UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.
20549


Form 10-K





(Mark
      One)þ
            ANNUAL
      REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934For
      the fiscal year ended December 31, 2008Oro
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934  (NO FEE REQUIRED)For
      the transition period
      from         to





Commission
File Number: 333-109381


Haights
Cross Communications, Inc.


(Exact
Name of Registrant as Specified in its Charter)





Delaware
              13-4087398(State
      or Other Jurisdiction of
                Incorporation)
              (I.R.S.
      Employer
                Identification
      Number)10
      New King Street, Suite 102
              10604White
      Plains, NY
                (Address
      of Principal Executive Offices)
              (Zip
      Code)





Registrant’s
telephone number, including area code:


(914) 289-9400





Securities
registered pursuant to Section 12(b) of the Act:


None





Securities
registered pursuant to Section 12(g) of the Act:


None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes o     No þ





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes þ     No o





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





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  o





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





Large
      accelerated filer o
                Accelerated
      filer o
                Non-accelerated
      filer þ
                Smaller
      reporting company o (Do not check if a smaller reporting company)





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





No
established published market exists for the registrant’s Common Stock, par value
$0.0003 per share.





The
registrant had 9,958,112 shares of Common Stock, par value $0.0003 per
share, outstanding as of May 20, 2009.





DOCUMENTS
INCORPORATED BY REFERENCE


None














TABLE
OF CONTENTS





Description
                
                Page No.Part IItem
      1.
                Business
                3Item
      1A
                Risk
      Factors
                12Item
      1B.
                Unresolved
      Staff Comments
                20Item
      2.
                Properties
                20Item
      3.
                Legal
      Proceedings
                20Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                20Part IIItem
      5.
                Market
      for Registrant’s Common Equity and Related Stockholder Matters And Issuer
      Purchases of Equity Securities
                20Item
      6.
                Selected
      Financial Data
                22Item
      7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                24Item
      7A.
                Quantitative
      and Qualitative Disclosures about Market Risk
                46Item
      8.
                Financial
      Statements and Supplementary Data
                47Item
      9.
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                82Item
      9A.
                Controls
      and Procedures
                82Item
      9B.
                Other
      Information
                84Part IIIItem
      10.
                Directors,
      Executive Officers and Corporate Governance
                84Item
      11.
                Executive
      Compensation
                87Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                102Item
      13.
                Certain
      Relationships and Related Transactions, and Director
      Independence
                105Item
      14.
                Principal
      Accounting Fees and Services
                107Part IVItem
      15.
                Exhibits,
      Financial Statements and Schedules
                108Exhibit
      List
                109Signatures
                112


2





PART I





Item 1.Business





As used herein, unless otherwise
indicated, the terms “we,” “our,” “ours,” “us” and “our company” refer, collectively,
to Haights Cross Communications, Inc. and its consolidated subsidiaries, including
our wholly owned subsidiary Haights Cross Operating Company and its
consolidated subsidiaries, references to “Haights Cross Communications” refer to Haights
Cross Communications, Inc. and references to “Haights Cross” refer to Haights
Cross Operating Company.





Company
Overview





We were
formed in Delaware in 1997 and are a leading developer and publisher of products
for the K-12 Education and library markets. Our products include state-specific
test preparation materials, skills assessment and intervention books, and
unabridged audiobooks.  Between November 2007 and January 2008, we
initiated a sale process for all of our operating businesses. On June 30, 2008
we sold the subsidiary that contained our Oakstone Publishing business,
which operated our Medical Education segment. On August 27, 2008 we sold the
subsidiary that contained our Sundance Newbridgebusiness,
which operated our K-12 Supplemental Education segment. As a result of these
dispositions, the results of Oakstone Publishingand Sundance Newbridgehave been
reclassified as discontinued operations for all periods presented in the
consolidated financial statements. On July 1, 2008 we announced the suspension
of our sale process to offer for sale our Triumph Learningand Recorded Books
businesses.





Our high
quality products are sold primarily to schools and libraries and we believe we
have leading positions in the two markets we serve:





•
            Test-prep and
      Intervention:  We publish state-specific test preparation
      and skills based instructional materials for K-12 competency tests under
      our well-recognized imprints and brands such as Triumph Learning, Coachand Buckle Down.We also publish skills assessment products and intervention
      materials for struggling math and reading students under the widely known
      Options Publishingimprint.





•
            Library:  We
      publish unabridged audiobooks for adults and children under the Recorded Booksimprint
      and market these titles, as well as selected non-proprietary unabridged
      audiobooks, primarily to public libraries and
  schools.





We
develop our product offerings to address the unique needs of our target
customers with a focus on continuous innovation and quality. We recognize the
importance of creating and delivering new proprietary products to our customers.
Our investment in product development or prepublication costs, which was
$19.0 million, or 11.1% of our 2008 revenue, is specific to each of our
imprints and brands. Our editors, managers and sales forces generate new product
ideas, based on customer feedback and market research, to increase the
likelihood of market acceptance and drive new sales growth. We currently offer
over 11,000 proprietary titles, which contributed 92% of our 2008 revenue. Our
investment in the development of new titles produced over 1,300 new products
during 2008, and we believe will contribute to the growth of our profitable
backlist. We define our backlist as proprietary titles that generate revenue in
any year following the calendar year of their initial release. Titles in our
backlist typically sell for five years or more. The strength of our backlist,
driven by effective product development and the longevity of our titles, reduces
our dependence on new titles for current period revenue.





Our
business model is designed to develop a diversified, recurring revenue stream,
providing a foundation for organic growth. Of our 2008 revenue, 75.6% was
generated from our backlist and 13.1% was generated from subscriptions.
Together, 88.7% of our 2008 revenue resulted from these recurring revenue
streams, which we believe increase the predictability of our sales and cash
flows. We sell our products through multiple channels to approximately 88,000
customers, including educators and school systems, public and school libraries,
medical professionals, consumers and employers.





We seek
to grow sales and improve cash flows at each of our businesses by developing and
marketing new products, implementing professional sales and marketing programs
and improving operating efficiencies. For the year ended December 31, 2008,
we generated revenue of $171.1 million and we had net loss of
$38.0 million.


3




Recent
Developments




As of
April 15, 2009, we had not completed our audited financial statements as
required under our credit agreement for our senior secured term loan (the
“Credit Agreement”), or filed our Annual Report on Form 10-K with the Securities
and Exchange Commission (the “SEC”) as required under our indentures for our
Senior Notes and our Senior Discount Notes.  As of May
29, 2009, we further had not completed our first quarter financial statements
required under the Credit Agreement or filed our Quarterly Report on Form 10-Q
with the SEC as required under the Indentures, resulting in further defaults
under the Credit Agreement and the Indentures.  These defaultsunder the indentures also resulted in a cross-default under the
Credit Agreement. In connection with the audit of these financial statements,
our independent registered public accounting firm has included an explanatory
paragraph that indicates that the uncertainties discussedherein raise substantial
doubt about our ability to continue as a going concern. The issuance of this
report with a  going concern emphasis paragraph also violates a
separate covenant of the Credit Agreement. In addition to our existing defaults
under the Credit Agreement, there is also uncertainty that we are in
compliance with certain financial covenants in the Credit Agreement. The
Company has requested the Administrative Agent for the Credit Agreement to
indicate their agreement with certain items included in the Company’s
calculations of 2008 financial covenant compliance, however, the Administrative
Agent has not responded to the Company’s request.  Should the
Administrative Agent disagree with the Company’s financial covenant
calculations, this could result in non-compliance with financial covenants
during 2008 and continuing into 2009 which would constitute additional events of
default under the Credit Agreement.





Rights
and remedies of the lenders under the Credit Agreement upon the occurrence of an
event of default include the right to charge a default interest rate, to declare
the loans outstanding to be due and payable, either in whole or in part,
immediately, and to foreclose on our assets securing our obligations under the
Credit Agreement,
including without limitation taking control of our operating subsidiaries
through our pledge of the shares of those subsidiaries, and blocking our access
to cash held in deposit accounts subject to control agreements (which includes
substantially all of our cash) and sweeping that cash into the Lenders
account.  Further, provisions of the Credit Agreement restrict our
ability to make interest payments on our Senior Notes and our Senior Discount
Notes if we are in default under the Credit Agreement.  We do not
expect that our cash on hand and cash generated from operations will be
sufficient to fund the repayment of our senior secured term loan should they be
declared due.  In addition, an
acceleration of the senior secured term loan would cause defaults under the
Senior Notes and Senior Discount Notes. As of May
20, 2009, the outstanding principal balances under the Credit Agreement, the
Senior Notes and Senior Discount Notes were $108.2 million, $138.8
million  and $135.0 million, respectively.





On April 15, 2009, weentered into a short-term forbearance agreement with the lenders under
the Credit Agreement relating to our financial reporting defaults, and since
that time  have entered into further forbearance agreements to extend
the applicable forbearance period, including a Fourth Forbearance Agreement and
Amendment No. 1 to Credit Agreement on May 7, 2009 (the “Forbearance Agreement
and Amendment”).  The Forbearance Agreement and Amendment also
provides for a forbearance relating to defaults, if any, resulting from our
failure to satisfy our financial covenants under our Credit Agreement for the
periods ended December 31, 2008 and March 31, 2009. Agreement and
Amendment; or (iii) the occurrence or existence of any event of default under
either of the indentures for the Senior Notes or the Senior Discount
Notes. Upon expiration of the forbearance period, the forbearance shall be
immediately and automatically terminated and be of no further force or effect,
which would permit the lenders to




Under our
forbearance arrangements, commencing April 15, 2009, we agreed to pay the
Lenders the default rate of interest under the Credit Agreement, an increase of
2% over the stated variable rate.  Effective, May 7, 2009, the Credit
Agreement was amended to increase the base interest rate by 4% over the stated
variable rate (an increase of 2% over the previous default rate), such that the
applicable interest rate under the Credit Agreement is now, at our election,
either:
 
 ·
              the
      three month LIBOR rate (with a floor of 3.00%) plus 12.25% per annum,
      payable monthly (LIBOR rate loans had previously been payable quarterly);
      or
 ·
              the
      prime rate (with a floor of 5.25%) plus 11.0% per annum, payable
      monthly.
 
 In
consideration of this increase, the Lenders have agreed to waive any default
interest during the current forbearance period.  As of May 7, 2009,
our base rate of interest under the Credit Agreement was
15.25%.  Under certain circumstances, we are allowed to make an
election to have a portion of the interest, not to exceed 2% per annum,
paid-in-kind through an increase in the outstanding principal amount of the term
loans.
 
 On May 7,
2009, we received a notice from the trustees under the indentures for our Senior
Notes and Senior Discount Notes that our failure to timely file our SEC reports
constitutes a default under each of those indentures.  The indentures
provide that we have 60 days from receipt of this notice of default to cure
such default before an event of default occurs under the indentures. If an event
of default occurs under the indentures, then the trustee or the holders of 25%
in aggregate principal amount of the Senior Notes or the Senior Discount Notes,
respectively, may thereafter declare the applicable notes to be due and payable
immediately.
  We are in
discussions with our lenders to amend the Credit Agreement, in the context of a
broader debt restructuring. We have engaged a financial advisor to help
implement the Credit Agreement amendment and to explore other potential debt
restructuring alternatives.  If we are unable to restructure our debt
obligations, we do not believe that the lenders would extend their forbearance
and amend the Credit Agreement so as to permit us to make our August 2009
interest payments on our Senior Notes and our Senior Discount
Notes.  Moreover, our Senior Discount Notes are obligations of Haights
Cross Communications.  These obligations are not guaranteed by any of
our subsidiaries and none of our subsidiaries is under any obligation to make
payments to us. The ability of subsidiaries to make any payments to us are
limited by statutory and other contractual restrictions that would depend on the
earnings or financial condition of our subsidiaries and various business and
contractual considerations.  As a result, even if otherwise permitted
under the Credit Agreement, we may not have the ability to pay the interest or
any other obligations under our Senior Discount Notes. Our failure to make interest
payments is a default under the applicable indenture governing those notes and
entitles the trustee or the holders of an applicable percentage of those notes
(after an applicable grace period) to accelerate our obligations under the
notes. This would in turn also trigger further cross defaults under our Credit
Agreement and the indentures for the Senior Notes and Senior Discount
Notes.





Although
we intend to attempt to restructure our debt obligations under one or more of
these arrangements, given the current negative conditions in the economy
generally and the credit markets in particular, we cannot give any assurance
that we will be successful in restructuring our debt or finding alternative
financing arrangements on favorable terms, if at all. We do not have any
agreement with holders of our debt obligations to restructure these obligations
and cannot predict or provide assurance we will obtain such
agreement.  A default under one or more of our debt arrangements,
including the Credit Agreement or the indenture governing the Senior Notes or
the Senior Discount Notes, could cause cross defaults of other agreements, any
of which could have a material adverse effect on our business, financial
condition, liquidity and operations and raise substantial doubt about the our
ability to continue as a going concern.  If we are unable to extend
the forbearance under the Credit Agreement and restructure our debt obligations,
we may not be able to continue our operations, and we may be unable to avoid
filing for bankruptcy protection and/or have an involuntary bankruptcy case
filed against us.  Accordingly, amounts outstanding under the
Company’s senior secured term loan, Senior Notes and Senior Discount Notes have
been classified as current liabilities in the accompanying consolidated balance
sheet as of December 31, 2008.  See “Risk Factors” and “Management’s
Discussion and Analysis of Financial Conditions and Results of Operations –
Liquidity and Capital Resources.”





Recapitalization
and Strategic Review





On
August 10, 2007, we consummated a recapitalization pursuant to which
holders of our previously outstanding Preferred B converted their shares of
Preferred B into approximately 82% of our outstanding shares of common stock and
warrants, holders of our previously outstanding Preferred A, Preferred C and
Preferred Warrants converted their shares and warrants into shares of common
stock and common stock warrants representing approximately 15% of our
outstanding shares of common stock and warrants, and certain members of
management acquired new shares of common stock under the terms of management
stock purchase agreements representing approximately 3% of our outstanding
common stock and warrants. In connection with the foregoing, all previously
outstanding shares of common stock were effectively eliminated through the
reclassification into one share of common stock in a reverse split and all
outstanding Common Warrants and options to purchase common stock were similarly
effectively eliminated by the reverse split of the common stock. The
recapitalization simplified the Company’s capital structure and resolved
litigation between certain Preferred B holders of the Company and the Company.
The consummation of the recapitalization led to the reconstitution of our Board
of Directors.


4





After the
consummation of the recapitalization, we undertook a review of our business
units and strategic alternatives. Based on the results of that strategic
review,in the fourth
quarter of 2007, we initiated a reduction in force at Sundance/Newbridge and
consolidated our Options
Publishingbusiness into our Triumph Learning(Test-prep
and Intervention) business. Following further review, in January 2008, we
announced our plans to offer for sale our three primary operating units: Triumph Learning; Recorded Books; and Oakstone Publishing. On June
30, 2008 we sold the subsidiary that contained our Oakstone Publishing business,
which operated our Medical Education segment. On August 27, 2008 we sold the
subsidiary that contained our Sundance Newbridgebusiness,
which operated our K-12 Supplemental Education segment. As a result of these
dispositions, the results of Oakstone Publishingand Sundance Newbridgehave been
reclassified as discontinued operations for all periods presented in the
consolidated financial statements. On July 1, 2008 we announced the suspension
of our sale process to offer for sale our Triumph Learningand Recorded Books
businesses.





Business
Segments





The
Company’s financial reporting is organized into two business segments: Test-prep
and Intervention and Library.





Our
Test-Prep and Intervention segment is comprised of our Triumph Learning and Buckle Down Publishing/
Options Publishingbusiness. Our Library segment is comprised of our
Recorded Books
business. Our Medical Education segment was comprised of our Oakstone Publishingbusiness which was
sold on June 30, 2008 and our K-12 Supplemental Education segment was comprised
of our Sundance Newbridgebusiness, which was sold on August 27, 2008. As a result of these
dispositions, the results of Oakstone Publishingand Sundance Newbridgehave been
reclassified as discontinued operations for all periods.





Test-prep
and Intervention





Triumph
Learning.  Our Test-prep and Intervention segment publishes
test preparation materials, skills based instructional and assessment products,
and standards-based supplemental materials for students in grades K-12 in
language arts, math, science and social studies, and intervention programs based
on educational principles and research. Our products are published under the
well-known imprints of Coach, Buckle Downand Options Publishing. The Coachand Buckle Downbrands have been
used in classrooms for over 21 years, and the Options brand for
17 years. Our Test-prep and Intervention segment provided 47.6%, 50.5% and
48.9% of our consolidated revenue for the years ended December 31, 2006,
2007 and 2008, respectively. See our Consolidated Financial
Statements.





On
September 28, 2007, the Board of Directors authorized a restructuring of
Options Publishingand
Triumph Learning,
whereas the management of Options Publishing was merged
into Triumph Learningand the warehouse functions of Options Publishing were
consolidated into the shared services division; the accounting functions were
taken over by the Triumph
Learninggeneral accounting group located in New York City; customer
services, warehousing and fulfillment were incorporated in to the shared service
facility in Northborough, MA; and the manufacturing and product purchasing
functions were consolidated into a new shared manufacturing group that was being
formed in our Iowa City location. The purpose of this restructuring was to save
operational costs and to improve the product development process. Furthermore,
certain functions of Triumph
Learningwere moved to other locations to improve processes, leverage
shared resources and take advantage of lower cost facilities. The accounts
receivable and cash applications functions were relocated to Northborough, MA;
and the manufacturing functions located in NY were moved into the previously
discussed shared manufacturing function in Iowa City. Additionally, as of
January 1, 2008, the Triumph Learningaccounting
group took over certain accounting functions from Sundance/Newbridgerelated to
the shared service facility in Northborough, MA. This restructuring process was
completed during the first quarter of 2008.





