12, 2007 when Cambium was acquired by Holdings.



Cactus Investments, LLP




The Company leased office and warehouse space in Longmont, Colorado from Cactus Investments, LLP. A
general partner of Cactus Investments, LLP was a director of Cambium through April 11, 2007. The
Company paid $497,880 in the period January 1, 2006 through December 31, 2006 and $169,320 in the
period January 1, 2007 through April 11, 2007 for rent for this location.



16. Other Information




The Company’s geographic area of operation is predominantly the United States. Export or foreign
sales to locations outside the United States are not significant to the Company’s business
segments. No single customer accounts for more than 10% of consolidated net sales. Although the
loss of a single customer or a few customers would not have a material adverse effect on the
Company’s business, schedules of school adoptions and market acceptance of the Company’s products
can materially affect year-to-year revenue performance.



17. Restructuring




In December 2007, Cambium developed, approved and communicated a plan to consolidate the Petaluma,
California, office and reduce the work force. As of December 31, 2007, severance costs of $60,305
are accrued under the plan and are classified as other accrued expense in the accompanying balance
sheet. The Company expensed $33,695 and $98,483 of severance costs for the period January 1, 2007
to April 11, 2007 and for the period from January 29, 2007 to December 31, 2007, respectively.




46









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




18. TASA Settlement




On February 15, 2007, Touchstone Applied Science Associates, Inc. (TASA) filed a complaint in the
United States District Court, Southern District of New York, against
Cambium Learning, Inc.,
requesting a judgment declaring that the parties entered into a licensing agreement pursuant to
which, in consideration of defendant paying in a timely manner an annual licensing fee, defendant
acquired the limited right to use TASA’s DRP specified materials only for the LANGUAGE! third
edition and otherwise only for a five-year period, measured from the date the materials were
delivered through April 2009. Cambium previously asserted that the license is perpetual, subject
to the timely payment of the annual license fee of $23,000. On July 31, 2007, Cambium and TASA
reached a settlement agreement on this matter. Cambium agreed to pay TASA $300,000 for a
irrevocable, royalty free, fully paid up, perpetual license to use TASA’s DRP specified materials
for the life of LANGUAGE! third edition. This amount is capitalized in prepublication costs and is
being amortized over its estimated useful life.



19. Subsequent Events — (subject to change)




Embezzlement Loss




Of the total embezzlement loss of $13,995,984 described in Note 1, $1,800,735 occurred in 2008,
subsequent to the date of these financial statements. In addition, the Company will incur
significant expenses associated with the investigation of the embezzlement matter. Both the
embezzlement loss of $1,800,735 and investigation expenses will be reflected in the financial
statements for the year ended December 31, 2008.



While the Company believes recovery of some portion of the funds stolen is possible, the amount is
uncertain and no benefit has been recorded in these financial statements for recovery.



Escrow Claim




As more fully described in Note 3 — Acquisitions, $20,000,000 of the purchase price of Cambium
Learning, Inc. was held in escrow. Pursuant to an agreement dated July 10, 2008 by and between the
former shareholders of the predecessor company and the members of the successor company, the
remaining escrow amount was distributed in its entirety to VSS — Cambium Settlement Fund, LLC
(Settlement Fund). Also, the former shareholders of the predecessor company agreed to contribute an
additional $10,000,000 to the Settlement Fund. The total settlement of $30,000,000 will be used to
cover costs incurred in connection with the Embezzlement Matter (see Note 1). The former
shareholders also agree to forego any claims or rights to any amount held in escrow in exchange for
which the members of VSS — Cambium Holdings, LLC indemnify the former shareholders from any claim
in connection with the embezzlement matter.




47









 








Cambium Learning, Inc. (Predecessor) and

VSS-Cambium Holdings, LLC (Successor)




Notes to Consolidated Financial Statements (continued)




19. Subsequent Events (continued)




Loan Agreement — Default and Temporary Waiver




As a result of the embezzlement and the relevant investigation, the Company was unable to issue
its 2007 financial statements until after April 14, 2008, causing a financial reporting default
under the Senior Facility and Subordinated Notes Agreements. Pursuant to Agreements entered into
on May 20, 2008, the lenders have temporarily waived the financial reporting defaults, and
extended the date upon which the Company is required to deliver the relevant financial reports
until August 14, 2008. During the period of temporary waiver, interest on the $128,000,000 senior
secured notes and $56,602,254 senior unsecured subordinated notes is calculated at 2% higher than
called for in the agreements. The additional interest for the Subordinated Notes is added to the
principal of the notes and payable at maturity.



While in default, including the period of temporary waiver, the Company is prohibited from
borrowing against the revolving credit agreement. In order to assist the Company in meeting its
seasonal, short-term financing requirements, three members of the Company made unsecured loans to
the Company totaling $7,000,000, payable October 11, 2014, with interest at 14% per year, payable
quarterly beginning June 30, 2008, or at the option of the Company added to the principal (Members’
Loans). In the event of default on the Members’ Loans, interest will accrue at 16%. The
additional 2% interest will be added to the principal and payable at maturity. A event of default
occurs if the Company fails to make any required payments under any of its financing obligations,
receives a judgment against it for $1,000,000 or more, or fails to meet any of the terms of notes
payable with respect to the Members’ Loans. As of the date of these financial statements, the
Company is not in default of the Members’ Loans. The amounts payable to each member are as follows:



	 	 	 	 	 
	Member (Lender)	 	Note Payable	 
	 
	VSS Communications Partners IV, L.P.
	 	$	3,233,935	 
	VSS Communications Parallel Partners IV, L.P.
	 	 	3,580,313	 
	VSS Communications Parallel II Partners IV, L.P.
	 	 	185,752	 
	 
	 	 	 
	Total
	 	$	7,000,000	 
	 
	 	 	 






48









 





Supplemental Information

(Exhibit I)





 











 





VSS-Cambium Holdings, LLC




Consolidating Balance Sheet




December 31,
2007




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Holdings &	 	 	 	 	 	Holdings
	 	 	Cambium Learning,	 	Management LLC	 	 	 	 	 	Year Ended
	 	 	Inc.	 	Consolidated	 	Eliminations	 	December 31, 2007
	 	 	 