On
November 19, 2008 the board approved the consolidation of the management of the
Buckle Down/Options
Operations in Iowa under the Triumph Learning management
in New York City.   This resulted in the elimination of the
President of Buckle
Down; the moving of the marketing function to the companies New York City
facility, the consolidation of sales management  and product
development to be managed in the New York office.  In addition to
reducing costs, this action better allowed the company to leverage its resources
and coordinate activities in product development, sales and
marketing.





Subsequent
to the year end, on March 11, 2009 the board approved the closing of our sales,
marketing and product development facility in Iowa City.  These
actions will allow the company to complete the consolidation of the Buckle Down
and Options Operations that began in November 2008.  The remaining
product development and sales and marketing  functions will be moved
to the Company’s New York City facility location .


5





The
Company’s products are sold primarily to schools and school districts and cover
reading, writing, math, science and social studies., Triumph Learningalso
publishes skills assessment products and complementary skills books focused on
building reading, math, social studies, writing and other basic skills, which
can be used either alone or in conjunction with our test-prep
books.





Triumph Learningpublishes
state-specific test-preparation titles for 26 states. Triumph Learning’s Coachtitles are generally 200-300 pages and priced in the $9-$10 range, while
Buckle Downtitles are
generally 175-225 pages and priced in the $7-$8 range.





Triumph Learningand Buckle Downproduct lines
include:





Product Line
            
            Grades
            
            DescriptionCoach
            
            1-12th
            
            Approximately
      975 state-specific test-prep workbooks covering 22 states; and
      450 complementary skills books and collections of state-specific practice
      tests.Buckle
      Down
            
            3rd-12th
            
            Approximately
      595 state-specific test-prep workbooks covering 23 states; and
      collections of state-specific practice
tests.





Triumph Learning’s
competitive advantages include the customer loyalty they have built over
21 years of providing state-specific test preparation materials, the
breadth and depth of their product lines and the degree to which they customize
each product to each state test. Unlike other test-preparation publishers, who
may offer one series of products for all states or who partially customize
books, our titles are highly customized and precisely focused on each state’s
specific standards. Our products provide high quality instruction on each of the
subjects assessed on the state test. Our practice tests, included in both Coachand Buckle Downbooks, have the
benefit of helping students become more familiar with the actual test they will
be taking because they match the features — including format, typeface,
lettering or numbering system, style of answer foils and question type — of
each state’s particular exam.





Options
Publishing.  Under our Options Publishingimprint,
we publish skills assessment products and standards-based supplemental materials
for grades K-8 in reading, writing, science, and literature, and intervention
programs based on educational principles and research. The core focus of Options Publishing’s product
strategy is to create and offer products with effective learning techniques and
extensive practice to assist students struggling with the current grade level
curriculum. These products are often used in after-school, tutorial, and summer
school environments, otherwise known as intervention settings, by students who
have not initially achieved required skill levels through the classroom. Options Publishingoffers more than
560 workbook titles, 2 intervention kit products and 65 intervention kit titles,
and over 45 different product lines, including:





Product Line
                    
                    Grades
                    
                    DescriptionComprehensive
      Reading Assessment
                      Comprehensive
      Math Assessment
                      Comprehensive
      Science Assessment
                      Comprehensive
      Social Studies Assessment
                    
                    K-8th
                    
                    Comprehensive
      assessment of students’  skills in the specific
      subject,  extensive exercises and lessons to  improve
      performance in one book.GPS
                    
                    2-6
                    
                    State
      specific leveled skills based reading kit.  Provides essential
      reading skill required to achieve proficiency on standardized
      tests.CSK
                    
                    2-5
                    
                    Paired
      fiction and non-fiction reading program designed to help increase reading
      comprehension;  Includes interactive
practice.Best
      Practices in Reading
                    
                    1st-8th
                    
                    Each
      book uses research-based  strategies, modeling in early
      lessons,  and skills development to help
      students  learn to become independent readers
      and  thinkers.Intervention
      Packages — Math or
                      Reading
                    
                    K-8th
                    
                    Programs
      for after school, summer school and special programs, ability
      to  diagnose students’ current functioning  levels,
      instruction for critical skills  and strategies, and extensive
      additional
practice.





Options Publishing’s
competitive strengths include its concentrated focus on developing products for
the struggling student market and its knowledge of classroom trends and teacher
demands through its extensive field sales network, which allows Options Publishingto rapidly
create responsive product solutions. Options Publishing’s product
development team has a track record of success in creating new products for the
struggling student market in a timely and cost effective manner. Options Publishing’s sales
and marketing effort is also a meaningful competitive strength. Its experienced
field sales force is able to reach the significant struggling student school
districts, and the extensive use of product sampling helps ensure students and
teachers in the classroom environment remember and value Options
products.


6





Library





Our
Library segment publishes unabridged audiobooks and other products, under our
Recorded Booksimprint,
for adults and children and markets these titles to public libraries, schools
and consumers. The Library segment provided 52.4%, 49.5% and 51.1% of our
consolidated revenue for the years ended December 31, 2006, 2007 and 2008,
respectively. See our Consolidated Financial Statements.





Recorded Books.  Recorded
Bookspublishes and markets unabridged audiobooks in the U.S. and
U.K. markets across multiple genres of literature, including mystery, history,
classics, inspirational, western, romance, and sports, primarily in CD and
audiocassette format. Recorded
Booksreleased over 700 new titles in 2008, and has over 7,500 titles on
its backlist. Recorded Bookslicenses the right to produce an unabridged audiobook for the library
market, usually on an exclusive basis, from the author or trade book publisher.
Recorded Books’
unabridged audiobooks, which generally run 10 to 20 hours in length, are
well known for their very high quality, from the engaging narration of the book
performed by professional voiceover artists to the quality of recording and
packaging materials used in the end product. Recorded Books’ dedication to
quality production has won it numerous industry awards. In addition, to meet the
increasing demand of its customers, Recorded Bookssupplements
its proprietary audiobooks by distributing non-proprietary titles.





Approximately
36% of Recorded Books’
sales to public libraries are through its Continuous-Order-Plans (COP). In a
COP, a public library agrees to purchase a specific number of new titles each
quarter, with the size of such quarterly purchases ranging from 6 titles to over
400 titles. The COP arrangement automatically renews each year and benefits from
high customer renewal rates. The new titles at each COP level are selected by
Recorded Books, and
while the library has the right to return COP titles, such returns have occurred
at a rate of less than 4% of library sales historically. Our
Continuous-Order-Plans represent a meaningful, recurring revenue stream for our
Recorded Booksimprint.
As of December 31, 2008, over 3,000 libraries participate in our COP
program.





In
addition to its extensive production of unabridged audiobooks, Recorded Bookshas leveraged
its expertise in audio-based products, and its reputation with the library
market, by creating new product lines such as The Modern Scholarseries,
and licensing on an exclusive basis for sale to the library market such well
known product lines as the Pimsleur Languageseries and
a growing collection of independent films from The Film Movement. Beginning in
late 2004, Recorded Booksbegan to offer a downloadable audiobook service to the public library
market, in which libraries pay an annual subscription fee based on usage, which
allows their patrons to download audiobooks to their computers or portable music
players. Recorded Booksalso offers proprietary and non-proprietary audiobooks to libraries and
consumers under its Audio Adventuresand Landmarkbrands.





We
believe Recorded Booksis the largest publisher of unabridged audiobooks in the United States.
This position gives us a strong competitive advantage in negotiating audiobook
rights for the majority of the best titles in the market. Another competitive
advantage is Recorded
Books’ reputation for high quality, which along with offering some of the
best titles in the industry, has resulted in a very high level of customer
satisfaction and brand loyalty. We also believe our dedicated employee field
sales force for the public library market is a significant competitive
advantage, allowing us to capture a larger share of the public library audiobook
market.





Seasonality





Our
business is subject to moderate seasonal fluctuations. Our revenue and income
from operations have historically been higher during the second and third
calendar quarters. See “Risk Factors” and “Management’s Discussion and Analysis
of Financial Conditions and Results of Operations.”





Customers





Our
customer base is highly diversified across a broad range of end customers in the
Test-prep and Intervention and Library markets.  In 2008, no one
customer accounted for more than 4% of our consolidated revenue, and our ten
largest customers accounted for 7.2% of our consolidated revenue.





Test-prep and
Intervention.  Triumph Learningsold its products to
approximately 41,000 customers, consisting mostly of schools and school
districts, in 2008, with such customers accounting for substantially all of 2008
revenue for this segment.


7





Library.  Recorded Bookssold its products to approximately 9,000 U.S. and U.K. public
libraries, 14,000 schools and school libraries, and 24,000 consumers and
consumer related distributors in 2008. In addition, Recorded Books sells and
rents its products to consumers at retail locations and through direct mail and
other channels.





Product
and Content Development





We make
significant investments in product development, which is an important focus at
each of our businesses and, we believe, a key factor in the continued success of
our backlist. Though the product development process varies across our imprints
and brands, all of our product development efforts feature a disciplined
approach designed to reduce the risk of introducing products that will not
receive market acceptance or achieve profitable sales levels. Our editors,
managers and sales force generate new product ideas that are outsourced to
freelance authors for writing and development, providing us with significant
operating leverage. We limit expenditures during the product development process
until we see evidence of feasibility and likely success in the
market.





There are
two important aspects of product development across our various imprints: the
identification of new product lines and the development of new titles within
existing and new products lines.





Identification of New Product
Lines.  The identification of new product lines is the core of
the new product development culture across our company and is primarily the
responsibility of the senior management of our various publishing imprints. New
product ideas originate from many sources, including the product development
teams for each imprint, our sales forces, internal market and customer research
studies and reviews of competitive product offerings. Once we identify a new
product line that we consider promising, we prepare a business and financial
plan. Assuming the expected return on investment exceeds our minimum
requirements, we then subject the product concept to a customer review and
feedback process. For smaller new product lines, this process might simply
include an informal review by established market contacts. For larger new
product lines, we conduct organized customer focus groups to gather
comprehensive feedback. Upon a successful customer review, the product
development team takes over to begin creating the new titles under the new
product line.





Development of New
Titles.  Across our various imprints, we have published more
than 1,000 new proprietary titles each year since 2003. In the development of
these new titles, we invested $17.1 million, $18.0 million and
$19.0 million in 2006, 2007, and 2008, respectively. Our product
development teams for each imprint lead the creation of our new proprietary
titles, working with independent authors, illustrators, designers, artists and
narrators. We believe that our use of independent experts enables us to produce
a significant number of new titles each year with a relatively small in-house
product development team. This approach also gives the resources to continue
producing and expanding our product lines and to create new product lines more
quickly. We engage the majority of these independent product development
partners on a work-for-hire basis, while some well-known authors create products
for us under a royalty arrangement. Our imprint-specific product development
teams are responsible for the final product design and layout prior to
transferring the new product master to production for printing or duplication.
Our products require varying periods of development time depending upon the
complexity of the graphics and design, and the writing and editing process. We
develop most of our new Test-prep and Intervention titles in a six- to
twelve-month period. We generally produce new Recorded Bookstitles in a
three- to six-month timeframe.





While the
important aspects of product development are similar across our imprints, the
actual processes vary by imprint based on the market, specific customer needs
and product requirements.





Test-Prep
and Intervention





For the
Coach and Buckle Down product lines, Triumph Learning’s product
development team’s efforts involve a three-pronged approach that focuses on
updating existing state-specific materials in response to changes in state
tests, developing non-state-specific skills materials and entering new state
markets with customized titles. Thus, to be successful, test-preparation
publishers must anticipate these changes and deliver product soon after the new
tests are issued. Triumph
Learning’s authors, editors and sales representatives have long-term
relationships with personnel in state education departments that allow it to
monitor changes in state tests as well as to receive up-to-date information on
standards changes and test formats as soon as they become available. Triumph Learning’seditorial
leadership screens new editorial hires for an understanding of the curriculum, a
commitment to quality and a sensitivity to the needs of students and educators.
These editors then seek to cultivate a broad pool of authors that can produce
high quality test preparation material. The combination of these factors,
together with its 41 years of experience developing content, usually
enables all of Triumph
Learning’sbrands to be first to market with high quality
test-preparation products that it develops for and targets toward specific
states.


8





When
evaluating whether to develop product for a new state, Triumph Learninganalyzes the
size of the state, the consequences of performance on the state’s test, the
state’s average expenditures on instructional materials and the competitive
landscape. Once Triumph
Learningdecides to enter a state, it works closely with the educators in
that state and carefully analyzes the state’s tests in order to develop products
that address specific testing needs in the context of the state’s curriculum. In
order to maintain the state-specific focus and credibility of its product line,
Triumph Learningstrives to match and customize the type, difficulty, structure and
presentation of questions to the state test in the markets in which it
publishes. Triumph
Learning’s writing, editorial and graphic design teams create and adapt
content for each test to achieve a custom product that matches the state test as
closely as possible.





Triumph Learning’s Options
Publishingimprint is known for its focused quality product for the
struggling student market. The development team is composed of experienced
editors — all former educators — who have in-depth expertise in the
various curriculum areas that Options Publishingtargets.
Paying close attention to information from schools, teachers, administrators and
field salespeople, Options Publishinghas been able to
develop product quickly and take advantage of new market opportunities, often
before its competitors, and to constantly explore new niches as the market and
funding sources change.





Library





Recorded Booksbegins its
product development efforts by acquiring the rights to produce books in the
recorded audiobook format. Recorded Booksutilizes its
deep, long-standing relationships with publishers, agents and authors to review
or preview books for rights acquisition. These relationships improve its ability
to identify high quality product early and obtain the rights at reasonable
costs. In some instances, Recorded Books’ ongoing
relationships allow it to purchase the exclusive unabridged audio rights to a
title directly from the author prior to completion or publication, thereby
reducing its acquisition cost. Recorded Bookshas also
successfully purchased rights in competitive auctions. Through its
Continuous-Order (COP) plans, Recorded Bookshas the
ability to sell automatically up to 3,000 copies of a title to libraries across
the country on the first day of a new title release, giving Recorded Booksa significant
advantage over its competitors in the library market when purchasing
rights.





Recorded Books’ direct, daily
interaction with librarians generally enables it to be first to market with new
products that satisfy specific market demands. For example, in response to
direct requests and feedback from its library customers, from 2002 through 2006,
Recorded Booksintroduced an audio lecture series, The Modern Scholar; a remastered
Classics imprint; The Bible on audiocassette and compact disk; and a
downloadable audiobook service provided in conjunction with NetLibrary and in
2008, added a Science Fiction imprint as well as a Canadian
imprint.





Recorded Booksoperates an
audiobook recording studio in New York City, employing as independent
contractors voice talent from the stage and screen industries. The studio
director casts each work individually, choosing the narrators whose talents best
fit the type of book being recorded. The studio operates seven recording booths
and creates between 700 and 1,000 recordings each year varying in length from
less than one hour to more than 45 hours each. Each recording is edited and
proofread against the written work to ensure faithfulness to the word-for-word
reproduction of the unabridged text. We employ a full-time linguist who
researches pronunciations in each text, supplying narrators with pronunciation
guides for each recording session. Final recordings undergo quality control
review at our facilities in Prince Frederick, Maryland as a part of the
duplication and assembly process.





Sales
and Marketing





We place
a great deal of emphasis on utilizing a multi-tiered sales and marketing
strategy. We recognize the importance of having a flexible, integrated and
fully-coordinated sales and marketing effort to reach all potential customer
levels. We conduct our sales and marketing activities through employees and
independent field sales representatives, inside and outsourced telesales and
telemarketing, direct mail with catalogs, product promotional pieces,
conventions, and teacher workshops and through our involvement in professional
associations.





As of
December 31, 2008, our employee field sales force consisted of 81 sales
professionals and 11 sales representatives focused on telemarketing. In
addition, as of that date, we utilized the services of 29 outside
representatives to sell our products. In 2008, we distributed approximately
eight million catalogs to potential customers across our various
imprints.





While the
principles are the same across our imprints, the execution of the marketing
plans varies by business in accordance with their particular markets and
customers.


9





Test-prep
and Intervention





Triumph Learningsells
itsproducts
through a multi-channel approach, in which almost all members of its sales
force, including both employees and independent sales representatives, sell
Triumph Learningproducts exclusively. Triumph Learninghas
implemented various strategies to improve sales penetration and reduce cost of
sales, including the introduction of a telesales program. Triumph Learningcomplements
its sales representatives, both inside and field, with targeted direct mail
campaigns, especially during critical buying periods. Triumph Learningalso
regularly mails catalogs to its customers, samples new and existing products,
attends key local, regional and national conferences is increasing the focus of
the use of electronic direct response and fax campaigns, as well as targeted
print, in order to reach specific customers and maximize contact with customers
during optimal purchase cycles.





In
November 2008 Triumph
Learning consolidated the sales and marketing function of Coach, Buckle Downand Options under a single
management team.  This allowed the company to eliminate duplicate
functions, and reduce costs while better leveraging the company’s sales and
marketing resources  It also enable the company to more efficiently
leverage and coordinate sales efforts across brands.  While the
company has consolidated management, it continues to maintain separate sales
forces and marketing campaigns for each brand.