	Assets
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Current assets:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash and cash equivalents
	 	$	1,173,365	 	 	$	32,881	 	 	$	—	 	 	$	1,206,246	 
	Accounts receivable, net of allowance
for bad debts of $489,695
and sales returns of $205,564
	 	 	9,508,735	 	 	 	—	 	 	 	—	 	 	 	9,508,735	 
	Inventories
	 	 	9,698,171	 	 	 	—	 	 	 	—	 	 	 	9,698,171	 
	Performance share plan
	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 
	Deferred tax benefit
	 	 	5,362,054	 	 	 	—	 	 	 	—	 	 	 	5,362,054	 
	Prepaid expenses and other current assets
	 	 	825,544	 	 	 	—	 	 	 	—	 	 	 	825,544	 
	 	 	 
	Total current assets
	 	 	26,567,869	 	 	 	32,881	 	 	 	—	 	 	 	26,600,750	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Property, plant and equipment, net
	 	 	18,808,134	 	 	 	—	 	 	 	—	 	 	 	18,808,134	 
	Pre-publication costs
	 	 	2,685,338	 	 	 	—	 	 	 	—	 	 	 	2,685,338	 
	Author advances
	 	 	56,323	 	 	 	—	 	 	 	—	 	 	 	56,323	 
	Goodwill
	 	 	192,287,323	 	 	 	—	 	 	 	—	 	 	 	192,287,323	 
	Other intangible assets
	 	 	123,408,901	 	 	 	—	 	 	 	—	 	 	 	123,408,901	 
	Investment in Cambium Learning, Inc
	 	 	—	 	 	 	144,023,857	 	 	 	(144,023,857	)	 	 	—	 
	Other long term assets
	 	 	5,291,534	 	 	 	—	 	 	 	—	 	 	 	5,291,534	 
	 	 	 
	Total assets
	 	$	369,105,422	 	 	$	144,056,738	 	 	$	(144,023,857	)	 	$	369,138,303	 
	 	 	 






49









 






VSS-Cambium Holdings, LLC




Consolidating Balance Sheet (continued)




December 31,
2007




	 	 	 	 	 	 	 	 	 	 	 	 	 	     	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Holdings
	 	 	 	 	 	 	Holdings &	 	 	 	 	 	Year Ended
	 	 	Cambium	 	Management LLC	 	 	 	 	 	December 31
	 	 	Learning, Inc.	 	Consolidated	 	Eliminations	 	2007
	 	 	 
	Liabilities and stockholder’s equity
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Current liabilities:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Accounts payable
	 	$	5,976,467	 	 	$	—	 	 	$	—	 	 	$	5,976,467	 
	Royalties payable
	 	 	1,433,421	 	 	 	—	 	 	 	—	 	 	 	1,433,421	 
	Accrued salaries, bonus, commissions
	 	 	2,234,239	 	 	 	—	 	 	 	—	 	 	 	2,234,239	 
	Current portion of long term debt
	 	 	1,280,000	 	 	 	—	 	 	 	—	 	 	 	1,280,000	 
	Income tax payable
	 	 	298,893	 	 	 	—	 	 	 	—	 	 	 	298,893	 
	Deferred revenue
	 	 	1,429,521	 	 	 	—	 	 	 	—	 	 	 	1,429,521	 
	Deferred compensation
	 	 	100,000	 	 	 	—	 	 	 	—	 	 	 	100,000	 
	Other accrued expenses
	 	 	4,063,220	 	 	 	32,881	 	 	 	 	 	 	 	4,096,101	 
	 	 	 
	Total current liabilities
	 	 	16,815,761	 	 	 	32,881	 	 	 	 	 	 	 	16,848,642	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Long term debt
	 	 	176,401,960	 	 	 	—	 	 	 	—	 	 	 	176,401,960	 
	Co-development liability
	 	 	780,092	 	 	 	—	 	 	 	—	 	 	 	780,092	 
	Deferred income taxes
	 	 	29,436,235	 	 	 	—	 	 	 	—	 	 	 	29,436,235	 
	Deferred compensation
	 	 	269,020	 	 	 	—	 	 	 	—	 	 	 	269,020	 
	Building lease liability
	 	 	13,239,336	 	 	 	—	 	 	 	—	 	 	 	13,239,336	 
	Other
	 	 	2,083,011	 	 	 	—	 	 	 	—	 	 	 	2,083,011	 
	 	 	 
	Total liabilities
	 	 	239,025,415	 	 	 	32,881	 	 	 	 	 	 	 	239,058,296	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Commitments and contingencies (Note 15)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Members’ equity:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Members’ interest
	 	 	—	 	 	 	144,023,857	 	 	 	—	 	 	 	144,023,857	 
	Common stock
	 	 	144,023,857	 	 	 	—	 	 	 	(144,023,857	)	 	 	—	 
	 	 	 
	Accumulated deficit
	 	 	(13,943,850	)	 	 	—	 	 	 	—	 	 	 	(13,943,850	)
	 	 	 
	Total owners’ equity
	 	 	130,080,007	 	 	 	144,023,857	 	 	 	(144,023,857	)	 	 	130,080,007	 
	 	 	 
	Total liabilities & owners’ equity
	 	$	369,105,422	 	 	$	144,056,738	 	 	$	(144,023,857	)	 	$	369,138,303	 
	 	 	 






50









 






VSS-Cambium Holdings, LLC




Consolidating Statement of Operations




For the
Period from January 29, 2007 (inception) to December 31, 2007




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Holdings
	 	 	 	 	 	 	Holdings &	 	 	 	 	 	Year Ended
	 	 	Cambium	 	Management LLC	 	 	 	 	 	December 31
	 	 	Learning, Inc.	 	Consolidated	 	Eliminations	 	2007
	 	 	 
	Net sales
	 	$	80,847,321	 	 	$	—	 	 	$  	—	 	 	$	80,847,321	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cost and expenses
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cost of sales, excluding pre-publication and publishing rights amortization
	 	 	31,308,237	 	 	 	—	 	 	 	—	 	 	 	31,308,237	 
	Pre-publication, publishing rights and developed technology amortization
	 	 	12,842,070	 	 	 	—	 	 	 	—	 	 	 	12,842,070	 
	 	 	 