Library





Recorded Bookshas internal
sales representatives and sales managers that sell exclusively to public
libraries throughout the United States, as well as sales representatives and
sales managers that target public libraries in the United Kingdom. We believe
Recorded Bookshas
the largest field sales organization dedicated to selling audiobooks in the
U.S. public library market in the U.S., which provides it with a
significant competitive advantage in selling product into this customer channel.
In support of this sales force, in 2008, Recorded Booksmailed
fourteen separate catalogs to over 16,000 public library locations in the United
States and an additional four catalogs, on a quarterly basis, to approximately
3,000 public libraries in the United Kingdom.





In the
school market, Recorded Bookshas a combination of internal and independent sales representatives.
Field representatives are supplemented by internal telesales representatives.
Recorded Booksalso
mailed approximately 2,200,000 catalogs to schools in the United States in 2008.
These catalogs were sent in three seasonal mailings so as to coincide with most
schools’ regular buying cycles.





In the
consumer market, Recorded
Booksmarkets its audiobooks and other products for rental and sale
directly through the use of catalog mailings and its website. On average, Recorded Booksmails
approximately 30- to 40,000 catalogs per month directly to consumers. Recorded Booksalso
distributes titles through booksellers, such as Barnes & Noble, Borders
and Waldenbooks.





Competition





Our
imprints face competition from numerous publishers and more recently software
companies offering print and electronic products to the same market niches we
serve. We believe we compete successfully in these markets based on our
well-established product lines and brand names, our reputation for quality
products and new product development, our broad range of product offerings, our
competitive pricing, the strength of our sales and marketing efforts and our
commitment to continued product innovation.





Test-prep and
Intervention.  Triumph Learningand Buckle Downgenerally face
competition from small companies that publish products that are state or subject
area focused, such as math or reading, or from large educational publishers that
publish products focused on national standards. Additionally, large educational
publishers provide state-specific test-preparation products as part of an
overall Basal program. We believe the quality of the competive product provided
by the basal publisher is of a lower quality and less comprehensive as it is a
premium provided in the text book adoption process. Triumph Learningand Buckle Down’s primary
competitors include People’s Publishing, Continental Press, Contemporary
Publishing, Amsco and Curriculum Associates. Options Publishingfaces
competition in its skills assessment and intervention product categories from
Harcourt Achieve, Curriculum Associates, Great Source and
Scholastic.





Library.  Recorded Booksfaces competition in the public library market from other publishers of
unabridged audiobooks, including Books on Tape, a division of Random House, BBC
Audio (Chivers), Blackstone, Brilliance Audio and Audio Editions, none of which,
we believe, is more than one-half the size of Recorded Booksin the public
library market. In the retail channel, which is not a major emphasis for
Recorded Books, we
compete with the large trade publishers, including Random House,
Simon & Schuster, Harper Collins and Time Warner.


10





Seasonality
and Quarterly Results of Operations





Our
business is subject to moderate seasonal fluctuations. Our revenue and income
from operations have historically been higher during the second and third
calendar quarters in each year. In addition, our quarterly results of operations
have fluctuated in the past and can be expected to continue to fluctuate in the
future, as a result of many factors, including general economic trends; the
traditional cyclical nature of educational material sales; school, library and
consumer purchasing decisions; the unpredictable funding of schools and
libraries by federal, state and local governments; consumer preferences and
spending trends; and the timing of introductions of new products.





Production
and Fulfillment





The
principal raw materials used in our products are paper, cassette tapes and audio
compact discs. We purchase paper and audio media from suppliers directly based
on price, quality and, to a lesser extent, availability. Paper is a commodity
product which is affected by demand, capacity and economic conditions. We
believe that adequate sources of supply will continue to be available to fulfill
our requirements.





Nearly
all of our print products are printed and bound by third parties with whom we
have contracts. We believe that outside printing and binding services at
competitive prices are readily available. We conduct much of our pre-press
production, typesetting, layout and design functions internally, which we
believe provides us with greater quality control and flexibility over the
creative process. We produce the product master files for our non-print
products, including our audiocassettes and compact discs, internally and then
replicate both in-house and through third party vendors as volume, scheduling
and packaging demands dictate.





In
general, we maintain an inventory of our products in owned or leased warehouse
facilities and fulfill customer orders from these locations.





Intellectual
Property





We regard
our trademarks, copyrights, trade secrets and similar intellectual property as
valuable assets and rely upon trademark and copyright laws to protect our
rights. For some of our products that involve the use of content created by
third parties, we enter into license agreements that generally give us the
exclusive right to use this content for specified purposes in specified
geographic areas and mediums. In addition, in some cases we buy products created
by third parties from distributors and re-package and redistribute such
products.





Our
efforts to protect our intellectual property rights could be inadequate to deter
misappropriation of proprietary information. For example, we may not detect
unauthorized use of our intellectual property. In addition, the legal status of
intellectual property on the Internet is currently subject to various
uncertainties. However, we do not believe any single copyrighted product to be
significant in the event of inappropriate use, and as the majority of our
customers are schools and public libraries we further believe that likelihood of
these customers purchasing unauthorized copies of our copyrighted products is
very small. To our knowledge, there are no threatened or pending legal
proceedings or claims related to our intellectual property that are likely to
have, individually or in the aggregate, a material adverse effect on our
business, financial condition or results of operations.





Environmental
Regulation





We are
subject to environmental laws and regulations relating to the protection of the
environment, including those that regulate the generation and disposal of
hazardous materials and worker health and safety. We believe that we currently
conduct our operations in material compliance with applicable environmental laws
and regulations. Based on our experience to date and the nature of our
operations, we believe that the future cost of compliance with existing
environmental laws and regulations and liability for known environmental claims
will not have a material adverse effect on our financial condition, results of
operations or liquidity.





Employees





As of
March 30, 2009, we had 542 full and part-time employees. None of our employees
are represented by any union or other labor organization, we have had no strikes
or work stoppages and we believe our relations with our employees are
good.


11





Item 1A.Risk
Factors.





Set forth below are some of the
risks and uncertainties that, if they were to occur, could materially and adversely
affect our business, or that could cause our actual results to differ materially from
the results contemplated by the forward-looking statements contained in this Annual
Report on Form 10-K and the other public statements we
make.





Risks
Related to Our Business





We
are in default under certain covenants of our senior secured term loan credit
agreement that has raised substantial doubt about our ability to continue as a
going concern.




As of
April 15, 2009, we had not completed our audited financial statements as
required under our credit agreement for our senior secured term loan (the
“Credit Agreement”), or filed our Annual Report on Form 10-K with the Securities
and Exchange Commission (the “SEC”) as required under our indentures for our
Senior Notes and our Senior Discount Notes.  As of May
29, 2009, we further had not completed our first quarter financial statements
required under the Credit Agreement or filed our Quarterly Report on Form 10-Q
with the SEC as required under the Indentures, resulting in further defaults
under the Credit Agreement and the Indentures.  These defaultsunder the indentures also resulted in a cross-default under the Credit
Agreement. In connection with the audit of these financial statements, our
independent registered public accounting firm has included an explanatory
paragraph that indicates that the uncertainties discussedherein raise substantial
doubt about our ability to continue as a going concern. The issuance of this
report with a  going concern emphasis paragraph also violates a
separate covenant of the Credit Agreement. In addition to our existing defaults
under the Credit Agreement, there is also uncertainty that we are in
compliance with certain financial covenants in the Credit Agreement. The
Company has requested the Administrative Agent for the Credit Agreement to
indicate their agreement with certain items included in the Company’s
calculations of 2008 financial covenant compliance, however, the Administrative
Agent has not responded to the Company’s request.  Should the
Administrative Agent disagree with the Company’s financial covenant
calculations, this could result in non-compliance with financial covenants
during 2008 and continuing into 2009 which would constitute additional events of
default under the Credit Agreement.
 
 Rights
and remedies of the lenders under the Credit Agreement upon the occurrence of an
event of default include the right to charge a default interest rate, to declare
the loans outstanding to be due and payable, either in whole or in part,
immediately, and to foreclose on our assets securing our obligations under the
Credit Agreement, including without limitation taking control of our operating
subsidiaries through our pledge of the shares of those subsidiaries, and
blocking our access to cash held in deposit accounts subject to control
agreements (which includes substantially all of our cash) and sweeping that cash
into the Lenders account.  Further, provisions of the Credit Agreement
restrict our ability to make interest payments on our Senior Notes and our
Senior Discount Notes if we are in default under the Credit
Agreement.  We do not expect that our cash on hand and cash generated
from operations will be sufficient to fund the repayment of our senior secured
term loan should they be declared due.  In addition, an
acceleration of the senior secured term loan would cause defaults under the
Senior Notes and Senior Discount Notes. As of May
20, 2009, the outstanding principal balances under the Credit Agreement, the
Senior Notes and Senior Discount Notes were $108.2 million, $138.8
million  and $135.0 million, respectively.
 
 On April 15, 2009, weentered into a short-term forbearance agreement with the lenders under
the Credit Agreement relating to our financial reporting defaults, and since
that time  have entered into further forbearance agreements to extend
the applicable forbearance period, including a Fourth Forbearance Agreement and
Amendment No. 1 to Credit Agreement on May 7, 2009 (the “Forbearance Agreement
and Amendment”).  The Forbearance Agreement and Amendment also
provides for a forbearance relating to defaults, if any, resulting from our
failure to satisfy our financial covenants under our Credit Agreement for the
periods ended December 31, 2008 and March 31, 2009. Agreement and Amendment;
or (iii) the occurrence or existence of any event of default under either of the
indentures for the Senior Notes or the Senior Discount Notes. Upon
expiration of the forbearance period, the forbearance shall be immediately and
automatically terminated and be of no further force or effect, which would
permit the lenders to
  Under our
forbearance arrangements, commencing April 15, 2009, we agreed to pay the
Lenders the default rate of interest under the Credit Agreement, an increase of
2% over the stated variable rate.  Effective, May 7, 2009, the Credit
Agreement was amended to increase the base interest rate by 4% over the stated
variable rate (an increase of 2% over the previous default rate), such that the
applicable interest rate under the Credit Agreement is now, at our election,
either:
 
 ·
                the
      three month LIBOR rate (with a floor of 3.00%) plus 12.25% per annum,
      payable monthly (LIBOR rate loans had previously been payable quarterly);
      or
 ·
                the
      prime rate (with a floor of 5.25%) plus 11.0% per annum, payable
      monthly.
 
 In
consideration of this increase, the Lenders have agreed to waive any default
interest during the current forbearance period.  As of May 7, 2009,
our base rate of interest under the Credit Agreement was
15.25%.  Under certain circumstances, we are allowed to make an
election to have a portion of the interest, not to exceed 2% per annum,
paid-in-kind through an increase in the outstanding principal amount of the term
loans.
 
 On May 7,
2009, we received a notice from the trustees under the indentures for our Senior
Notes and Senior Discount Notes that our failure to timely file our SEC reports
constitutes a default under each of those indentures.  The indentures
provide that we have 60 days from receipt of this notice of default to cure
such default before an event of default occurs under the indentures. If an event
of default occurs under the indentures, then the trustee or the holders of 25%
in aggregate principal amount of the Senior Notes or the Senior Discount Notes,
respectively, may thereafter declare the applicable notes to be due and payable
immediately.
  We are in
discussions with our lenders to amend the Credit Agreement, in the context of a
broader debt restructuring. We have engaged a financial advisor to help
implement the Credit Agreement amendment and to explore other potential debt
restructuring alternatives.  If we are unable to restructure our debt
obligations, we do not believe that the lenders would extend their forbearance
and amend the Credit Agreement so as to permit us to make our August 2009
interest payments on our Senior Notes and our Senior Discount
Notes.  Moreover, our Senior Discount Notes are obligations of Haights
Cross Communications.  These obligations are not guaranteed by any of
our subsidiaries and none of our subsidiaries is under any obligation to make
payments to us. The ability of subsidiaries to make any payments to us are
limited by statutory and other contractual restrictions that would depend on the
earnings or financial condition of our subsidiaries and various business and
contractual considerations.  As a result, even if otherwise permitted
under the Credit Agreement, we may not have the ability to pay the interest or
any other obligations under our Senior Discount Notes. Our failure to make interest
payments is a default under the applicable indenture governing those notes and
entitles the trustee or the holders of an applicable percentage of those notes
(after an applicable grace period) to accelerate our obligations under the
notes. This would in turn also trigger further cross defaults under our Credit
Agreement and the indentures for the Senior Notes and Senior Discount
Notes.





Although
we intend to attempt to restructure our debt obligations under one or more of
these arrangements, given the current negative conditions in the economy
generally and the credit markets in particular, we cannot give any assurance
that we will be successful in restructuring our debt or finding alternative
financing arrangements on favorable terms, if at all. We do not have any
agreement with holders of our debt obligations to restructure these obligations
and cannot predict or provide assurance we will obtain such
agreement.  A default under one or more of our debt arrangements,
including the Credit Agreement or the indenture governing the Senior Notes or
the Senior Discount Notes, could cause cross defaults of other agreements, any
of which could have a material adverse effect on our business, financial
condition, liquidity and operations and raise substantial doubt about the our
ability to continue as a going concern.  If we are unable to extend
the forbearance under the Credit Agreement and restructure our debt obligations,
we may not be able to continue our operations, and we may be unable to avoid
filing for bankruptcy protection and/or have an involuntary bankruptcy case
filed against us.  Accordingly, amounts outstanding under the
Company’s senior secured term loan, Senior Notes and Senior Discount Notes have
been classified as current liabilities in the accompanying consolidated balance
sheet as of December 31, 2008.


12





We have a history
of losses, which we expect to continue, and we might not ever achieve or
maintain profitability.





We have
experienced losses every year since our inception through 2006 and for the
fiscal year 2008. In 2008, we had Net Loss of $38.0 million and had a
stockholders deficit of $186.6 million and a working capital deficiency of
$320.5 million (including long term debt in default classified as current of
$381.8 million) as of December 31, 2008. The 2008 Net Loss was due, in part, to
a goodwill impairment charge  of $31.6 million. We expect to continue
to incur losses for the foreseeable future. Even if we do achieve profitability,
we may not be able to sustain or increase profitability on a quarterly or annual
basis. If our revenue grows more slowly than we anticipate, or if our operating
expenses exceed our expectations, our business will be harmed.





The recent U.S.
financial turmoil and associated economic downturn has and may
continue  to harm our Test-prep and Intervention and Library
businesses and prospects.





The
worldwide financial turmoil and associated economic downturn has resulted in the
curtailment, delay or reduction in federal, state and local government funding
available to schools and libraries and the general retail markets. During 2008,
we derived more than 82.8% of our revenue from schools, school districts and
school and public libraries. These institutions depend on funding from federal,
state and local governments to purchase our products. Many state and local
governments have faced, and may continue to face, budget deficits. In addition,
the government appropriations process is often slow, unpredictable and subject
to factors outside of our control. Curtailments, delays or reductions in the
funding of schools or libraries has reduced and could continue to reduce our
revenue.





Lack of
adequate funding results in decreased revenue on the sale of our products. For
example, in the fourth quarter of 2008 our revenue decreased to $36.0 million
compared to $42.0 million in the fourth quarter of 2007. In order to mitigate
any resulting decrease in revenue, we have designed and implemented a
cost-savings plan. We cannot assure that these cost savings initiatives will
offset any decrease in revenue effected by the downturn in funding. If our
revenue grows more slowly than we anticipate, or if our cost savings initiatives
are not successful, our business and prospects will be harmed.  Any
continuing or further reduction or delay in governmental funding earmarked for
education or library materials could have a material adverse effect on our
operations.





Our
Senior Notes are unsecured and are effectively subordinated to our secured
indebtedness to the extent of the collateral securing that
indebtedness.





Our
Senior Notes are general unsecured obligations of our subsidiary, Haights Cross,
and each of the guarantors of those notes, including Haights Cross
Communications and each of Haights Cross’ domestic subsidiaries. As unsecured
obligations our Senior Notes are effectively subordinated to our secured debt,
including our senior secured loans under our Credit Agreement, to the extent of
the collateral securing that indebtedness. As of December 31, 2008, we had
an aggregate principal amount outstanding of $108.2 million in secured debt
under our Credit Agreement.  In addition we have the right to incur
additional secured indebtedness subject to the baskets and other restrictions
set forth in the indenture for our Senior Notes. In the event of our insolvency,
bankruptcy, liquidation, reorganization, dissolution or winding up, we may not
have sufficient assets to pay all or any portion of the amounts due under our
outstanding Senior Notes.




Our
Senior Discount Notes are unsecured obligations of Haights Cross Communications,
are effectively subordinated to our secured indebtedness to the extent of the
collateral securing that indebtedness, and are structurally subordinated to all
liabilities of our subsidiaries, including our senior secured indebtedness under
our Credit Agreement and our Senior Notes, each of which is guaranteed by our
subsidiaries, and the trade payables of our subsidiaries.





Our
senior discount notes are general unsecured obligations of Haights Cross
Communications and none of its subsidiaries has guaranteed or otherwise become
obligated with respect to the senior discount notes. Substantially all of our
consolidated assets are held by Haights Cross and its subsidiaries and
substantially all of our consolidated cash flow and net income are generated by
such subsidiaries. Our senior secured term loans are secured obligations of our
subsidiary, Haights Cross, and are guaranteed by our other subsidiaries and
Haights Cross Communications, and secured by substantially all of our property
and assets. Our senior notes are general unsecured obligations of our
subsidiary, Haights Cross, and are also guaranteed by our other domestic
subsidiaries and Haights Cross Communications.