	Total cost of sales
	 	 	44,150,307	 	 	 	—	 	 	 	—	 	 	 	44,150,307	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Selling and administrative
	 	 	29,926,744	 	 	 	—	 	 	 	—	 	 	 	29,926,744	 
	Other intangible asset amortization
	 	 	7,228,665	 	 	 	—	 	 	 	—	 	 	 	7,228,665	 
	Acquired in-process research and development
	 	 	890,000	 	 	 	—	 	 	 	—	 	 	 	890,000	 
	Embezzlement expenses
	 	 	5,731,671	 	 	 	—	 	 	 	—	 	 	 	5,731,671	 
	 	 	 
	Total cost and expenses
	 	 	87,927,387	 	 	 	—	 	 	 	—	 	 	 	87,927,387	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Income (loss) from operations
	 	 	(7,080,066	)	 	 	—	 	 	 	—	 	 	 	(7,080,066	)
	Interest and other expenses
	 	 	(14,702,431	)	 	 	13,341	 	 	 	—	 	 	 	(14,689,090	)
	 	 	 
	Income (loss) from operations before taxes
	 	 	(21,782,497	)	 	 	13,341	 	 	 	—	 	 	 	(21,769,156	)
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Income tax benefit
	 	 	(7,838,647	)	 	 	—	 	 	 	—	 	 	 	(7,838,647	)
	 	 	 
	Net Income (loss)
	 	$	(13,943,850	)	 	$	13,341	 	 	$  	—	 	 	$	(13,930,509	)
	 	 	 






51









 






VSS-Cambium Holdings, LLC




Consolidating Statement of Cash Flows




For the Period from January 29, 2007 (inception) to December 31, 2007




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Holdings &	 	 	 	 	 	 
	 	 	 	 	 	 	Management	 	 	 	 	 	Holdings
	 	 	Cambium Learning,	 	LLC	 	 	 	 	 	Year Ended
	 	 	Inc.	 	Consolidated	 	Eliminations	 	December 31, 2007
	 	 	 
	Operating activities
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net income
	 	$	(13,943,850	)	 	$	13,341	 	 	$  	—	 	 	$	(13,930,509	)
	Adjustments to reconcile net income to cash flows provided by
(used in) operating activities:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Depreciation and amortization expense on property, plant and
equipment
	 	 	986,651	 	 	 	—	 	 	 	—	 	 	 	986,651	 
	Amortization expense on pre-publication costs and intangible assets
	 	 	20,070,735	 	 	 	—	 	 	 	—	 	 	 	20,070,735	 
	Acquired in-process research and development
	 	 	890,000	 	 	 	—	 	 	 	—	 	 	 	890,000	 
	Inventory Step-Up
	 	 	2,931,000	 	 	 	—	 	 	 	—	 	 	 	2,931,000	 
	Non-cash interest expense
	 	 	641,960	 	 	 	—	 	 	 	—	 	 	 	641,960	 
	Amortization of deferred financing costs
	 	 	679,333	 	 	 	—	 	 	 	—	 	 	 	679,333	 
	Loss on derivative instruments
	 	 	1,534,379	 	 	 	—	 	 	 	—	 	 	 	1,534,379	 
	Deferred taxes
	 	 	(8,364,668	)	 	 	—	 	 	 	—	 	 	 	(8,364,668	)
	Changes in operating assets and liabilities:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	—	 
	Accounts receivable
	 	 	305,707	 	 	 	—	 	 	 	—	 	 	 	305,707	 
	Inventories
	 	 	(867,025	)	 	 	—	 	 	 	—	 	 	 	(867,025	)
	Accounts payable
	 	 	(1,182,890	)	 	 	—	 	 	 	—	 	 	 	(1,182,890	)
	Royalties, net
	 	 	650,609	 	 	 	—	 	 	 	—	 	 	 	650,609	 
	Other, net
	 	 	(7,806,845	)	 	 	32,881	 	 	 	 	 	 	 	(7,773,964	)
	 	 	 
	Net cash provided by (used in) operating activities
	 	 	(3,474,904	)	 	 	46,222	 	 	 	 	 	 	 	(3,428,682	)
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Investing activities
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Acquisition of businesses, less cash acquired
	 	 	—	 	 	 	(303,235,675	)	 	 	—	 	 	 	(303,235,675	)
	Pre-publication expenditures
	 	 	(2,726,476	)	 	 	—	 	 	 	—	 	 	 	(2,726,476	)
	Property, plant and equipment expenditures
	 	 	(643,176	)	 	 	—	 	 	 	—	 	 	 	(643,176	)
	 	 	 
	Net cash used in investing activities
	 	 	(3,369,652	)	 	 	(303,235,675	)	 	 	—	 	 	 	(306,605,327	)
	 	 	 





52









 






VSS-Cambium Holdings, LLC




Consolidating Statement of Cash Flows (continued)




For the Period from January 29, 2007 (inception) to December 31, 2007




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Holdings &	 	 	 	 	 	Holdings
	 	 	 	 	 	 	Management	 	 	 	 	 	Year Ended
	 	 	Cambium Learning,	 	LLC	 	 	 	 	 	December 31
	 	 	Inc.	 	Consolidated	 	Eliminations	 	2007
	 	 	 
	Financing activities
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Proceeds from capital contribution
	 	$	—	 	 	$	140,108,857	 	 	$  	—	 	 	$	140,108,857	 
	Proceeds from the issuance of long-term financing
	 	 	—	 	 	 	172,104,739	 	 	 	—	 	 	 	172,104,739	 
	Payment of long-term financing
	 	 	(960,000	)	 	 	—	 	 	 	—	 	 	 	(960,000	)
	Borrowings under revolving credit facility
	 	 	4,500,000	 	 	 	—	 	 	 	—	 	 	 	4,500,000	 
	Payment of revolving credit facility
	 	 	(4,500,000	)	 	 	—	 	 	 	—	 	 	 	(4,500,000	)
	Distribution to members
	 	 	—	 	 	 	(13,341	)	 	 	—	 	 	 	(13,341	)
	 	 	 
	Net cash flow provided by financing activities
	 	 	(960,000	)	 	 	312,200,255	 	 	 	—	 	 	 	311,240,255	 
	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Increase (decrease) in cash and cash equivalents
	 	 	(7,804,556	)	 	 	9,010,802	 	 	 	—	 	 	 	1,206,246	 
	Cash and cash equivalents at the beginning of the year
	 	 	8,977,921	 	 	 	(8,977,921	)	 	 	—	 	 	 	—	 
	 	 	 
	Cash at year end
	 	$	1,173,365	 	 	$	32,881	 	 	$  	—	 	 	$	1,206,246	 
	 	 	 






53









 





SCHEDULE IV




Permanent Waiver of Senior Unsecured Note Purchase Agreement





 












 







          PERMANENT WAIVER AND AMENDMENT NO. 2, dated as of August 22, 2008 (this “Permanent Waiver and
Amendment”), among CAMBIUM LEARNING, INC., a Delaware corporation and successor to VSS-Cambium
Merger Corp. (“Company”), VSS-CAMBIUM HOLDINGS, LLC, a Delaware limited liability company
(“Holdings”), TCW/CRESCENT MEZZANINE PARTNERS IV, L.P., as Administrative Agent, and the Required
Note-Holders, in each case listed on the signature pages hereto, to the Note Purchase Agreement
dated as of April 12, 2007 (as waived and amended by the Temporary Waiver and Amendment (“Amendment
No. 1”), dated as of May 20, 2008, such Amendment No. 1 as extended by the letter agreement dated
July 15, 2008 (“Letter Agreement”), and as further amended, supplemented, amended and restated,
extended or otherwise modified from time to time, the “Purchase Agreement”) among Company,
Holdings, each purchaser from time to time party thereto (collectively, the “Purchasers”  and
individually, a “Purchaser”) and TCW/CRESCENT MEZZANINE PARTNERS IV, L.P., as administrative agent
(in such capacity, “Administrative Agent”) for the Purchasers. Capitalized terms used and not
otherwise defined herein shall have the meanings assigned to them in the Purchase Agreement.




          WHEREAS, at the request of the Issuer Parties, the Administrative Agent and the Required
Note-Holders have agreed to make certain amendments to and waive certain defaults by the Company of
its obligations under the Purchase Agreement, but only on the terms and conditions set forth in
this Permanent Waiver and Amendment.




          NOW, THEREFORE, in consideration of the premises and covenants contained herein and for other
good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound hereby, agree as follows:




          Section 1. Waivers. Subject to the satisfaction of the conditions set forth in
Section 5 of this Permanent Waiver and Amendment, with respect to any Defaults or Events of
Default set forth on Schedule I hereto (the “Schedule I Defaults”), the Required
Note-Holders hereby waive such Schedule I Defaults; provided that if Company has not complied in
all material respects with the covenant set forth in Section 6(e) hereto, all waivers
hereby shall be immediately rescinded and the Schedule I Defaults shall be immediately reinstated
with full force and effect. Notwithstanding anything herein to the contrary, any material new
information and/or material change in existing information provided to the Purchasers or the
Administrative Agent prior to the date hereof, in each case with respect to the Schedule I Defaults
waived hereby, may be the basis for any new Defaults or Events of Default.




          Section 2. Amendment to the Purchase Agreement. In connection with the waivers
set forth in Section 1 above, from and after the Permanent Amendment Effective Date (as
defined below), the Purchase Agreement shall be deemed modified to reflect the following:





          (i) Section 1.1 of the Purchase Agreement is amended by including the
following defined terms therein in appropriate alphabetical order:




“Escrow and Settlement Agreement” shall mean the Escrow Settlement, Release,
and Indemnity Agreement dated as of July 10, 2008 by and among



 









 






Holdings, Company, VSS-Cambium Settlement Fund, LLC, Whitney & Co., LLC, Whitney V,
L.P. and the other persons party thereto.




“Insolvency or Liquidation Proceeding” shall mean, collectively, (a) any voluntary or
involuntary case or proceeding under the Bankruptcy Code or any similar federal, state or
foreign law for the relief of debtors or any arrangement, reorganization, insolvency,
moratorium, assignment for the benefit of creditors, any other marshalling of the assets and
liabilities of the Company, (b) any other voluntary or involuntary insolvency,
reorganization or bankruptcy case or proceeding, or any receivership, liquidation,
reorganization or other similar case or proceeding with respect to Company or with respect
to any substantial part of its assets, (c) any liquidation, dissolution or winding up of
Company, whether voluntary or involuntary and whether or not involving insolvency or
bankruptcy, (d) any assignment for the benefit of creditors or any other marshaling of
assets and liabilities of Company, and (e) Company ceases to operate its business.




“Moody’s” shall mean Moody’s Investors Service, Inc.




“Permanent Amendment Effective Date” shall mean August 22, 2008.




“Permanent Waiver and Amendment” shall mean the Permanent Waiver and Amendment No. 2 which
amends this Agreement, dated as of the Permanent Amendment Effective Date, among the
Company, Holdings, the Administrative Agent and the Purchasers party thereto.




“Ratings” shall mean, as of any date of determination, the corporate family ratings level
assigned to Company as determined and published by Moody’s and S&P, as applicable.




“S&P” shall mean Standard & Poor’s Rating Services, a Division of the McGraw Hill
Companies, Inc.




“Windle Matter Event” shall mean any indemnity payment, insurance payment or any other
payment or recovery (including, without limitation, recoveries from Jeffrey S. Windle’s
estate) arising from or related to any judgment, arbitration, order, decree, settlement
negotiation or other proceeding, whether criminal or civil in nature, in connection with
the theft, fraud, malfeasance and other conduct committed by Jeffrey S. Windle or any other
person involved in such conduct against the Issuer Parties.