13





Our
senior discount notes are effectively subordinated to the senior secured term
loans to the extent of the collateral securing the senior secured term loans.
The senior discount notes are also structurally subordinated to all existing and
future liabilities of our subsidiaries, including our senior secured term loans,
senior notes and trade payables. As of December 31, 2008, we the aggregate
amount of liabilities of our subsidiaries was approximately $282.5 million,
including indebtedness of our subsidiaries, indebtedness guaranteed by our
subsidiaries, accrued expenses, and trade and other payables, but excluding
intercompany liabilities.





Our right
to receive assets from any of our subsidiaries upon its liquidation or
reorganization, and the right of holders of the senior discount notes to
participate in those assets, is structurally subordinated to claims of that
subsidiary’s creditors, including trade creditors. Even if we were a creditor of
any of our subsidiaries, our rights as a creditor would be subordinate to any
security interest in the assets of that subsidiary and any indebtedness of that
subsidiary senior to that held by us. Furthermore, none of our subsidiaries is
under any obligation to make payments to us, and the ability of subsidiaries to
make any payments to us would depend on the earnings or financial condition of
our subsidiaries and various business considerations. For example, our Credit
Agreement prohibits Haights Cross from making distributions to Haights Cross
Communications to pay interest on the Senior Discount Notes during a default
under our Credit Agreement.  We are currently in default under our
Credit Agreement, though we have obtained a short-term forbearance from our term
loan lenders.  As of December 31, 2008, Haights Cross Communications
had cash and cash equivalents of approximately $4.0 million and has an interest
payment due on August 1, 2009 of $8.4 million.  Statutory, contractual
or other restrictions may also limit our subsidiaries’ ability to pay dividends
or make distributions, loans or advances to us. For these reasons, we may not
have access to any assets or cash flows of our subsidiaries to make payments on
the senior discount notes.  Even if otherwise permitted under the
Credit Agreement, in the event of our insolvency, bankruptcy, liquidation,
reorganization, dissolution or winding up, we may not have sufficient assets to
pay all or any portion of the amounts due under our outstanding Senior Discount
Notes.




We are in
discussions with our lenders to amend the Credit Agreement, in the context of a
broader debt restructuring. We have engaged a financial advisor to help
implement the Credit Agreement amendment and to explore other potential debt
restructuring alternatives.  If we are unable to restructure our debt
obligations, we do not believe that the lenders would extend their forbearance
and amend the Credit Agreement so as to permit us to make our August 2009
interest payments on our Senior Notes and our Senior Discount
Notes.  Moreover, our Senior Discount Notes are obligations of Haights
Cross Communications.  These obligations are not guaranteed by any of
our subsidiaries and none of our subsidiaries is under any obligation to make
payments to us. The ability of subsidiaries to make any payments to us are
limited by statutory and other contractual restrictions that would depend on the
earnings or financial condition of our subsidiaries and various business and
contractual considerations.  As a result, even if otherwise permitted
under the Credit Agreement, we may not have the ability to pay the interest or
any other obligations under our Senior Discount Notes. Our failure to make interest
payments is a default under the applicable indenture governing those notes and
entitles the trustee or the holders of an applicable percentage of those notes
(after an applicable grace period) to accelerate our obligations under the
notes. This would in turn also trigger further cross defaults under our Credit
Agreement and the indentures for the Senior Notes and Senior Discount
Notes.


Our substantial
leverage and indebtedness may adversely affect
our ability to operate our business as a going concern following the
maturity of
our senior secured term loans.





We are
highly leveraged and have significant debt service obligations. As of
December 31, 2008, we had total indebtedness of $381.8 million. See
Note 15 to our Consolidated Financial Statements.





In the
future we may also borrow more money, subject to limitations imposed on us by
the agreements governing our debt.





In
addition to the risks to our ability to continue as a going concern described
above, our significant debt and debt service requirements could adversely affect
our ability to operate our business and may limit our ability to take advantage
of potential business opportunities. For example, our high level of debt
presents the following risks:





•
            we
      are required to use a substantial portion of our cash flow from operations
      to pay interest on our debt, thereby reducing the availability of our cash
      flow to fund working capital, capital expenditures, product development
      efforts, investments and alliances and other general corporate
      requirements;





•
            our
      debt service requirements increase our vulnerability to economic downturns
      and adverse competitive and industry conditions and could place us at a
      competitive disadvantage compared to those of our competitors that have
      less debt;





•
            our
      debt service obligations could limit our flexibility in planning for, or
      reacting to, changes in our business and our industry and could limit our
      ability to pursue other business opportunities, borrow more money for
      operations or capital expenditures in the future and implement our
      business strategies;





•
            our
      level of debt may restrict us from raising additional financing or
      extending existing financing on satisfactory terms to fund working
      capital, capital expenditures, product development efforts, strategic
      acquisitions, investments and alliances and other general corporate
      requirements; and





•
            our
      substantial leverage may make it more difficult for us to satisfy our debt
      service obligations.





Restrictive
covenants in our debt instruments may adversely affect our
operations.





The
senior secured term loans and the indentures governing the senior notes and
senior discount notes contain various provisions that limit our management’s
discretion by restricting our ability to, among other things:


14





•
            incur
      additional debt;





•
            pay
      dividends and make other
distributions;





•
            make
      investments and other restricted
payments;





•
            enter
      into sale and leaseback
transactions;





•
            incur
      liens;





•
            engage
      in mergers, acquisitions and asset
sales;





•
            enter
      into transactions with affiliates;





•
            make
      capital expenditures;





•
            amend
      or otherwise alter debt and other material
      agreements; and





•
            alter
      the business we conduct.





Our new
credit facilities also require us to satisfy certain financial
covenants.





As of
April 15, 2009, we had not completed our audited financial statements as
required under our Credit Agreement, or filed our Annual Report on Form 10-K
with SEC, as required under our indentures for our Senior Notes and our
Senior Discount Notes.  As of May
29, 2009, we further had not completed our first quarter financial statements
required under the Credit Agreement or filed our Quarterly Report on Form 10-Q
with the SEC as required under the Indentures, resulting in further defaults
under the Credit Agreement and the Indentures.  These defaultsunder the indentures also resulted in a cross-default under the Credit
Agreement. In connection with the audit of these financial statements, our
independent registered public accounting firm has included an explanatory
paragraph that indicates that the uncertainties discussedherein raise substantial
doubt about our ability to continue as a going concern. The issuance of this
report with a  going concern emphasis paragraph also violates a
separate covenant of the Credit Agreement. In addition to our existing
defaults under the Credit Agreement, there is also uncertainty that we are in
compliance with certain financial covenants in the Credit Agreement.  The
Company has requested the Administrative Agent for the Credit Agreement to
indicate their agreement with certain items included in the Company’s
calculations of 2008 financial covenant compliance, however, the Administrative
Agent has not responded to the Company’s request.  Should the
Administrative Agent disagree with the Company’s financial covenant
calculations, this could result in non-compliance with financial covenants
during 2008 and continuing into 2009 which would constitute additional events of
default under the Credit Agreement.




Rights
and remedies of the lenders under the Credit Agreement upon the occurrence of an
event of default include the right to charge a default interest rate, to declare
the loans outstanding to be due and payable, either in whole or in part,
immediately, and to foreclose on our assets securing our obligations under the
Credit Agreement, including without limitation taking control of our operating
subsidiaries through our pledge of the shares of those subsidiaries, and
blocking our access to cash held in deposit accounts subject to control
agreements (which includes substantially all of our cash) and sweeping that cash
into the Lenders account. Further, provisions of the Credit Agreement restrict
our ability to make interest payments on our Senior Notes and our
Senior Discount Notes if we are in default under the Credit
Agreement.  We do not expect that our cash on hand and cash generated
from operations will be sufficient to fund the repayment of our senior secured
term loan should they be declared due.  In addition, an
acceleration of the senior secured term loan would cause defaults under the
Senior Notes and Senior Discount Notes.  See Note 15 to our
Consolidated Financial Statements. As of May
20, 2009, the outstanding principal balances under the Credit Agreement, the
Senior Notes and Senior Discount Notes were $108.2 million, $138.8
million  and $135.0 million, respectively.





A change of
control in us could result in an event of default under our debt agreements.





Certain
changes in beneficial ownership interest in us or a sale of all or substantially
all of our assets through a sales process or otherwise would constitute a change
of control under our senior secured term loans and the indentures governing the
senior notes and senior discount notes, and would require our successor, if
applicable, to assume the obligations under our senior secured term loans, our
senior notes and our senior discount notes to the extent that such debt remains
outstanding, and would require a change of control offer as described below. In
addition we or our successor, as applicable, would be required to satisfy the
limitation on additional indebtedness covenants contained in the debt
agreements. Failure to satisfy these conditions would result in an event of
default under one or more of our outstanding debt agreements. Any such event of
default could trigger a cross-default under one or more of our other debt
agreements and, in any event, would require us to make an immediate payment
under such agreements at a time when we may not have the funds to do so. Upon a
change of control we or our successor would be required to offer to make a
change of control offer to repurchase all of our then outstanding senior secured
term loans, senior notes and senior discount notes at a price of 101% of
principal amount, or accreted value with respect to the senior discount notes,
plus accrued interest.


15





Our debt
agreements will restrict our use of proceeds that we receive from any
sales of our
assets.





The
indentures governing our senior notes and senior discount notes require us to
apply net proceeds from any significant asset sales that are not applied to
certain specified purposes within 365 days, including capital expenses or
the repayment of the senior secured term loans (and under the senior discount
notes indentures, repayment of the senior notes), to offer to repurchase the
senior notes and senior discount notes at a price equal to the principal amount
plus accrued interest and accreted value plus accrued interest,
respectively.




We may be
required to reduce the value of our inventory, long-lived assets and/or
goodwill, which could materially adversely affect our financial condition and
results of operations.




We may be
required to reduce inventory carrying values using the lower of cost or market
approach in the future due to a decline in market conditions in our businesses,
which could have a material adverse effect on our financial condition and
results of operations. Future events could cause us to conclude that impairment
indicators exist and that goodwill associated with our acquired businesses is
impaired. Any resulting impairment loss related to reductions in the value of
our long-lived assets or our goodwill could materially adversely affect our
financial condition and results of operations.




The
Company performs an annual goodwill impairment test of each year. As discussed
in Note 9 to our financial statements, an impairment charge of $31.6 million was
incurred in the fourth quarter of 2008.  Assumptions used in our
impairment test regarding future operating results of our reporting units could
prove to be inaccurate. This could cause an adverse change in our valuation and
thus any of our goodwill impairment tests may have been flawed. Any future
impairment tests are subject to the same risks.





We
may be unable to compete successfully in our highly competitive
industry.





We operate in highly competitive
markets.  Many of our competitors are larger and have greater
financial resources than us. As a result, these competitors may be able to
devote greater resources to the promotion and sale of their products than we
can. Conversely, other competitors are smaller than us and focused on narrow,
niche market opportunities. These smaller companies may be able to adapt more
quickly to new or emerging technologies and changes in customer preferences. In
each of our business segments, we expect to meet significant competition in
regard to our existing products and new products we might introduce. Further,
competitors might expand their product offerings, either through internal
product development or acquisitions of our businesses’ direct
competitors.





To
maintain a competitive advantage, we will need to continue to invest in product
development and sales and marketing. We may not have sufficient resources to
make the necessary investments to compete successfully against our competitors.
We cannot assure you that we will be able to compete effectively with these
companies in the future, and if we are unable to compete effectively, our
financial condition and results of operations will be materially adversely
affected. See “Business — Competition.”





Misuse,
misappropriation or other loss of our proprietary rights could have a
material
adverse effect on our results of operations.





Our
success depends in part on our intellectual property rights in the products that
we develop. We rely on a combination of registered and common law copyright,
trademark and trade secret laws of the United States and other countries, as
well as customer licensing agreements, employee and third-party nondisclosure
agreements and other methods to protect our proprietary rights. We cannot be
certain that the steps we have taken to protect our intellectual property rights
will be adequate or that third parties will not infringe or misappropriate our
proprietary rights or develop technology or products that are similar to ours.
Any such infringement or misappropriation could materially adversely affect our
future financial results, reduce or eliminate any competitive advantage we have
developed and otherwise harm our business. Enforcing our intellectual property
rights could result in substantial costs and a diversion of management’s
attention and resources, which could materially affect our business, financial
condition, cash flows or results of operations, and we may not
prevail.





We do not
include any mechanisms in our materials or products to prevent or inhibit
unauthorized copying. We have no knowledge of the unauthorized copying of our
books or products. However, if such copying or misuse were to occur to any
substantial degree, our results of operations could be materially adversely
affected. In addition, our U.S. registrations may not be enforceable or
effective in protecting our trademarks and copyrights, especially outside of the
United States.


16





We may have to
defend against intellectual property infringement claims and other claims that may
cause us to incur significant costs and may divert management attention.





Although
we believe that our products do not infringe on the intellectual property rights
of others, other parties may assert claims that we have violated or infringed on
a copyright, trademark or other proprietary right belonging to them. We license
third-party content to create some of our products. In these license agreements,
the licensors have generally agreed to defend, indemnify and hold us harmless
with respect to any claims by a third party that the licensed content infringes
other proprietary rights. We cannot assure you that these provisions will be
adequate to protect us from infringement claims regarding the use of such
third-party intellectual property. In addition, in some instances we buy
products created by third parties from distributors and re-package and
redistribute such products without a license or other permission from the third
party creators. Although we believe that the manner in which we license third
party content to create our products, as well as the manner in which we purchase
third party products and re-package and redistribute them, complies with
applicable trademark and copyright laws, any infringement claims could result in
the expenditure of significant financial and managerial resources on our part
and, if such claims are finally determined to be meritorious, could materially
adversely affect our business, results of operations and financial
condition.





In
addition, we may be vulnerable to claims of defamation, negligence, personal
injury or other legal theories relating to the information we publish, including
content licensed from third parties. Our insurance, which covers commercial
general liability, may not adequately protect us against these types of claims.
Furthermore, if such claims are successful, we may be required to cease selling
or alter our product, pay financial damages or obtain licenses from others (if
available on favorable terms or at all). Any of the foregoing could cause us to
incur significant costs and prevent us from distributing or selling our
products.





Our management
has broad discretion over the application of cash and cash equivalents
on hand,
and investors will not have the opportunity to evaluate information concerning the
application of such amounts.





As of
December 31, 2008, we had on hand cash and cash equivalents of
$47.4 million. Our management has broad discretion as to the use and
allocation of such cash and cash equivalents, and investors will not have the
opportunity to evaluate the economic, financial and other relevant information
that we may consider in the application of such cash and cash
equivalents.





We
are dependent upon our key personnel.





We are
dependent on the continued services of our senior management team, including the
senior management of our operating subsidiaries. Our future success depends in
large part on the continued service of our key operations, marketing, editing
and sales personnel and on our ability to continue to attract, motivate and
retain highly qualified employees. Each of our key employees may terminate their
employment with us at any time. There is competition within the industry for
these employees and the process of locating key technical and management
personnel with suitable skills may be difficult. The loss of our key personnel
could have a material adverse effect on our business, operating results or
financial condition. We do not maintain key man insurance on our key
personnel.





Growth
of multimedia products may compete with and reduce our publishing
activities.





The
traditional media platform is being increasingly challenged by the growing body
of multimedia products. Multimedia products serve as ancillary tools to
traditional publishing mediums such as print but can also serve as stand-alone
interactive tools replacing traditional publishing mediums. The continued growth
of multimedia products may detract from the viability of our traditional
publishing activities.





Technological
changes may reduce our sale of products.





Both the
traditional publishing industry and the online services industry continue to
experience technological change. The publishing industry continues to evolve
from traditional mechanical format printing to full digital printing. An
inability to keep pace with the new technologies and standards in the print
industry could negatively impact the competitiveness of our products. Our future
success will depend on our ability to address the increasingly sophisticated
needs of our customers by producing and marketing enhancements to our products
that respond to technological changes or customer requirements. We may be
required to invest significant capital in additional technology in order to
remain competitive. In addition, the provision of online services is
characterized by continuing improvements in technology that results in the
frequent introduction of new products, short product life cycles and continual
improvement in product price/performance characteristics. A failure on our part
to effectively manage a product transition will directly affect the demand for
our products and the profitability of our operations.


17





Our
business may be adversely affected by an increase in paper or postage
costs.





The price
of paper constitutes a significant portion of our costs relating to our print
book products and direct mail solicitations. Significant increases in the price
of paper may have an adverse effect on our future results. Postage for product
distribution and direct mail solicitations is also one of our significant
expenses. To manage the potential effect of inflation on paper costs, we
negotiate arrangements of up to one year with brokers to ensure a supply of
needed paper at fixed pricing, and when advantageous, we purchase and inventory
raw material paper in advance of our production need. Although we distribute
many of our products under a contract with the United Parcel Service, shipping
and postage costs increase periodically and can be expected to increase in the
future. If the costs of paper or postage increase and we are unable to pass on
these increased costs to our customers, our operating results could be adversely
affected.





A limited number
of stockholders own a large percentage of our common stock and will be able to
influence or control substantially all corporate
decisions.