          (ii) Section 1.1 of the Purchase Agreement is amended by amending or restating
the following defined terms as follows:




               (a) the definition of “Consolidated EBITDA” shall be amended by deleting the
word “and” at the end of clause (x)(ii)(l) and adding new clauses (x)(ii)(m) and (x)(ii)(n)
as follows: “(m)(A) all losses incurred for such period in respect of any Windle Matter
Event (and/or the underlying embezzlement related thereto) and which shall not exceed
$1,801,000 in the



2









 






aggregate after December 31, 2007 and (B) all fees and expenses incurred for such period in
respect of any Windle Matter Event (and/or the underlying embezzlement related thereto) not
to exceed $9.5 million, and (n) the fees paid under Sections 5(c) and 8 of the
Permanent Waiver and Amendment (and such substantially similar fees paid pursuant to that
certain amendment and waiver to the Senior Credit Agreement dated as of the Permanent
Amendment Effective Date) and the cost of funds paid under item 3 of Schedule I to the
Permanent Waiver and Amendment not in excess of $125,000, and”




          (b) the definition of “Extraordinary Event” shall be amended
and restated in its entirety as follows:




“Extraordinary Event” shall mean any purchase price adjustment, indemnity
payment, pension plan revision or a Windle Matter Event. For the avoidance
of doubt, “Extraordinary Event” shall not include a Casualty Event.”




          (c) the definition of “Net Cash Proceeds” shall be amended
by amending and restating subsection (d) of such definition as follows:




“(d) with respect to any Extraordinary Event (including,
without limitation, a Windle Matter Event), the cash
proceeds or other compensation received in respect thereof,
net of all reasonable costs and expenses incurred in
connection with the collections of such proceeds, awards or
other compensation in respect of such Extraordinary Event.”




          (iii) Section 8.1(b) of the Purchase Agreement is amended by deleting the word “and”
at the end of clause (iii), adding the word “and” at the end of clause (iv) and adding a new
clause (v) as follows:




          “(v) any public announcement by Moody’s or S&P of any change or possible change in a
Rating.”




          (iv) Section 8.2(a)(xv) of the Purchase Agreement is amended and restated as
follows:




“(xv) (x) from the Permanent Amendment Effective Date until the date
Section 6(d) of the Permanent Waiver and Amendment has been satisfied in
all respects, unsecured Indebtedness of any Company in an aggregate amount
not to exceed $8.0 million at any time outstanding; provided that such
Indebtedness shall be evidenced by a note in form and substance as set
forth in Exhibit I to the Limited Waiver and Amendment with
modifications to such terms, if any, not more adverse to the interest of
the Purchasers than any other Indebtedness incurred under this clause (o)
and



3









 






outstanding on May 20, 2008 (including, without limitation, the
subordination of such Indebtedness to the Obligations) nor more
favorable to the creditors of any other Indebtedness of any Company
than to the Purchasers hereunder; provided, further, that such
Indebtedness shall only accrue interest (including any default
interest) in the form of pay-in-kind interest and such Indebtedness
shall not have any sinking fund or other principal payment and shall
not be redeemable or prepayable without the prior written consent of
the Required Note-Holders and (y) thereafter, unsecured Indebtedness
of any Company in an aggregate amount not to exceed $5.0 million at
any time outstanding; provided, however, that (a)
upon the occurrence of an Insolvency or Liquidation Proceeding, all
Obligations shall be paid in full in cash prior to any payment,
whether in cash or in kind, by offset, securities or any other
property, being made on account of such Indebtedness (provided that,
if the Equity Investors are the holders of such unsecured
Indebtedness, nothing herein shall prohibit or prevent the Equity
Investors from converting such Indebtedness into or exchanging such
Indebtedness for Qualified Capital Stock of Holdings); (b) the cash
portion payable with respect to such Indebtedness shall not accrue at
an interest rate in excess of 10% per annum and (c) such Indebtedness
shall not be on terms more favorable to the creditors of any other
Indebtedness of the Issuer Parties than to the Purchasers hereunder.”




          (v) Schedule 5.21 to the Purchase Agreement is amended by including
therein the Escrow and Settlement Agreement.



          Section 3. Amendment to Notes.




          (a) In connection with and in consideration of the waivers and amendments set forth
above, from and after the date hereof, Section 2(a) of each Note is hereby amended so that the
Company promises to pay interest on the Accreted Principal Amount (as defined in the Notes) of such
Note at the rate of thirteen and three-quarters percent (13.75%) per annum (“Interest Rate”) on the
same dates and on the same conditions as set forth in the Notes and three and three-quarters
percent (3.75%) per annum of the Interest Rate shall constitute the PIK Amount; provided,
however, if the Total Leverage Ratio exceeds 5.5 to 1.0, the Interest Rate then in effect
shall be increased by one-half of one percent (0.50%) (with such increase to be added to the PIK
Amount) until the second day following receipt of the financial statements and certificates
required by Sections 8.1(a)(i) or 8.1(a)(ii) and 8.1(a)(iv) of the Purchase
Agreement indicating that the Total Leverage Ratio no longer exceeds 5.5 to 1.0. Notwithstanding
the foregoing, (x) from the date hereof to the date of the delivery of the financial statements and
certificates required by Sections 8.1(a)(i) or 8.1(a)(ii) and 8.1(a)(iv) of
the Purchase Agreement for the fiscal period ended at least three months after the date the
covenants in Section 6 of the Permanent Waiver and Amendment are satisfied and (y) at all
times during which the Issuer Parties have failed to deliver the financial statements and
certificates required by Sections 8.1(a)(i) or 8.1(a)(ii) and 8.1(a)(iv),
respectively, the Leverage Ratio shall be deemed to be in




4









 








excess of 5.5 to 1.0. In addition, from and
including September 5, 2008 and until but excluding the
date Section 6(a) of the Permanent Waiver and Amendment has been satisfied in all material
respects, the Interest Rate then in effect shall be increased by one percent (1.0%) (with such
increase to be added to the PIK Amount). For the avoidance of doubt, if on September 5, 2008,
Section 6(a) of the Permanent Waiver and Amendment has not been satisfied in all material respects,
the Interest Rate shall be equal to fifteen and one-quarter percent (15.25%) per annum with the PIK
Amount being equal to five and one-quarter percent (5.25%) per annum.




          (b) Section 2(b) of each Note is hereby amended and restated as follows:




     “(b) Notwithstanding subsection (a) of this Section 2, but subject to applicable law, upon
and during the occurrence of an Event of Default, the Accreted Principal Amount of this Note shall
bear interest, from the date of the occurrence of such Event of Default until such Event of Default
is cured or waived, payable on demand in immediately available funds, at a rate equal to the
applicable interest rate in effect hereunder plus two percent (2%) (or 1% to the extent such Event
of Default relates solely to the failure of the Company to comply with Section 6(a) of the
Permanent Waiver and Amendment) (and interest shall be paid entirely in cash and no PIK Amount
shall be added to the Accreted Principal Amount of this Note in respect of such interest). In
addition, any overdue interest on this Note shall bear interest, payable on demand in immediately
available funds, at a rate equal to the applicable interest rate in effect hereunder plus two
percent (2%) (or 1% to the extent such Event of Default relates solely to the failure of the
Company to comply with Section 6(a) of the Permanent Waiver and Amendment) (and interest shall be
paid entirely in cash and no PIK Amount shall be added to the Accreted Principal Amount of this
Note in respect of such interest).”



          Section 4. Representations and Warranties. Company represents and warrants
to the Purchasers as of the date hereof that:




          (a) The execution, delivery and performance of this Permanent Waiver and Amendment have been
duly authorized by all necessary corporate action by Company, and (i) do not require any consent or
approval of, registration or filing with, or any other action by, any Governmental Authority, (ii)
will not violate the Organizational Documents of any Issuer Party, (iii) will not violate any
Requirement of Law, (iv) will not violate or result in a default or require any consent or approval
under any indenture, agreement or other instrument binding upon any Issuer Party or its property,
or give rise to a right thereunder to require any payment to be made by any Issuer Party, and (v)
will not result in the creation or imposition of any Lien on any property of any Issuer Party,
except Permitted Liens;




          (b) This Permanent Waiver and Amendment constitutes the legal, valid and binding obligations
of Company and Holdings enforceable against Company and the other Issuer Parties in accordance with
its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors’ rights generally and subject to general principles of equity, regardless of
whether considered in a proceeding in equity or at law;




          (c) On and as of the Permanent Amendment Effective Date (giving effect to this Permanent
Waiver and Amendment), each of the representations and warranties made by any Issuer Party
contained in Article 5 of the Purchase Agreement and each other Transaction




5









 







Document is true and correct in all material respects (except that any representation and warranty
that is qualified as to “materiality” or “Material Adverse Effect” shall be true and correct in all
respects on and as of the Permanent Amendment Effective Date (giving effect to this waiver) as if
made on and as of such date and except to the extent that such representations and warranties
specifically relate to an earlier date);




          (d) On and as of the Permanent Amendment Effective Date (giving effect to this Permanent
Waiver and Amendment), Company and the other Issuer Parties represent and warrant that no other
event has occurred that would give rise to a mandatory prepayment event under Section 5 of
the Notes and, other than the Net Cash Proceeds from the Escrow and Settlement Agreement applied to
prepay the Tranche B Loan (as defined in the Senior Credit Agreement) in accordance with
Section 6(e) below, there are no other proceeds from any source which are subject to the
mandatory prepayment provisions of Section 5 of the Notes, except in each case as set forth
on Schedule II hereto;




          (e) Company has delivered to the Administrative Agent and the Required Note-Holders (i) the
draft consolidated financial statements of Holdings and the footnotes thereto for the fiscal year
ended December 31, 2007 as attached on Schedule III hereto, (ii) the revised summary
forecast of the financial performance of Holdings, Company and their Subsidiaries and (iii) the
final report dated August 5, 2008 prepared by FTI Consulting, Inc., relating to the fraud and
malfeasance perpetrated by Jeffrey S. Windle against Holdings and its Subsidiaries (the
“FTI Report”); and




          (f) At the time of and after giving effect to this Permanent Waiver and
Amendment, no Default or Event of Default has occurred and is continuing.




          Section 5. Conditions. This Permanent Waiver and Amendment shall become
effective as of the date (the “Permanent Amendment Effective Date”) when, and only when, each of
the following conditions precedent shall have been (or is or will be substantially concurrently
therewith) satisfied:




          (a) The Administrative Agent (or its counsel) shall have received from each of Company,
Holdings and the Required Note-Holders either (i) a counterpart of this Permanent Waiver and
Amendment signed on behalf of Company, Holdings and the Required Note-Holders or (ii) written
evidence satisfactory to the Administrative Agent (which may include facsimile transmission or
other electronic communication permitted under the Purchase Agreement of a signed signature page of
this Permanent Waiver and Amendment) that each of Company, Holdings and the Required Note-Holders
have signed a counterpart of this Waiver and Amendment;




          (b) The Administrative Agent and the Required Note-Holders shall have received evidence
satisfactory to the Administrative Agent that the Company and the Required Lenders (as defined in
the Senior Credit Agreement) shall have entered into a permanent waiver and amendment of the Senior
Credit Agreement in form and substance as set forth on Schedule IV hereto; and




6









 








          (c) Company shall have paid to the Administrative Agent, for the benefit of each
Purchaser who consents to this Permanent Waiver and Amendment on or prior to 5:00 p.m. on August
27, 2008, a fee (in immediately available funds) on the Permanent Amendment Effective Date in an
amount equal to 50 basis points of each such Purchaser’s outstanding principal balance of Notes as
of the Business Day ending immediately prior to the Permanent Amendment Effective Date.




          Section 6. Covenants.




          (a) On or prior to October 31, 2008, Company shall have delivered, and the Administrative
Agent and the Required Note-Holders shall have received, reviewed and be satisfied with the
consolidated financial statements of Holdings for the fiscal year ended December 31, 2007
accompanied by an unqualified audit opinion of Ernst & Young LLP (the “Audited Financial
Statements”) which shall not differ in any materially adverse respect from the draft financial
statements and footnotes thereto for the fiscal year ended December 31, 2007 set forth on
Schedule III hereto.




          (b) On or prior to the later of (i) September 12, 2008 and (ii) the date of the delivery of
the Audited Financial Statements, Company shall have delivered, and the Administrative Agent and
the Required Note-Holders shall have received a management report, a narrative report, management’s
discussion and analysis and all other deliverables required under Sections 8.1(a)(i), (iv)
and (ix).




          (c) No later than September 12, 2008, Company shall have delivered and the Administrative
Agent and the Required Note-Holders shall have received (x) the unaudited consolidated financial
statements of Holdings for the fiscal quarter ended June 30, 2008 and (y) all other deliverables
required to be delivered in accordance with Sections 8.1(a)(ii) and (iv) of the
Purchase Agreement for such fiscal period and the failure to have delivered such items by the date
sets forth in the Purchase Agreement shall not constitute an Event of Default.