In
connection with our recapitalization in August 2007, we entered into a
shareholders’ agreement with certain shareholders that collectively beneficially
own approximately 80% of our Common Stock as of February 27, 2009. Pursuant to
the shareholders’ agreement, it was agreed that the size of our Board of
Directors would include five persons nominated by their five shareholder groups.
Our board of directors currently consists of five persons, including four
persons nominated by four of these shareholder groups (a fifth shareholder group
having elected to forego its nominating rights as of the date of this report)
and our chief executive officer. A limited number of our shareholders can
therefore direct our policies, select a majority of our directors and control
stockholder actions such as the approval of agreements to be executed in
connection with the sales process. The interests of these shareholders and their
affiliates may conflict with the interest of our other investors. These
conflicting interests could include, without limitation:





•
            interests
      in our outstanding senior secured term loans, senior notes, senior
      discount notes or other
obligations;





•
            investments
      in media businesses and businesses that support or enhance media
      properties, including publishing
businesses;





•
            ownership
      of controlling or non-controlling interests in media and related
      businesses, including publishing businesses, some of which may compete
      with us; and





•
            the
      participation in the acquisition of one or more of our business units in
      connection with our sales process.





To the
extent that conflicts of interests may arise between us and our principal
stockholders or their affiliates, these conflicts may be resolved in a manner
adverse to other of our investors. See Item 12, “Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters.”





Our success
depends in large part on our ability to update and expand the content of
existing
products and develop new products in a cost-effective manner and on a
timely basis.





We
believe that the development of high quality products each year contributes not
only to near-term revenue growth, but also to revenue in subsequent periods by
increasing the longevity and sustaining the competitiveness of our back list.
The update and expansion of our existing products and the development of new
products may not be accepted by the markets we serve. If we cannot respond to
changes in industry requirements, our business may be adversely affected. Even
if we are able to develop acceptable new products, we may not be able to
introduce these new products as quickly as the markets require or as quickly as
our competitors introduce competing new products.





If the federal No
Child Left Behind (NCLB) Act is materially changed, repealed, or found
unconstitutional, our revenue and
profitability could be adversely affected.





The NCLB
Act, and its implementation have been criticized by certain representatives of
states and schools, including complaints that federal funding is not sufficient
to carry out all aspects of NCLB. If the legislation is repealed, found to be
unconstitutional or is amended in a manner that results in reduced state
participation in assessment and remediation programs, our revenue and
profitability could be adversely affected.





If there is a
substantial reduction in the emphasis placed by federal and state governments on
assessment and remediation in K-12 education, our business may be adversely
affected.





The
success of our test-prep and intervention and K-12 supplemental education
businesses depends on the continued use of standardized tests. If the use of
standardized tests declines or falls out of favor with educational institutions
or state and local governments, the markets for many of our products will
deteriorate and our business may be materially adversely
affected.


18





We are dependent
on a limited number of suppliers and service providers, and any interruption of
supply or services from these vendors could have a material adverse effect on our
operations.





We are
dependent on a limited number of suppliers for certain of our product lines, and
a limited number of service providers, such as delivery service from United
Parcel Service. Any interruption of supply from current vendors or any material
increased costs could cause significant delays in the shipment of such products
and could have a material adverse effect on our business, financial condition,
and results of operations. Increases in freight costs charged to us or inability
to ship products, whether real or perceived, could have a material adverse
effect on our business, financial condition, and results of
operations.





Disruption in our
distribution centers could significantly lower our revenues and profitability.





We
currently maintain national distribution centers located in Northborough,
Massachusetts and Prince Frederick, Maryland, which are essential to the
efficient operation of our national distribution network. Any serious disruption
to these distribution centers due to fire, earthquake, act of terrorism or any
other cause could damage a significant portion of our inventory and could
materially impair our ability to distribute our products to customers. In
addition, we could incur significantly higher costs and longer lead times
associated with distributing our products to our customers during the time that
it takes for us to reopen or replace the centers. As a result, any such
disruption could significantly lower our revenues and
profitability.





We are dependent
upon a central computer system and if we experience damage, service interruptions or
failures in this system, or if our security measures are breached, our customer
relationships and our ability to attract new customers may be adversely
affected.





Our
business could be interrupted by damage to or disruption of our central computer
system from natural disasters, a fire, power loss, hardware or software
malfunctions, penetration by computer hackers, terrorist acts, vandalism,
sabotage, computer viruses, vendor performance failures or insolvency, and other
causes. As a result of any of the foregoing, we may lose data, our relationships
with our customers may be impaired, we may lose customers, our ability to
attract new customers may be adversely affected and we could be exposed to
contractual liability. The precautions that we have taken to protect ourselves
from, or minimize the impact of, such events, such as our disaster recovery
plans, may not be adequate and we may be unable to recover data used in our
operations.





We have incurred
and will continue to incur increased costs as a result of our efforts to comply
with the requirements of the Sarbanes-Oxley Act and in the course of such
compliance have discovered a material weakness in our internal controls,
which if
not properly remediated could result in misstatements in our financial
statements
in future periods.





The
Sarbanes-Oxley Act requires, among other things, that we maintain effective
internal control over financial reporting and disclosure controls and
procedures. We have a material weakness concerning our close process and
technical expertise.  See Item 9A of this Annual Report on
Form 10-K for a discussion of this material weakness. If we are unable to
remedy this material weakness, we may fail to meet our future reporting
obligations, our financial statements may contain misstatements or our operating
results may be adversely affected. In addition, during 2008, we have performed a
system and process evaluation and testing of our internal controls over
financial reporting to allow management to report on the effectiveness of our
internal controls over financial reporting. This annual report does not include
an attestation report of the Company’s independent registered public accounting
firm regarding internal control over financial reporting. Management’s report
was not subject to attestation by the Company’s independent registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report in this
annual report. Our future testing may reveal additional deficiencies in our
internal control over financial reporting that are deemed to be material
weaknesses. Our compliance with the Sarbanes-Oxley Act will require that we
incur substantial accounting expense and expend significant management time on
compliance related issues. If we are not able to comply with the requirements of
the Sarbanes-Oxley Act in a timely manner, or if we or our independent
registered public accounting firm identifies additional deficiencies in our
internal control over financial reporting that are deemed to be material
weaknesses, we could be subject to sanctions or investigations by the Securities
and Exchange Commission (the “SEC”) or the other regulatory authorities, which
would require additional financial and management resources.





Future
transactions may limit our ability to use our net operating loss carryforwards.





As of
December 31, 2008, we had federal net operating loss carryforwards, or
NOLs, of $123.7 million. These NOLs may be used to offset future taxable
income and thereby reduce our U.S. federal income taxes otherwise payable.
Section 382 of the Internal Revenue Code of 1986, as amended, imposes an
annual limit on the ability of a corporation that undergoes an “ownership
change” to use its NOLs to reduce its tax liability. Our ability to offset
gains, if any, against our NOLs are limited by past and any future ownership
changes.


19





Item 1B.Unresolved Staff
Comments.





Not
applicable.





Item 2.Properties.





The
offices of our senior executive management are located in approximately
5,450 square feet of leased space at 10 New King Street, White Plains, New
York under a lease that expires in March 30, 2010. As of December 31, 2008,
we own a 52,000 square foot office, warehouse and production facility in
Prince Frederick, Maryland, which is used by our Library segment. We also lease
10 additional office, warehouse and mixed use facilities for our
businesses, as summarized in the table below





Leased Locations As of December 31,
      2008
                    
                    Use
                    
                    Sq. Ft.
                    
                    Expiration Date8310
      Capital of Tx Hy, Austin, TX(2)
                    
                    Office
                    
                    
                    2,910
                    
                    April,
      30, 2009One
      Beeman Road, Northborough, MA(3)(5)
                    
                    Warehouse/Office
                    
                    
                    150,000
                    
                    July
      31, 20092308
      Heinz Road, Iowa City, IA(2)
                    
                    Warehouse/Office
                    
                    
                    45,000
                    
                    September
      30, 2009140
      Bugeye Square, Prince Frederick, MD(1)(6)
                    
                    Warehouse
                    
                    
                    19,400
                    
                    November
      6, 2009136
      Madison Avenue, New York, NY(2)
                    
                    Office
                    
                    
                    16,500
                    
                    March
      30, 2010301
      Bugeye Square, Prince Frederick, MD(1)
                    
                    Warehouse
                    
                    
                    9,000
                    
                    March
      31, 2010826-828
      Broadway, New York, NY(1)
                    
                    Recording
      Studios
                    
                    
                    11,500
                    
                    August
      31, 20102080
      Cabot Blvd. West, Langhorne, PA(4)
                    
                    Office
                    
                    
                    9,955
                    
                    March
      31, 2009200
      Skipjack Road, Prince Frederick, MD(1)
                    
                    Warehouse
                    
                    
                    23,000
                    
                    November
      30, 2012Units
      4 Rearsby Business Park, Rearsby, UK(1)
                    
                    Warehouse/Office
                    
                    
                    20,000
                    
                    December
      31, 2015





(1)
            This
      property is used by our Library
segment.





(2)
            This
      property is used by our Test-prep and Intervention segment. Our Iowa
      office will be abandoned in May 2009 and our Austin office was abandoned
      in November 2008.





(3)
            This
      property is used by Test-prep and Intervention segments( shared
      services).





(4)
            This
      property was previously occupied by ourChelsea Housebusiness,
      and was held for sub-lease.





(5)
            The
      Company plans on finalizing plans to occupy a new warehouse facility in
      the second quarter of 2009 and will not be renewing the lease on the One
      Beeman Road Property.





(6)
            The
      Company plans to renew the lease on this property at the end of it’s
      term.





We
believe that our properties, taken as a whole, are in good operating condition
and are suitable and adequate for our current business operations, and that
suitable additional or alternative space will be available at commercially
reasonable terms for future expansion, if necessary.





Item 3.Legal
Proceedings.





From time
to time, we are involved in legal proceedings that we consider to be in the
normal course of business. We are not presently involved in any legal
proceedings that we expect individually or in the aggregate to have a material
adverse effect on our financial condition, results of operations or
liquidity.





Item 4.Submission of Matters to
a Vote of Security Holders.





No matter
was submitted during the fourth quarter of the fiscal year ended December 31,
2008, to a vote of security holders or through the solicitation of
proxies.




PART II





Item 5.Market
for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchasers of Equity Securities.





There is
no public trading market for our common stock.


20





Holders





As of
February 27, 2009, there were approximately 35 holders of record of our common
stock.





Dividends





We have
never declared or paid a cash dividend on our common stock, and we currently do
not anticipate paying any cash dividends on our common stock in the foreseeable
future. Our various loan agreements and indentures also provide covenants that
would prohibit us from issuing cash dividends unless certain conditions were
met.





Securities
Authorized for Issuance under Equity Compensation Plans





None.





Recent
Sales of Unregistered Securities; Use of Proceeds from Registered
Securities.





Restricted
stock grants as set forth in “Director Compensation.” All such securities were
issued and sold in private placement transactions made in reliance upon the
exemption from securities registration afforded by Section 4(2) and/or any
other applicable exemption under the Securities Act.


21





Item 6.Selected Financial
Data.





The
following table sets forth our selected historical consolidated financial data
for each of the five years in the period ended December 31, 2008, which has
been derived from our consolidated financial statements. The consolidated
balance sheet data as of December 31, 2007 and 2008 and consolidated
statement of operations and cash flow data for the years ended December 31,
2006, 2007 and 2008 are derived from the Company’s consolidated financial
statements audited by Ernst & Young LLP, our independent registered
public accounting firm, which are included elsewhere herein. When you read our
selected historical consolidated financial data, it is important for you to read
it along with our audited consolidated financial statements, the notes to those
audited consolidated financial statements and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” appearing elsewhere
in this Annual Report on Form 10-K.





Year Ended
December 31,2004
                
                
                2005
                
                
                2006
                
                
                2007
                
                
                2008(Dollars
      in thousands)Consolidated
      Statements of Operations Data:Revenue:Test-prep
      and Intervention
                
                $
                34,421
                
                
                $
                64,501
                
                
                $
                73,909
                
                
                $
                86,074
                
                
                $
                83,668Library
                
                
                68,878
                
                
                
                76,626
                
                
                
                81,328
                
                
                
                84,529
                
                
                
                87,411Total
      revenue
                
                
                103,299
                
                
                
                141,127
                
                
                
                155,237
                
                
                
                170,603
                
                
                
                171,079Cost
      of goods sold
                
                
                35,327
                
                
                
                42,144
                
                
                
                42,905
                
                
                
                46,607
                
                
                
                47,441Selling,
      general and administrative expense(1)
                
                
                43,697
                
                
                
                60,135
                
                
                
                67,591
                
                
                
                80,895
                
                
                
                81,422Amortization
      of pre-publication costs(2)
                
                
                5,781
                
                
                
                8,845
                
                
                
                12,043
                
                
                
                14,279
                
                
                
                19,359Goodwill
      impairment charges(3)
                
                
                —
                
                
                
                —
                
                
                
                10,419
                
                
                
                —
                
                
                
                31,600Asset
      impairment charges(4)
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                565
                
                
                
                —Depreciation
      and amortization
                
                
                1,770
                
                
                
                3,571
                
                
                
                3,696
                
                
                
                3,727
                
                
                
                4,241Income
      (loss) from operations
                
                
                16,724
                
                
                
                26,432
                
                
                
                18,583
                
                
                
                24,530
                
                
                
                (12,984
                )Gain
      on troubled debt restructuring(5)
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                115,489
                
                
                
                —Interest
      expense and other(6)(7)
                
                
                (50,281
                )
                
                
                (61,215
                )
                
                
                (66,256
                )
                
                
                (62,272
                )
                
                
                (45,649
                )(Loss)
      income before taxes, discontinued operations and cumulative effect of
      accounting change
                
                
                (33,557
                )
                
                
                (34,783
                )
                
                
                (47,673
                )
                
                
                77,747
                
                
                
                (58,633
                )(Provision)
      benefit for income tax
                
                
                (2,331
                )
                
                
                (3,356
                )
                
                
                (2,086
                )
                
                
                (3,508
                )
                
                
                6,075(Loss)
      income before discontinued operations and cumulative effect of accounting
      change
                
                
                (35,888
                )
                
                
                (38,139
                )
                
                
                (49,759
                )
                
                
                74,239
                
                
                
                (52,558
                )(Loss)
      income from discontinued operations
                
                
                9,474
                
                
                
                3,902
                
                
                
                (23,096
                )
                
                
                (10,689
                )
                
                
                14,551Cumulative
      effect of accounting change(7)
                
                
                —
                
                
                
                2,213
                
                
                
                —
                
                
                
                —
                
                
                
                —Net
      (loss) income
                
                $
                (26,414
                )
                
                $
                (32,024
                )
                
                $
                (72,855
                )
                
                $
                63,550
                
                
                $
                (38,007
                )





Year Ended December 31,2004
                
                
                2005
                
                
                2006
                
                
                2007
                
                
                2008(Dollars in thousands)Other
      Financial Data:Additions
      to pre-publication costs(2)
                
                
                7,907
                
                
                
                15,470
                
                
                
                17,108
                
                
                
                17,985
                
                
                
                19,003Additions
      to property and equipment
                
                
                2,202
                
                
                
                2,071
                
                
                
                1,506
                
                
                
                1,545
                
                
                
                1,248Interest
      expense(6)
                
                
                48,194
                
                
                
                59,370
                
                
                
                65,787
                
                
                
                61,772
                
                
                
                44,747Net
      cash provided by (used in):Operating
      activities
                
                
                3,634
                
                
                
                13,225
                
                
                
                11,401
                
                
                
                14,954
                
                
                
                11,051Investing
      activities
                
                
                (87,994
                )
                
                
                (19,217
                )
                
                
                (18,130
                )
                
                
                (19,553
                )
                
                
                29,621Financing
      activities
                
                
                116,569
                
                
                
                (1,802
                )
                
                
                (1,393
                )
                
                
                (3,426
                )
                
                
                (50,909
                )Ratio
      of earnings to fixed charges(8)
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                2.1
                
                
                
                —


22





As of December 31,2004
                
                
                2005
                
                
                2006
                
                
                2007
                
                
                2008(Dollars
      in thousands)Consolidated
      Balance Sheet Data:Cash
      and cash equivalents
                
                $
                78,581
                
                
                $
                69,592
                
                
                $
                69,847
                
                
                
                61,784
                
                
                
                47,414Working
      capital (deficiency)(9)
                
                
                155,774
                
                
                
                152,456
                
                
                
                121,378
                
                
                
                (25,379
                )
                
                
                (320,520
                )Total
      assets
                
                
                399,703
                
                
                
                401,319
                
                
                
                362,686
                
                
                
                344,772
                
                
                
                243,376Total
      debt(5)(6)
                
                
                492,848
                
                
                
                520,743
                
                
                
                552,769
                
                
                
                414,882
                
                
                
                381,819Redeemable
      preferred stock(5)(6)
                
                
                36,882
                
                
                
                37,717
                
                
                
                41,051
                
                
                
                —
                
                
                
                —Total
      stockholders’ deficit
                
                
                (192,819
                )
                
                
                (228,121
                )
                
                
                (303,919
                )
                
                
                (146,829
                )
                
                
                (186,583
                )





(1)
            Selling,
      general and administrative expense is a summary of the following captions
      from our consolidated statement of operations: marketing and sales,
      fulfillment and distribution, general and administrative, and
      restructuring. For the years ended December 31, 2004 and 2005, our
      selling, general and administrative expense includes restructuring and
      restructuring related charges of $0.4 million and $0.4 million,
      respectively, relating to IT system implementation costs at ourRecorded Booksand Triumph
      Learningbusinesses. For the year ended December 31, 2006 our
      selling, general and administrative expense includes restructuring and
      restructuring related charges of $0.8 million, relating to the
      consolidation of the Iowa-based warehousing, customer service and order
      fulfillment functions of our Buckle Down Publishingbusiness with our existing shared service facility in Northborough,
      Massachusetts and IT system implementation costs at our Recorded Books
      business. For the year ended December 31, 2007, our selling, general
      and administrative expense includes restructuring charges of
      $1.2 million related to Buckle Down Publishingand Options Publishingbusinesses.
      For the year ended December 31, 2008 our selling, general and
      administrative expense includes restructuring and restructuring related
      charges of $2.0 million, relating to Buckle Down Publishingand Options Publishingbusinesses.





(2)
            We
      capitalize and amortize the pre-publication costs associated with the
      development of our new products. These costs primarily include author fees
      under work-for-hire agreements (excluding royalties), the costs associated
      with artwork, photography and master tapes, other external creative costs,
      internal editorial staff costs and pre-press costs that are directly
      attributable to the product. Also included is the intangible value
      assigned to the backlist of acquired companies. These capitalized
      pre-publication and intangible costs are amortized over the anticipated
      life of the product, for a period not exceeding five
  years.





(3)
            Goodwill
      and other intangible assets with indefinite lives are tested for
      impairment annually, as required  by SFAS No. 142,
      “Goodwill and Other Intangible Assets.”  For the year ended
      December 31, 2006 financial results include a $10.4 million
      goodwill impairment charge related to ourOptions Publishingbusinesses. For the year ended December 31, 2008 financial
      results include a $31.6 million goodwill impairment charge related to
      our Triumph Learningbusinesses (See Note 9, “Goodwill”, of our consolidated
      financial statements included elsewhere in this Annual Report on
      Form 10-K.)





(4)
            The
      year ended December 31, 2007 included a restructuring of ourTest-prep and
      Interventionsegment with the consolidating of our Options Publishingbusiness into our Triumph Learningbusiness. In connection with the consolidation, our building
      located in Merrimack, New Hampshire was abandoned and offered for sale
      resulting in a $0.6 million impairment charge from a fair value
      assessment of the building.





(5)
            On
      August 10, 2007, we consummated the Recapitalization Agreement and
      under the terms of the Recapitalization Agreement, holders of our
      previously outstanding Preferred A, Preferred B and Preferred C converted
      their shares into shares of common stock. (‘See “Recapitalization
      Transaction” in Note 3 of our consolidated financial statements
      included elsewhere in this Annual Report on Form 10-K). The Company
      recorded a gain of $115.5 million on troubled debt restructuring in
      the year ended December 31, 2007, based on the difference in carrying
      value of the Preferred B compared to the fair value, based on an
      independent appraisal, of the common shares exchanged. The gain includes
      approximately $1.9 million in transaction costs and a
      $2.8 million benefit from consequential balance sheet write offs,
      primarily the unamortized portion of the deferred gain on Preferred B. The
      recapitalization of the Preferred A and Preferred C also resulted in gains
      based on their carrying value compared to the fair value of the common
      shares exchanged, but because of their classification as equity
      instruments, the gains of $33.0 million and $1.3 million,
      respectively, are reflected as Gain on Recapitalization in the calculation
      of net income available to common
stockholders.


23





(6)
            On
      January 1, 2004 we adopted Statement of Financial Accounting
      Standards No. 150, “Accounting for Certain Financial Instruments with
      Characteristics of both Liabilities and Equity”
      (“SFAS No. 150”). SFAS No. 150 establishes standards for
      classifying and measuring as liabilities certain financial instruments
      that embody obligations of the issuer and have characteristics of both
      liabilities and equity. This adoption required that our Preferred B be
      classified as debt on our consolidated balance sheet and that the
      dividends and accretion related to the Series B Senior Preferred
      Stock (“Preferred B”) be classified as interest expense on a going forward
      basis. (See Note 16, “Equity and Redeemable Preferred Stock”, of our
      consolidated financial statements included elsewhere in this Annual Report
      on Form 10-K.) On August 10, 2007, we consummated the
      Recapitalization Agreement and under the terms of the Recapitalization
      Agreement, holders of our previously outstanding Series A Preferred
      Stock (“Preferred A”), Preferred B and Series C Preferred Stock
      (“Preferred C”) converted their shares into shares of common stock. (‘See
      “Recapitalization Transaction” in Note 3 of our consolidated
      financial statements included elsewhere in this Annual Report on
      Form 10-K)





(7)
            The
      financial statements for the year ended December 31, 2005 include a
      change in accounting to reflect our outstanding Warrants as liabilities in
      accordance with FASB Staff Position FAS 150-5: Issuer’s Accounting
      under FASB Statement No. 150 for Freestanding Warrants and Other
      Similar Instruments on Shares That Are Redeemable. As a result of
      recording these Preferred Warrants as liabilities which should be marked
      to fair market value, the Company recorded a gain of $2.2 million,
      which is presented as a cumulative effect of accounting change for the
      year ended December 31, 2005. On August 10, 2007 we consummated
      the recapitalization pursuant to the Recapitalization Agreement (“See
      “Recapitalization Transaction” in Note 3 of our consolidated
      financial statements included elsewhere in this Annual Report on
      Form 10-K). Upon the closing of the Recapitalization Agreement, all
      outstanding shares of Preferred Warrants were converted into warrants to
      acquire common stock at an agreed upon
rate.





(8)
            The
      “ratio of earnings to fixed charges” is an analytical tool used to assist
      investors in evaluating a company’s ability to meet the interest
      requirements of debt securities or the dividend requirements of preferred
      stock. Earnings for the purpose of this calculation are defined as pretax
      income before the effects of discontinued operations, extraordinary items
      and the cumulative effect of accounting change. Fixed charges are defined
      as the sum of interest expense, amortization of deferred financing costs,
      and the interest portion of rental expense. Earnings for the year ended
      December 31, 2008 included a $31.6 million of goodwill impairment
      charge inTriumph
      Learning business. Earnings for the year ended December 31,
      2007 included a $115.5 million gain on troubled debt restructuring.
      Excluding the impact of this gain, earning would have been insufficient to
      cover fixed charges by $37.8 million. For the years ended
      December 31, 2004, 2005, 2006 and 2008 earnings were inadequate to
      cover fixed charges by, $33.6 million, $34.8 million, $47.7 and
      $58.6 million, respectively.





(9)
            At
      December 31, 2007 the working capital deficiency resulted from the
      reclassifications of our Term Loans due August 15, 2008 as a current
      liability.  At December 31, 2008 the working capital resulted from
      the reclassifications of our Term Loans, Senior Discount Notes and Senior
      Notes as a current liability due to defaults under our loan agreements
      (“See “Financial Arrangements” in Note 15 of our consolidated
      financial statements included elsewhere in this Annual Report on
      Form 10-K).





Item 7.Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





“Safe
Harbor” Statement under Private Securities Litigation Reform Act of
1995





This
Annual Report on Form 10-K contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934 (the “Exchange Act”). The forward-looking
statements included in this Annual Report on Form 10-K include statements
concerning our plans, objectives, goals, strategies, future events,
projections, future sales or performance, adequacy of capital, capital
expenditures, financing needs, plans or intentions relating to acquisitions,
business trends and other information that is not historical information. When
used in this Annual Report on Form 10-K, the words “estimates,” “expects,”
“anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts” and
variations of such words or similar expressions are intended to identify
forward-looking statements. All forward-looking statements, including, without
limitation, projections and management’s examination of business trends, are
based upon our current expectations, beliefs, projections and assumptions. Our
expectations, beliefs, projections and assumptions are expressed in good faith
and we believe there is a reasonable basis for them. However, there can be no
assurance that our financial condition or results of operations will meet the
expectations set forth in our forward-looking statements.





The
forward-looking statements that we make in this Annual Report on Form 10-K
are subject to a variety of risks, uncertainties, and other factors, known and
unknown, that could cause actual results to differ materially from such
forward-looking statements. We refer you to documents filed by us with the
Securities and Exchange Commission, specifically Item 1A of this Annual
Report on Form 10-K, as may be amended from time to time, which identify
important risks that could cause our actual results to differ materially from
those contained in our forward-looking statements. Other factors could also
materially affect our actual results.


24


Without
limitation of the foregoing, among the important factors or risks that could
cause our actual results to differ from those contained in our forward-looking
statements are: (i) the effect of a continued weak economy on sales of our
products; (ii) our inability to extend the forbearance and amend our senior
secured term loan  as described herein or otherwise to avoid further
defaults under that agreement; (iii) our inability to make our August 2009
interest payments on our senior notes and senior discount notes if we are not
able to restructure our debt obligations; (iv) our substantial leverage and
indebtedness, which may adversely affect our ability to operate our business and
place us at a competitive disadvantage in our industry; (v) our obligation to
meet financial covenants and inability to take certain actions because of
restrictions contained in our debt instruments, as they may be amended, which
may adversely affect our operations; (vi) our history of losses, which we expect
to continue; (vii) changes in funding of school systems and libraries by
federal, state and local governments due to weaknesses in the United States
economy that are or may continue to result in the curtailment, delay or
reduction in federal, state and local government funding available to schools
and libraries for the purchase of our products, which have and could continue to
reduce our sales and adversely affect our results of operations; (viii)
the effect that a substantial reduction in the emphasis placed by federal and
state governments on assessment and remediation in K-12 education would have on
our sales and operations;(ix)
our inability to compete in the highly competitive industries in which we
operate; (x) the effect that misuse, misappropriation or other loss of our
proprietary rights could have on our results of operations; (xi) our need to
defend against intellectual property infringement and other claims, which may
cause us to incur significant costs and divert management attention; (xii) our
dependence on key personnel; (xiii) a growth in multimedia products that may
compete with and reduce our publishing activities; (xiv) technological changes
that may reduce the sales of our products; (xv) the effect of an increase in
paper or postage costs, which could adversely affect our business; (xvi) our
ability to update and expand the content of existing products and develop new
products in a cost effective manner and on a timely basis; (xvii) the effect
that a material change to or repeal of the federal government’s No Child Left
Behind Act of 2001 (“NCLB Act”) would have on our revenue and profitability;
(xviii) our dependence on a limited number of suppliers and service providers,
the interruption of supply or service with which could have a material adverse
effect on our operations; (xix) a disruption in our distribution centers could
significantly lower our revenues and profitability; (xx) our dependence on a
central computer system, which if damaged, or if service is interrupted or a
failure occurs, could adversely affect our customer relationships and harm our
ability to attract new customers; (xxi) the effect of changes in accounting,
regulatory and/or tax policies and practices, including the additional
professional and internal costs necessary for compliance with  SEC
rules (including the Sarbanes-Oxley Act of 2002) and accounting rules; (xxii)
limitations on our ability to utilize our net operating loss carryforwards;
(xxiii) the seasonal and cyclical nature of sales of our products; (xxiv)
changes in the competitive environment, including those which could adversely
affect our cost of sales; (xxv) changes in the relative profitability of
products sold; (xxvi) regulatory changes that could affect the purchase of our
products; (xxvii) delays and unanticipated expenses in developing new programs
and other products or in developing new technology products, and market
acceptance and use of online instruction and assessment materials; and
(xxviii) the risk that our well-known authors will depart and write for our
competitors.





Information
included in this Annual Report on Form 10-K is made as of the date hereof.
We undertake no obligation, and disclaim any duty, to update our forward-looking
statements, including any financial projections we make. We do not endorse any
projections regarding future performance that may be made by third
parties.





Recent
Developments





Refinancing
and Repurchase of Senior Notes





On August
15, 2008, we entered into a credit agreement with DDJ Capital Management LLC, as
administrative agent, and collateral agent, and certain other lenders. Under the
Credit Agreement, we borrowed $108.2 million under a senior secured term loan
facility with a maturity of May 15, 2011. We used a combination of the net
proceeds of the New Term Loan and cash on hand, including the net proceeds from
its previous sale of our Oakstone Publishing business,
to repay the full amount of our Term Loans due August 15, 2008 in full. In
addition, on August 15, 2008, we repurchased and retired Senior Notes in the
aggregate principal amount of $31.2 million from certain of the Lenders and
their affiliates for a purchase price equal to the aggregate principal amount of
the notes retired, plus accrued but unpaid interest, if any. See Note 15 to our
consolidated financial statements and “Liquidity and Capital
Resources”.





Effective
July 29, 2008, Haights Cross entered into a commitment letter with Monarch
Capital on behalf of certain of its affiliated investment funds and Glenview on
behalf of certain of its affiliated investment funds. Pursuant to the Commitment
Letter, Monarch Capital’s and Glenview’s affiliated investment funds made
commitments to provide $75 million of senior secured term loans to Haights Cross
to refinance its then existing senior secured term loan indebtedness that
matured on August 15, 2008. See Note 22 to our consolidated financial
statements. These commitments expired upon the execution of the Credit Agreement
and consummation of the loan transaction described above. We have recorded
financing related legal costs of $0.6 million and commitments fees paid to the
lenders of $1.5 million in general and administrative expenses for the year
ended December 31, 2008, related to this backstop financing
option.


25





Dispositions





On June
30, 2008, we sold all the assets that comprised our Oakstone Publishingbusiness, which
previously constituted our Medical Education segment and on August 27, 2008, we
sold all the assets that comprised our Sundance Newbridgebusiness which
previously constituted our K-12 Supplemental Education segment. As a result of
these dispositions, the results of Oakstone Publishing and Sundance Newbridgehave been
reclassified as discontinued operations for all periods presented in the
consolidated financial statements. We also entered into a post acquisition
service agreement with the purchaser of Sundance Newbridgeunder which Triumph Learningprovides
warehouse, distribution and customer service to the purchaser under an arms
length agreement. This agreement provides for a 60 day cancellation by either
party with notice. This agreement will terminate effective May 16,
2009.





Restructuring





On
September 28, 2007, the Board of Directors authorized a restructuring of
Options Publishingand
Triumph Learning,
whereas the management of Options Publishing was merged
into Triumph Learningand the warehouse functions of Options Publishing was
consolidated into the shared services division; the accounting functions were
taken over by the Triumph
Learninggeneral accounting group located in New York City; customer
services, warehousing and fulfillment were incorporated in to the shared service
facility in Northborough, MA; and the manufacturing and product purchasing
functions were consolidated into a new shared manufacturing group that was
formed in our Iowa City location. The purpose of this restructuring was to save
operational costs and to improve the product development process. Furthermore,
certain functions of Triumph
Learningwere moved to other locations to improve processes, leverage
shared resources and take advantage of lower cost facilities. The accounts
receivable and cash applications functions were relocated to Northborough, MA;
and the manufacturing functions located in NY were moved into the previously
discussed shared manufacturing function in Iowa City. Additionally, as of
January 1, 2008, the Triumph Learningaccounting
group took over certain accounting functions from Sundance/Newbridgerelated to
the shared service facility in Northborough, MA. The Company completed the
restructuring process during the first quarter of 2008.





On
November 19, 2008 the board approved the consolidation of the management of the
Buckle Down/Options
Operations in Iowa under the Triumph Learning management
in New York City.   This resulted in the elimination of the
President of Buckle
Down; the moving of the marketing function to the company’s New York City
facility, the consolidation of sales management  and product
development to be managed in the New York office.  In addition to
reducing costs, this action better allowed the company to leverage its resources
and coordinate activities in product development, sales and
marketing.





Subsequent
to the year end, on March 11, 2009 the board approved the closing of our sales,
marketing and product development facility in Iowa City.  This actions
will allow the company to complete the consolidation of the Buckle Down and Options operations that began
in November 2008.  The remaining product development and sales and
marketing functions will be moved to the Company’s New York City facility
location.





Recapitalization





On August
10, 2007, we consummated the recapitalization pursuant to the Recapitalization
Agreement. The recapitalization simplified the Company’s capital structure and
resolved litigation between certain Preferred B holders of the Company and the
Company.  As a result of the recapitalization, the preference related
to the Company’s outstanding shares of preferred stock including the Company’s
Preferred B shares, which had a mandatory redemption feature, were extinguished
improving the Company’s financial position and the former holders of the
Company’s Preferred B shares received approximately 82% of the outstanding
shares of Common Stock and thus voting control of the Company.





Under the
terms of the Recapitalization Agreement, holders of our previously outstanding
Preferred B converted their shares of Preferred B into approximately 82% of our
outstanding shares of common stock, holders of our previously outstanding
Preferred A, Preferred C and Preferred Warrants converted their shares and
warrants into shares of common stock and common stock warrants representing
approximately 15% of our outstanding shares of common stock, and certain members
of management acquired new shares of common stock under the terms of management
stock purchase agreements representing approximately 3% of our outstanding
common stock. Pursuant to the management stock purchase agreements, management
paid $0.001 per share to acquire the shares of common stock. In connection with
the foregoing, all previously outstanding shares of common stock were
effectively eliminated through the reclassification into one share of common
stock in a reverse split and all outstanding Common Warrants and options to
purchase common stock were similarly effectively eliminated by the reverse split
of the common stock. As a result of the closing of the transactions contemplated
by the Recapitalization Agreement, the Company has only outstanding common stock
and common stock warrants and no shares of Preferred A, Preferred B or Preferred
C, or stock options remain outstanding.


26





In
connection with the recapitalization, each Preferred A share and Preferred C
share was reclassified into shares of Common Stock at the rate of one share of
Common Stock for each $31.481 of accrued liquidation value of Preferred A share
or Preferred C share as of June 30, 2007.  Each Preferred B share
was converted into approximately 4.09953 shares of Common Stock.





All of
the Company’s previously outstanding warrants to purchase its Preferred A shares
were automatically adjusted to become exercisable to purchase 70,301 shares of
the Company’s Common Stock at a purchase price of $0.0003 per share of Common
Stock.  All of such rights were currently exercisable at the time of
the closing of the recapitalization and have expiration dates of December 10,
2011.