          (d) No later than three Business Days after the date hereof, all subordinated Indebtedness
held by Equity Investors shall have been converted into Qualified Capital Stock of Holdings
(provided that the terms of such Qualified Capital Stock shall not require any dividends, payments
or other distributions of cash or property other than payments in kind, in each case prior to the
payment in full of all obligations under the Loan Documents) and no Indebtedness shall be
outstanding under Section 8.2(a)(xv) of the Credit Agreement. For the avoidance of doubt,
the amount of such subordinated Indebtedness converted shall have been not more than $7,000,000 and
upon the satisfaction of this clause (d), all such subordinated Indebtedness shall be deemed to
have been repaid in full and retired on June 30, 2008.




          (e) No later than three Business Days after the date hereof, Company shall have received, in
immediately available funds, Net Cash Proceeds (which, for the avoidance of doubt, shall not
include the fees and expenses incurred with respect to a Windle Matter Event) from the Escrow and
Settlement Agreement in an aggregate amount of not less than $23.0 million, and such Net Cash
Proceeds shall have been immediately applied to prepay the Tranche B Loan (as defined in the Senior
Credit Agreement) in reverse order of the prepayments required




7









 







under Section 2.09 of the Credit Agreement and otherwise in accordance with the terms of
the second paragraph of Section 2.10(i) and Section 2.10(j) of the Credit Agreement.




          Section 7. Event of Default. The failure of Company to comply with Section
6 hereto (other than clause (c) which shall have the applicable grace period afforded to such
deliverable by the Purchase Agreement) shall constitute an immediate Event of Default under the
Purchase Agreement.




          Section 8. Expenses. Company agrees to promptly reimburse the Administrative
Agent for its reasonable out-of-pocket expenses incurred in connection with this Permanent Waiver
and Amendment, including the reasonable fees, charges and disbursements of Loeb & Loeb LLP.




          Section 9. Counterparts. This Permanent Waiver and Amendment may be executed in
any number of counterparts and by different parties hereto on separate counterparts, each of which
when so executed and delivered shall be deemed to be an original, but all of which when taken
together shall constitute a single instrument. Delivery of an executed counterpart of a signature
page of this Permanent Waiver and Amendment by facsimile transmission or electronic email
affirmation shall be effective as delivery of a manually executed counterpart hereof.




          Section 10. Applicable Law; Jurisdiction; Consent to Service of Process.
THIS PERMANENT WAIVER AND AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW
OF THE STATE OF NEW YORK. The waiver of venue, waiver of jury trial, jurisdiction and consent to
service of process provisions set forth in Sections 12.8 and 12.9 of the Purchase
Agreement are hereby incorporated by reference, mutatis mutandis, in this Permanent Waiver and
Amendment.




          Section 11. Headings. The headings of this Permanent Waiver and Amendment are
for purposes of reference only and shall not limit or otherwise affect the meaning hereof.




          Section 12. Effect of Permanent Waiver and Amendment. Except as expressly set
forth herein, this Permanent Waiver and Amendment shall not by implication or otherwise limit,
impair, constitute a waiver of or otherwise affect the rights and remedies of the Purchasers or the
Administrative Agent under the Purchase Agreement or any other Transaction Document, and shall not
alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or
agreements contained in the Purchase Agreement or any other provision of the Purchase Agreement or
any other Transaction Document, all of which are ratified and affirmed in all respects and shall
continue in full force and effect. Amendment No. 1 and the Letter Agreement shall each hereby be
superseded in their entirety by this Permanent Waiver and Amendment and each of Amendment No. 1 and
the Letter Agreement are of no further force or effect. By executing and delivering a copy hereof,
each applicable Issuer Party hereby agrees and confirms that all Obligations shall be guaranteed
and secured pursuant to the Transaction Documents as provided therein.




8









 








          IN WITNESS WHEREOF, the parties hereto have caused this Permanent Waiver and Amendment to be
duly executed as of the date first above written.




	 	 	 	 	 
	 	CAMBIUM LEARNING, INC.

 	 
	 	By:  	/s/ Eric Van Ert
 	 
	 	 	Name:  	Eric Van Ert 	 
	 	 	Title:  	Secretary 	 
	 
	 	VSS-CAMBIUM HOLDINGS, LLC

 	 
	 	By:  	/s/ Eric Van Ert
 	 
	 	 	Name:  	Eric Van Ert 	 
	 	 	Title:  	Secretary 	 



 









 






	 	 	 	 	 



	 	 	 	 	 	 	 
	 	 	ADMINISTRATIVE AGENT:	 	 
	 
	 	 	 	 	 	 
	 	 	TCW/CRESCENT MEZZANINE	 	 
	 	 	PARTNERS IV, L.P.	 	 
	 
	 	 	 	 	 	 
	 	 	By:     TCW/Crescent Mezzanine	 	 
	 	 	Management IV, L.L.C., its Investment	 	 
	 	 	Manager	 	 
	 
	 	 	 	 	 	 
	 	 	By:     TCW/Asset Management Company,	 	 
	 	 	its Sub-Advisor	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Joseph Kaufman	 	 
	 

	 	 	 	 

Name:  Joseph Kaufman
	 	 
	 

	 	 	 	Title:	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Joseph Kaufman	 	 
	 

	 	 	 	 

Name:  Joseph Kaufman
	 	 
	 

	 	 	 	Title:	 	 






10









 






	 	 	 	 	 	 	 
	 	 	PURCHASERS:	 	 
	 
	 	 	 	 	 	 
	 	 	TCW/CRESCENT MEZZANINE	 	 
	 	 	PARTNERS IV, L.P.	 	 
	 
	 	 	 	 	 	 
	 	 	By:     TCW/Crescent Mezzanine	 	 
	 	 	Management IV, L.L.C., its Investment	 	 
	 	 	Manager	 	 
	 
	 	 	 	 	 	 
	 	 	By:     TCW/Asset Management Company,	 	 
	 	 	its Sub-Advisor	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Joseph Kaufman	 	 
	 

	 	 	 	 

Name: Joseph Kaufman
	 	 
	 

	 	 	 	Title:	 	 
	 
	 	 	 	 	 	 
	 	 	TCW/CRESCENT MEZZANINE	 	 
	 	 	PARTNERS IVB, L.P.	 	 
	 