The
closing of the Recapitalization Agreement was subject to the satisfaction of
certain stated conditions, including the waiver by the requisite holders of our
Term Loans, Senior Notes and Senior Discount Notes of applicable “change of
control” covenants that, absent such waiver, might have applied in connection
with the conversion of the Preferred C, Preferred B, and Preferred A into common
stock. All required waivers were obtained.





In
connection with the recapitalization, the Company recorded a gain on troubled
debt restructuring of $115.5 million in the year ended December 31,
2007, based on the difference in carrying value of the Preferred B compared to
the fair value, based on an independent appraisal, of the common shares
exchanged. The gain includes approximately $1.9 million in transaction cost
and a $2.8 million benefit from consequential balance sheet write offs,
primarily the unamortized portion of the deferred gain on Preferred B. The
recapitalization of the Preferred A and Preferred C also resulted in gains based
on their carrying value compared to the fair value of the common shares
exchanged, but because of their classification as equity instruments, the gains
of $33.0 million and $1.3 million, respectively, are reflected as Gain
on Recapitalization in the calculation of net income available to common
stockholders.





The
independent appraisal of the Company’s Common Stock was conducted utilizing
three approaches: (i) a multi-period income approach, specifically a discounted
cash flow method, (ii) a review of industry guideline companies and (iii) a
review of industry acquisitions.





The
significant assumptions in the discounted cash flow method include the discount
rates used, which range from 15 to 17%, the terminal value multiples used and
the projected revenues and profits of the Company based on management’s
estimates and historical performance. The significant assumptions in the
industry guideline approach included the selection of similar entities for
market value and the determination that earnings multiples were the most
indicative measure of value. Under the industry acquisition approach the
significant assumptions include the determination of similar transactions for
similar entities and a determination of the appropriate valuation
multiples.





Once the
value from each method was determined and weighted, a range of value was
determined and a discount factor based on lack of marketability of 20% was
applied to the values.





The
adjustment of $59,746 to the accumulated deficit in our statement of changes in
stockholders’ deficit for 2007 was calculated based on the fair value of shares
issued in the recapitalization less the related legal fees and less the par
value of the cancelled Common Stock.





Recent
U.S. Economic Developments





Weaknesses
in the United States economy have resulted in the curtailment, delay or
reduction in federal, state and local government funding available to schools
and libraries and has adversely impacted retail purchases. In our fourth quarter
of 2008 we experienced a decline in revenues across our business lines which we
believe was due to this weakness in the economy.  However, the recent
federal stimulus package provides for a significant increase in funding for
education programs in K-12 education. This significant increase could have an
important impact on our businesses. Additional funds for K-12 education could
enable school districts to purchase products created by Triumph Learning and the
school division of Recorded
Books.


27





Schools
districts are in the process of receiving these additional funds. These funds
mostly benefit large urban districts, where both Triumph Learning and the
school division of Recorded
Books, has an important presence and where its products are already in
use.





In
addition, the allowable use for these stimulus funds includes after-school,
extended day and summer school, and Response to Intervention (RTI) programs. We
believe that Triumph Learning,
Buckle Down, Options and Recorded Books school products are well suited
for these programs, and again where its products are already in
use.





Triumph Learning and Recorded Books has an already
existing relationship with schools currently receiving federal education funds,
as a result of their extensive marketing efforts (direct mail, email, inside
sales), and national sales organizations. These already existing relationships
will position Triumph Learning and Recorded Books to take maximum advantage of
these additional funds.





Going
Concern Considerations




As of
April 15, 2009, we had not completed our audited financial statements as
required under our credit agreement for our senior secured term loan (the
“Credit Agreement”), or filed our Annual Report on Form 10-K with the Securities
and Exchange Commission (the “SEC”) as required under our indentures for our
Senior Notes and our Senior Discount Notes. As of May
29, 2009, we further had not completed our first quarter financial statements
required under the Credit Agreement or filed our Quarterly Report on Form 10-Q
with the SEC as required under the Indentures, resulting in further defaults
under the Credit Agreement and the Indentures.  These defaultsunder the indentures also resulted in a cross-default under the Credit
Agreement. In connection with the audit of these financial statements, our
independent registered public accounting firm has included an explanatory
paragraph that indicates that the uncertainties discussedherein raise substantial
doubt about our ability to continue as a going concern. The issuance of this
report with a  going concern emphasis paragraph also violates a
separate covenant of the Credit Agreement. In addition to our existing defaults
under the Credit Agreement, there is also uncertainty that we are in
compliance with certain financial covenants in the Credit Agreement. The
Company has requested the Administrative Agent for the Credit Agreement to
indicate their agreement with certain items included in the Company’s
calculations of 2008 financial covenant compliance, however, the Administrative
Agent has not responded to the Company’s request.  Should the
Administrative Agent disagree with the Company’s financial covenant
calculations, this could result in non-compliance with financial covenants
during 2008 and continuing into 2009 which would constitute additional events of
default under the Credit Agreement.
 
 Rights
and remedies of the lenders under the Credit Agreement upon the occurrence of an
event of default include the right to charge a default interest rate, to declare
the loans outstanding to be due and payable, either in whole or in part,
immediately, and to foreclose on our assets securing our obligations under the
Credit Agreement, including without limitation taking control of our operating
subsidiaries through our pledge of the shares of those subsidiaries, and
blocking our access to cash held in deposit accounts subject to control
agreements (which includes substantially all of our cash) and sweeping that cash
into the Lenders account.  Further, provisions of the Credit Agreement
restrict our ability to make interest payments on our Senior Notes and our
Senior Discount Notes if we are in default under the Credit
Agreement.  We do not expect that our cash on hand and cash generated
from operations will be sufficient to fund the repayment of our senior secured
term loan should they be declared due.  In addition, an
acceleration of the senior secured term loan would cause defaults under the
Senior Notes and Senior Discount Notes. As of May
20, 2009, the outstanding principal balances under the Credit Agreement, the
Senior Notes and Senior Discount Notes were $108.2 million, $138.8
million  and $135.0 million, respectively.
 
 On April 15, 2009, weentered into a short-term forbearance agreement with the lenders under
the Credit Agreement relating to our financial reporting defaults, and since
that time  have entered into further forbearance agreements to extend
the applicable forbearance period, including a Fourth Forbearance Agreement and
Amendment No. 1 to Credit Agreement on May 7, 2009 (the “Forbearance Agreement
and Amendment”).  The Forbearance Agreement and Amendment also
provides for a forbearance relating to defaults, if any, resulting from our
failure to satisfy our financial covenants under our Credit Agreement for the
periods ended December 31, 2008 and March 31, 2009. Agreement and
Amendment; or (iii) the occurrence or existence of any event of default under
either of the indentures for the Senior Notes or the Senior Discount
Notes. Upon expiration of the forbearance period, the forbearance shall be
immediately and automatically terminated and be of no further force or effect,
which would permit the lenders to
  Under our
forbearance arrangements, commencing April 15, 2009, we agreed to pay the
Lenders the default rate of interest under the Credit Agreement, an increase of
2% over the stated variable rate.  Effective, May 7, 2009, the Credit
Agreement was amended to increase the base interest rate by 4% over the stated
variable rate (an increase of 2% over the previous default rate), such that the
applicable interest rate under the Credit Agreement is now, at our election,
either:
 
 ·
                the
      three month LIBOR rate (with a floor of 3.00%) plus 12.25% per annum,
      payable monthly (LIBOR rate loans had previously been payable quarterly);
      or
 ·
                the
      prime rate (with a floor of 5.25%) plus 11.0% per annum, payable
      monthly.
 
 In
consideration of this increase, the Lenders have agreed to waive any default
interest during the current forbearance period.  As of May 7, 2009,
our base rate of interest under the Credit Agreement was
15.25%.  Under certain circumstances, we are allowed to make an
election to have a portion of the interest, not to exceed 2% per annum,
paid-in-kind through an increase in the outstanding principal amount of the term
loans.
 
 On May 7,
2009, we received a notice from the trustees under the indentures for our Senior
Notes and Senior Discount Notes that our failure to timely file our SEC reports
constitutes a default under each of those indentures.  The indentures
provide that we have 60 days from receipt of this notice of default to cure
such default before an event of default occurs under the indentures. If an event
of default occurs under the indentures, then the trustee or the holders of 25%
in aggregate principal amount of the Senior Notes or the Senior Discount Notes,
respectively, may thereafter declare the applicable notes to be due and payable
immediately.
  We are in
discussions with our lenders to amend the Credit Agreement, in the context of a
broader debt restructuring. We have engaged a financial advisor to help
implement the Credit Agreement amendment and to explore other potential debt
restructuring alternatives.  If we are unable to restructure our debt
obligations, we do not believe that the lenders would extend their forbearance
and amend the Credit Agreement so as to permit us to make our August 2009
interest payments on our Senior Notes and our Senior Discount
Notes.  Moreover, our Senior Discount Notes are obligations of Haights
Cross Communications.  These obligations are not guaranteed by any of
our subsidiaries and none of our subsidiaries is under any obligation to make
payments to us. The ability of subsidiaries to make any payments to us are
limited by statutory and other contractual restrictions that would depend on the
earnings or financial condition of our subsidiaries and various business and
contractual considerations.  As a result, even if otherwise permitted
under the Credit Agreement, we may not have the ability to pay the interest or
any other obligations under our Senior Discount Notes. Our failure to make interest
payments is a default under the applicable indenture governing those notes and
entitles the trustee or the holders of an applicable percentage of those notes
(after an applicable grace period) to accelerate our obligations under the
notes. This would in turn also trigger further cross defaults under our Credit
Agreement and the indentures for the Senior Notes and Senior Discount
Notes.


28





Although
we intend to attempt to restructure our debt obligations under one or more of
these arrangements, given the current negative conditions in the economy
generally and the credit markets in particular, we cannot give any assurance
that we will be successful in restructuring our debt or finding alternative
financing arrangements on favorable terms, if at all. We do not have any
agreement with holders of our debt obligations to restructure these obligations
and cannot predict or provide assurance we will obtain such
agreement.  A default under one or more of our debt arrangements,
including the Credit Agreement or the indenture governing the Senior Notes or
the Senior Discount Notes, could cause cross defaults of other agreements, any
of which could have a material adverse effect on our business, financial
condition, liquidity and operations and raise substantial doubt about the our
ability to continue as a going concern.  If we are unable to extend
the forbearance under the Credit Agreement and restructure our debt obligations,
we may not be able to continue our operations, and we may be unable to avoid
filing for bankruptcy protection and/or have an involuntary bankruptcy case
filed against us.  Accordingly, amounts outstanding under the our
senior secured term loan, Senior Notes and Senior Discount Notes have been
classified as current liabilities in the accompanying consolidated balance sheet
as of December 31, 2008.





These
uncertainties raise substantial doubt about our ability to continue as a going
concern.  The financial statements do not include any adjustments that
might result from the outcome of these uncertainties. See “Risk Factors” and
“Management’s Discussion and Analysis of Financial Conditions and Results of
Operations – Liquidity and Capital Resources.”





Overview





We are a
leading developer and publisher of products for the K-12 education and library
markets. Our products include state-specific test preparation materials, skills
assessment and intervention books and unabridged audiobooks. Our high quality
products are sold primarily to schools and libraries and we believe we have
leading positions in the two markets we serve.





•
            Test-prep and Intervention:We publish state-specific test preparation materials for K-12
      competency tests under our well-recognized imprints and brands such as
      Triumph Learning,
      Coachand Buckle Down. We also
      offer skills assessment products and intervention materials for struggling
      math and reading students under the widely known Options Publishingimprint.





•
            Library:We publish
      unabridged audiobooks and other products for adults and children under the
      Recorded Booksbrand, and market these titles, as well as selected non-proprietary
      audiobooks and other products, primarily to public libraries and
      schools.





Business
Segments





Our
financial reporting is organized into two business segments: Test-prep and
Intervention and Library.





Test-prep and Intervention.Our Test-prep and Intervention segment publishes state-specific test
preparation materials for K-12 state-specific competency tests and proprietary
instructional materials with the focus on students in kindergarten through 8th
grade, who need more help after using textbooks. This segment is comprised of
our Triumph Learning, Coach,
Buckle Down Publishingand Options Publishingimprints.





Library.Our Library segment
publishes unabridged audiobooks and other products for adults and children and
markets these titles, as well as non-proprietary audiobooks and other products,
to public libraries and schools. This segment is comprised of our Recorded Booksbusiness.





On June
30, 2008, we sold all the assets that comprised our Oakstone Publishingbusiness, which
previously constituted our Medical Education segment and on August 27, 2008, we
sold all the assets that comprised our Sundance Newbridgebusiness which
previously constituted our K-12 Supplemental Education segment. As a result of
these dispositions, the results of Oakstone Publishing and Sundance Newbridgehave been
reclassified as discontinued operations for all periods presented in the
consolidated financial statements.





Critical
Accounting Policies





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results may differ from those estimates.
Changes in facts, circumstances and market conditions may result in revised
estimates.


29





The
critical accounting policies described herein are those that are, in
management’s opinion, most important to the presentation of our consolidated
financial condition and results of operations.





Revenue
and Expense Recognition





We
recognize revenue from books when the product is shipped to the customer.
Product shipment terms are FOB shipping point and collectability is reasonably
assured at the time of shipment.





Short
term rental revenue for audio books is recognized at the time of the rental and
audio book lease revenue is deferred and recognized ratably over the term of the
lease. Revenue is recognized net of provisions for estimated returns. These
estimated return provisions are based upon historical experience and other
industry factors including management’s expectations. Actual return experience
is monitored and any significant change from management’s expectations results
in an adjustment in the reserve rates utilized to estimate returns.





Cost of
goods sold is recognized when the related revenue is recognized and primarily
consists of paper, media, printing, binding and duplication and author royalty
expenses.





Pre-Publication
Costs





We
capitalize the costs associated with the development of our new products. These
costs primarily include author fees under work-for-hire agreements (excluding
royalties), the costs associated with artwork, photography and master tapes,
other external creative costs, internal editorial staff costs and pre-press
costs that are directly attributable to the products. These costs are tracked at
the product title or product series level and are amortized beginning in the
month the product is introduced to market. These costs are amortized over the
estimated life cycle of the book or product, based upon the sales performance of
similarly existing products that are sold in the same business segment, for
periods ranging from eighteen months to five years. The amortization rate is
determined by the expected annual performance during the life cycle and,
accordingly, in many cases an accelerated amortization method is utilized. Costs
determined to be unrecoverable are written off. A write-off occurs most often
when sales of a product are lower than anticipated or when a later version of
the product is released. In addition, life cycles are periodically monitored for
changes in length or rate of sales during the life cycle. When changes are
significant, the amortization rate and period are adjusted.





Goodwill
and Other Intangible Assets





Goodwill
represents the excess of net acquisition cost over the estimated fair value of
net assets acquired of purchased companies. We follow the provisions
of  Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”
(“SFAS No. 142”). Under SFAS No. 142, intangible assets considered to have
indefinite lives, such as goodwill, are no longer amortized to expense but are
periodically evaluated for impairment at the reporting unit level. Intangible
assets with finite lives continue to be amortized to expense over their useful
lives.





Under
SFAS No. 142, goodwill and other indefinite lived intangible assets are subject
to an annual impairment test as well as an interim test if an event occurs or
circumstances change between annual tests indicating that the asset might be
impaired. The goodwill impairment test is a two-step process. First, the fair
value of the reporting unit is compared to its carrying value. If the fair value
is less than the carrying value, a second step is performed. In the second step,
an implied goodwill value is determined by deducting the fair value of all
tangible and intangible net assets of the reporting unit from the fair value of
the reporting unit. If the implied fair value of the goodwill, as calculated, is
less than the carrying amount of the goodwill, an impairment charge is taken for
the difference. The Company tests the goodwill of each of its reporting units
annually, and more frequently if impairment indicators exist.





Direct
Response Advertising Costs





Direct
response advertising costs are incurred to solicit sales from potential new
customers who can be shown to have responded specifically to an advertising
campaign that results in probable future economic benefits. We have two types of
direct response advertising costs: direct mail and catalogs. We are able to
track the revenue, costs and profitability from these advertising efforts at the
campaign level. Both the direct mail and catalog campaign costs are capitalized
and the net recoverability is evaluated on a product-by-product basis at the
campaign level. The life and amortization rate are determined by historical
experience with similar products at the same business. Direct mail costs are
amortized over lives up to 12 months.


30





Catalog
costs are amortized over the estimated life of the catalog, generally between
one and eighteen months with greater than 90% of catalog costs being amortized
in the first year. The estimated life and amortization rate are based on the
sales experience of similar catalogs at the same business segment. Amortization
of direct response advertising costs is included in marketing and sales expense
in the accompanying consolidated statements of operations. If a direct mail
solicitation or catalog is determined to be unprofitable, all remaining
capitalized costs are written-off at that time.





Inventory
and Related Obsolescence





Inventory
consists primarily of books, CDs and audiocassettes, which are valued at the
lower of cost or market, as determined by the first-in, first-out method.
Obsolescence reserves on slow-moving or excess merchandise are recorded, where
applicable, based upon regular reviews of inventories on-hand and estimated
future demand. If a book is taken out of print, superseded by a later version or
ceases to sell, it is considered obsolete and all related inventory amounts are
written-off. If quantities of a book exceed expected future demand based on
historical sales of that title, the excess inventory is also written
off.





Income
Taxes





We
account for income taxes pursuant to the provisions of Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes”
(“SFAS No. 109”). Under SFAS No. 109, deferred tax assets and liabilities are
recorded to reflect the future tax consequences attributable to the effects of
differences between carrying amounts of existing assets and liabilities for
financial reporting and for income tax purposes. A history of generating taxable
income is required in order to substantiate the recording of a net deferred tax
asset.