	 	 	 	 	 	 
	 	 	By:     TCW/Crescent Mezzanine	 	 
	 	 	Management IV, L.L.C., its Investment	 	 
	 	 	Manager	 	 
	 
	 	 	 	 	 	 
	 	 	By:     TCW/Asset Management Company,	 	 
	 	 	its Sub-Advisor	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Joseph Kaufman	 	 
	 

	 	 	 	 

Name: Joseph Kaufman
	 	 
	 

	 	 	 	Title:	 	 






11









 






	 	 	 	 	 	 	 
	 	 	MAC CAPITAL, LTD.	 	 
	 
	 	 	 	 	 	 
	 	 	By: TCW Advisors, Inc., as attorney-in-fact	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Julia K. Haramis	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Name: Julia K. Haramis	 	 
	 

	 	 	 	Title: Vice President	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ [ILLEGIBLE]	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Name: 	 	 
	 

	 	 	 	Title:	 	 






12









 






	 	 	 	 	 	 	 
	 	 	NEW YORK LIFE INVESTMENT	 	 
	 	 	MANAGEMENT MEZZANINE PARTNERS II, LP	 	 
	 
	 	 	 	 	 	 
	 	 	By: NYLIM Mezzanine Partners II GenPar, LP	 	 
	 	 	Its: General Partner	 	 
	 
	 	 	 	 	 	 
	 	 	By: NYLIM Mezzanine Partners II GenPar GP, LLC	 	 
	 	 	Its: General Partner	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ James M. Barker, V
 

	 	 
	 	 	Name: James M. Barker, V	 	 
	 	 	Title: Executive Vice President	 	 
	 
	 	 	 	 	 	 
	 	 	NYLIM MEZZANINE PARTNERS II PARALLEL FUND, LP
	 	 
	 
	 	 	 	 	 	 
	 	 	By: NYLIM Mezzanine Partners II GenPar, LP	 	 
	 	 	Its: General Partner	 	 
	 
	 	 	 	 	 	 
	 	 	By: NYLIM Mezzanine Partners II GenPar GP, LLC	 	 
	 	 	Its: General Partner	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ James M. Barker, V	 	 
	 

	 	 	 	 	 	 
	 	 	Name: James M. Barker, V	 	 
	 	 	Title: Executive Vice President	 	 
















 





	 	 	 	 	 
	 	GOLDENTREE CAPITAL SOLUTIONS FUND
 FINANCING



     By: GoldenTree Asset Management, LP

 	 
	 	By:  	/s/ Karen Weber
 	 
	 	 	Name:  	Karen Weber 	 
	 	 	Title:  	Director — Bank Debt 	 
	 
	 	GOLDENTREE CAPITAL OPPORTUNITIES, LP



     By: GoldenTree Asset Management, LP

 	 
	 	By:  	/s/ Karen Weber
 	 
	 	 	Name:  	Karen Weber 	 
	 	 	Title:  	Director — Bank Debt 	 
	 
	 	GOLDENTREE CAPITAL SOLUTIONS 
OFFSHORE FUND FINANCING



     By: GoldenTree Asset Management, LP

 	 
	 	By:  	/s/ Karen Weber
 	 
	 	 	Name:  	Karen Weber 	 
	 	 	Title:  	Director — Bank Debt 	 



 









 






	 	 	 	 	 



SCHEDULE I





	1.	 	The Events of Default that have occurred due to the breach of Sections 5.4,
5.14, 5.21, 8.1(a)(i), 8.1(a)(ii), 8.1(a)(iii), 8.1(a)(iv), 

8.1(a)(ix),
8.1(b)(i) and 8.1(g) of the Purchase Agreement resulting from the theft, fraud and
malfeasance of Jeffrey S. Windle as disclosed by Holdings to the Purchasers in the FTI Report,
or with respect to Sections 8.1(a)(i), (ii), (iii), (iv) and (ix), for all
deliveries of financial statements for the periods ending from December 31, 2007 through and
including June 30, 2008 and any management reports, certificates and other documents or
information to be delivered concurrently therewith.
	 
	2.	 	Any Event of Default that has occurred from the delivery of financial statements pursuant to
Section 8.1(a)(ii) and (iii) of the Purchase Agreement to the extent such
Events of Default relate to footnotes excluding the impact of the investigation into the into
the theft, fraud and malfeasance of Jeffrey S. Windle.
	 
	3.	 	Any Event of Default that would occur under Sections 5(b) and 5(c) of the
Notes and Sections 8.2(a)(xv), 8.2(d), 8.2(h) and 8.2(i) as a result of (i)
any conversion of subordinated Indebtedness in accordance with Section 6(d) of this
Permanent Waiver and Amendment, (ii) the payment or reimbursement of any cost of funds to
Equity Investors not in excess of $125,000 relating to subordinated Indebtedness described in
Section 6(d) of this Permanent Waiver and Amendment or (iii) reimbursement to Equity Investors
of fees and expenses paid by Equity Investors on behalf of Companies or any other Issuer Party
related to a Windle Matter Event not to exceed the total amount of fees and expenses set forth
in clauses (m)(B) and (n) of the definition of Consolidated EBITDA.




 









 











SCHEDULE II




Proceeds of Recoveries from the Estate of Jeffrey S. Windle




     Recoveries from proceeds of Jeffrey S. Windle’s estate, including without limitation, houses,
cars, boats and bank accounts by any Company or in connection with the foreclosure proceeding
brought by VSS-Cambium Maritime, LLC, an affiliate of Company. Upon the receipt of such recoveries
or the consummation of such foreclosure proceeding, the Net Cash Proceeds therefrom (x) to the
extent such recovery is not made by Borrower, will be promptly contributed to Company, and (y) and
will be promptly applied in accordance with the terms of the Purchase Agreement (after giving
effect to the Permanent Waiver and Amendment).



 









 





SCHEDULE III




Draft Consolidated Financial Statements and Footnotes Thereto

for the Fiscal Year Ended December 31, 2007




 









 






SCHEDULE IV




Permanent Waiver of Senior Credit Agreement