Results
of Operations





The
following table summarizes our historical results of operations and the
percentage of total revenue represented by each category for the years
presented:





Year Ended
December 31,2008
                  
                  
                  2007
                  
                  
                  2006(Dollar
      amounts in thousands)RevenueTest-Prep
      and Intervention
                  
                  $
                  83,668
                  
                  
                  
                  48.9
                  %
                  
                  $
                  86,074
                  
                  
                  
                  50.5
                  %
                  
                  $
                  73,909
                  
                  
                  
                  47.6
                  %Library
                  
                  
                  87,411
                  
                  
                  
                  51.1
                  %
                  
                  
                  84,529
                  
                  
                  
                  49.5
                  %
                  
                  
                  81,328
                  
                  
                  
                  52.4
                  %Total
      revenue
                  
                  
                  171,079
                  
                  
                  
                  100.0
                  %
                  
                  
                  170,603
                  
                  
                  
                  100.0
                  %
                  
                  
                  155,237
                  
                  
                  
                  100.0
                  %Cost
      of goods sold
                  
                  
                  47,441
                  
                  
                  
                  27.7
                  %
                  
                  
                  46,607
                  
                  
                  
                  27.3
                  %
                  
                  
                  42,905
                  
                  
                  
                  27.6
                  %Selling,
      general and administrative expense:Marketing
      and sales
                  
                  
                  40,012
                  
                  
                  
                  23.3
                  %
                  
                  
                  38,351
                  
                  
                  
                  22.4
                  %
                  
                  
                  34,626
                  
                  
                  
                  22.3
                  %Fulfillment
      and distribution
                  
                  
                  12,510
                  
                  
                  
                  7.3
                  %
                  
                  
                  12,268
                  
                  
                  
                  7.2
                  %
                  
                  
                  11,094
                  
                  
                  
                  7.1
                  %General
      and administrative
                  
                  
                  26,892
                  
                  
                  
                  15.7
                  %
                  
                  
                  29,104
                  
                  
                  
                  17.1
                  %
                  
                  
                  21,464
                  
                  
                  
                  13.8
                  %Restructuring
      charges
                  
                  
                  2,008
                  
                  
                  
                  1.2
                  %
                  
                  
                  1,172
                  
                  
                  
                  0.7
                  %
                  
                  
                  407
                  
                  
                  
                  0.3
                  %Total
      Selling, general and administrative expense
                  
                  
                  81,422
                  
                  
                  
                  47.5
                  %
                  
                  
                  80,895
                  
                  
                  
                  47.4
                  %
                  
                  
                  67,591
                  
                  
                  
                  43.5
                  %Amortization
      of pre-publication costs
                  
                  
                  19,359
                  
                  
                  
                  11.3
                  %
                  
                  
                  14,279
                  
                  
                  
                  8.4
                  %
                  
                  
                  12,043
                  
                  
                  
                  7.8
                  %Goodwill
      and other asset impairment charges(1)
                  
                  
                  31,600
                  
                  
                  
                  18.5
                  %
                  
                  
                  565
                  
                  
                  
                  0.3
                  %
                  
                  
                  10,419
                  
                  
                  
                  6.7
                  %Depreciation/amortization
      of intangibles
                  
                  
                  4,241
                  
                  
                  
                  2.5
                  %
                  
                  
                  3,727
                  
                  
                  
                  2.2
                  %
                  
                  
                  3,696
                  
                  
                  
                  2.4
                  %Income(Loss)
      from operations
                  
                  
                  (12,984
                  )
                  
                  
                  (7.5
                  )%
                  
                  
                  24,530
                  
                  
                  
                  14.4
                  %
                  
                  
                  18,583
                  
                  
                  
                  12.0
                  %Interest
      expense
                  
                  
                  44,747
                  
                  
                  
                  26.2
                  %
                  
                  
                  61,772
                  
                  
                  
                  36.2
                  %
                  
                  
                  65,787
                  
                  
                  
                  42.4
                  %Gain
      on troubled debt restructuring(2)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (115,489
                  )
                  
                  
                  (67.7
                  )%
                  
                  
                  —
                  
                  
                  
                  —Other
      expenses, net of interest income
                  
                  
                  902
                  
                  
                  
                  0.5
                  %
                  
                  
                  500
                  
                  
                  
                  0.3
                  %
                  
                  
                  469
                  
                  
                  
                  0.3
                  %Income(Loss)
      before income taxes and discontinued operations
                  
                  
                  (58,633
                  )
                  
                  
                  (34.2
                  )%
                  
                  
                  77,747
                  
                  
                  
                  45.6
                  %
                  
                  
                  (47,673
                  )
                  
                  
                  (30.7
                  )%Tax
      benefit (provision)
                  
                  
                  6,075
                  
                  
                  
                  3.5
                  %
                  
                  
                  (3,508
                  )
                  
                  
                  (2.1
                  )%
                  
                  
                  (2,086
                  )
                  
                  
                  (1.3
                  )%Income(Loss)
      before discontinued operations
                  
                  
                  (52,558
                  )
                  
                  
                  (30.7
                  )%
                  
                  
                  74,239
                  
                  
                  
                  43.5
                  %
                  
                  
                  (49,759
                  )
                  
                  
                  (32.0
                  )%Loss
      from discontinued operations(3)
                  
                  
                  14,551
                  
                  
                  
                  8.5
                  %
                  
                  
                  (10,689
                  )
                  
                  
                  (6.2
                  )%
                  
                  
                  (23,096
                  )
                  
                  
                  (14.9
                  )%Net
      Income(Loss)
                  
                  $
                  (38,007
                  )
                  
                  
                  (22.2
                  )%
                  
                  $
                  63,550
                  
                  
                  
                  37.3
                  %
                  
                  $
                  (72,855
                  )
                  
                  
                  (46.9
                  )%







(1)
            Results
      of operations for the year ended December 31, 2006 include a goodwill
      impairment charge of $10.4 million of ourOptions Publishingbusiness, which is included within our Test-prep and Intervention
      segment. In addition, the fourth quarter of 2007 included a restructuring
      of our Test-prep and
      Interventionsegment with the consolidating of our Options Publishing
      business into our Triumph Learningbusiness. In connection with the consolidation, our building
      located in Merrimack, New Hampshire was abandoned and offered for sale
      resulting in a $0.6 million impairment charge from a fair value
      assessment of the building. Results of operations for the year ended
      December 31, 2008 include a goodwill impairment charge of $31.6 million of
      our Triumph
      Learning business, which makes up our Test-prep and Intervention
      segment.


31





(2)
            On
      August 10, 2007, we consummated the Recapitalization Agreement and
      under the terms of the Recapitalization Agreement, holders of our
      previously outstanding Preferred A, Preferred B and Preferred C converted
      their shares into shares of common stock. (‘See “Recapitalization
      Transaction” in Note 3 of our consolidated financial statements
      included elsewhere in this Annual Report on Form 10-K). The Company
      recorded a gain of $115.5 million on troubled debt restructuring in
      the year ended December 31, 2007, based on the difference in carrying
      value of the Preferred B compared to the fair value, based on an
      independent appraisal, of the common shares exchanged. The gain includes
      approximately $1.9 million in transaction costs and a
      $2.8 million benefit from consequential balance sheet write offs,
      primarily the unamortized portion of the deferred gain on Preferred B. The
      recapitalization of the Preferred A and Preferred C also resulted in gains
      based on their carrying value compared to the fair value of the common
      shares exchanged, but because of their classification as equity
      instruments, the gains of $33.0 million and $1.3 million,
      respectively, are reflected as Gain on Recapitalization in the calculation
      of net income available to common
stockholders.





(3)
            On
      August 27, 2008, the Company sold theSundance Newbridge
      business unit.  As a result of the sale, the results of K-12
      Supplemental Education which had previously been presented as a separate
      reporting segment are included in discontinued operations in the Company’s
      consolidated financial statements for 2008, 2007 and 2006. On June 30,
      2008, the Company sold the Oakstone business
      unit.  As a result of the sale, the results of Medical Education
      which had previously been presented as a separate reporting segment are
      included in discontinued operations in the Company’s consolidated
      financial statements for 2008, 2007 and
2006.





Year
Ended December 31, 2008 Compared To Year Ended December 31,
2007





The
following table summarizes the results of operations and the percentage of total
revenue represented by each category for the year ended December 31, 2008
and 2007:





Years Ended
    December 31,2008
                    
                    
                    2007(In
      thousands)RevenueTest
      Prep and Intervention
                    
                    $
                    83,668
                    
                    
                    
                    48.9
                    %
                    
                    $
                    86,074
                    
                    
                    
                    50.5
                    %Library
                    
                    
                    87,411
                    
                    
                    
                    51.1
                    %
                    
                    
                    84,529
                    
                    
                    
                    49.5
                    %Total
      Revenue
                    
                    
                    171,079
                    
                    
                    
                    100.0
                    %
                    
                    
                    170,603
                    
                    
                    
                    100.0
                    %Cost
      of goods sold
                    
                    
                    47,441
                    
                    
                    
                    27.7
                    %
                    
                    
                    46,607
                    
                    
                    
                    27.3
                    %Selling,
      general and administrative expenses:Marketing
      and sales
                    
                    
                    40,012
                    
                    
                    
                    23.3
                    %
                    
                    
                    38,351
                    
                    
                    
                    22.4
                    %Fulfillment
      and distribution
                    
                    
                    12,510
                    
                    
                    
                    7.3
                    %
                    
                    
                    12,268
                    
                    
                    
                    7.2
                    %General
      and administrative expense
                    
                    
                    26,892
                    
                    
                    
                    15.7
                    %
                    
                    
                    29,104
                    
                    
                    
                    17.1
                    %Restructuring
      charges
                    
                    
                    2,008
                    
                    
                    
                    1.2
                    %
                    
                    
                    1,172
                    
                    
                    
                    0.7
                    %Total
      selling, general and administrative expenses
                    
                    
                    81,422
                    
                    
                    
                    47.5
                    %
                    
                    
                    80,895
                    
                    
                    
                    47.4
                    %Amortization
      of pre-publication costs
                    
                    
                    19,359
                    
                    
                    
                    11.3
                    %
                    
                    
                    14,279
                    
                    
                    
                    8.4
                    %Goodwill
      and other asset impairment charges(1)
                    
                    
                    31,600
                    
                    
                    
                    18.5
                    %
                    
                    
                    565
                    
                    
                    
                    0.3
                    %Depreciation
      expense/amortization of intangibles
                    
                    
                    4,241
                    
                    
                    
                    2.5
                    %
                    
                    
                    3,727
                    
                    
                    
                    2.2
                    %Income
      (loss) from operations
                    
                    
                    (12,984
                    )
                    
                    
                    (7.5
                    )%
                    
                    
                    24,530
                    
                    
                    
                    14.4
                    %Interest
      expense
                    
                    
                    44,747
                    
                    
                    
                    26.2
                    %
                    
                    
                    61,772
                    
                    
                    
                    36.2
                    %Gain
      on troubled debt restructuring(2)
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (115,489
                    )
                    
                    
                    (67.7
                    )%Other
      expenses, net of interest income
                    
                    
                    902
                    
                    
                    
                    0.5
                    %
                    
                    
                    500
                    
                    
                    
                    0.3
                    %Income(loss)
      before taxes
                    
                    
                    (58,633
                    )
                    
                    
                    (34.2
                    )%
                    
                    
                    77,747
                    
                    
                    
                    45.6
                    %Tax
      (provision) benefit
                    
                    
                    6,075
                    
                    
                    
                    3.5
                    %
                    
                    
                    (3,508
                    )
                    
                    
                    (2.1
                    )%Income
      (loss) before discontinued operations
                    
                    
                    (52,558
                    )
                    
                    
                    (30.7
                    )%
                    
                    
                    74,239
                    
                    
                    
                    43.5
                    %Loss
      from discontinued operations(3)
                    
                    
                    14,551
                    
                    
                    
                    8.5
                    %
                    
                    
                    (10,689
                    )
                    
                    
                    (6.2)
                    %Net
      income (loss)
                    
                    $
                    (38,007
                    )
                    
                    
                    (22.2
                    )%
                    
                    $
                    63,550
                    
                    
                    
                    37.3
                    %







(1)
            The
      fourth quarter of 2007 included a restructuring of ourTest-prep and Interventionsegment with the consolidating of our Options Publishing
      business into our Triumph Learningbusiness. In connection with the consolidation, our building
      located in Merrimack, New Hampshire was abandoned and offered for sale
      resulting in a $0.6 million impairment charge from a fair value
      assessment of the building. Results of operations for the year ended
      December 31, 2008 include goodwill impairment charge of $31.6 million of
      our Triumph
      Learning business, which makes up our Test-prep and Intervention
      segment.


32





(2)
            On
      August 10, 2007, we consummated the Recapitalization Agreement and
      under the terms of the Recapitalization Agreement, holders of our
      previously outstanding Preferred A, Preferred B and Preferred C converted
      their shares into shares of common stock. (See “Recapitalization
      Transaction” in Note 3 of our consolidated financial statements
      included elsewhere in this Annual Report on Form 10-K). The Company
      recorded a gain of $115.5 million on troubled debt restructuring in
      the year ended December 31, 2007, based on the difference in carrying
      value of the Preferred B compared to the fair value, based on an
      independent appraisal, of the common shares exchanged. The gain includes
      approximately $1.9 million in transaction costs and a
      $2.8 million benefit from consequential balance sheet write offs,
      primarily the unamortized portion of the deferred gain on Preferred B. The
      recapitalization of the Preferred A and Preferred C also resulted in gains
      based on their carrying value compared to the fair value of the common
      shares exchanged, but because of their classification as equity
      instruments, the gains of $33.0 million and $1.3 million,
      respectively, are reflected as Gain on Recapitalization in the calculation
      of net income available to common
stockholders.





(3)
            On
      August 27, 2008, the Company sold theSundance Newbridge
      business unit.  As a result of the sale, the results of K-12
      Supplemental Education which had previously been presented as a separate
      reporting segment are included in discontinued operations in the Company’s
      consolidated financial statements for 2008, 2007 and 2006. On June 30,
      2008, the Company sold the Oakstone business
      unit.  As a result of the sale, the results of Medical Education
      which had previously been presented as a separate reporting segment are
      included in discontinued operations in the Company’s consolidated
      financial statements for 2008, 2007 and
2006.





Revenue





Our total
revenue increased $0.5 million, or 0 .3%, to $171.1 million
for the year ended December 31, 2008 from $170.6 million for the year
ended December 31, 2007. The increase is due to growth in the Library
segment offset by the decline from our Test-prep and Intervention
segment.





Test-prep and
Intervention.  Revenue for the Test-prep and Intervention
segment decreased  $2.4 million, or 2.8%, to $83.7 million
for the year ended December 31, 2008, from $86.1 million for the year
ended December 31, 2007. The decrease is primarily attributable to the
decline of our Buckle
Down/Options Publishing product lines, which was impacted by schools
reaction to budgetary pressures, particularly in the fourth quarter
2008.  This decrease was partially offset by the continued success of
our Coach product
line.  A key provision of the NCLB Act required each state to
implement; beginning with the 2005-2006 school year, increased standardized
testing across many grade levels. The state standardized tests in reading, math,
science and social studies are the subject of Triumph Learning’stest-prep study
materials. Triumph Learningproactively sought to benefit from the demand created by the NCLB Act by
publishing new state, subject and grade specific test-prep study materials (for
example a State of New York, Grade 5, Math test-preparation workbook)
corresponding to these new tests for many but not all
states.  However, with the weakened economy we expect to see the
schools react to budgetary pressures, which could have an adverse impact on
revenue.





Library.  Revenue
for the Library segment increased $2.9 million, or 3.4%, to
$87.4 million for the year ended December 31, 2008, from
$84.5 million for the year ended December 31, 2007. The majority of
the segment revenue growth is attributable to the 23% increase in the school
channel and a 3% increase in the core public library channel, which represented
approximately two-thirds of the business. The school channel revenue was driven
by Plugged-in to
Reading, the program developed by Dr. Janet Allen to aid struggling
readers while the library channel growth was primarily due to strong download
audio sales, increased revenue in the United Kingdom and incremental revenue
from Playaway, the new
preloaded digital audio player product offered by Recorded Books.However in
the fourth quarter revenues declined in the Library segment, we believe due to
the weakened economy and we expect to see libraries continue to react to the
budgetary pressures, which could have an adverse impact on revenue.





Cost
of Goods Sold





Cost of
goods sold increased $0.8 million, or 1.8%, to $47.4 million for the
year ended December 31, 2008 from $46.6 million for the year ended
December 31, 2007. Cost of goods sold as a percentage of revenue was 27.7%
and 27.3% for the years ended December 31, 2008 and 2007,
respectively.


33





Test-prep and
Intervention.  Cost of goods sold for the Test-prep and
Intervention segment decreased $0.2 million, or 1.0%, to $16.6 million
for the year ended December 31, 2008 from $16.7 million for the year
ended December 31, 2007 due to the corresponding decrease in revenue,
offset by an increase in inventory obsolescence charge. Cost of goods sold as a
percentage of revenue for the Test-prep and Intervention segment increased to
19.8% from 19.4% period over period primarily due to increased
obsolescence.





Library.  Cost of
goods sold for the Library segment increased $1.0 million, or 3.3% to
$30.9 million for the year ended December 31, 2008 from
$29.9 million for the year ended December 31, 2007 primarily due to
the corresponding growth in revenue. Cost of goods sold as a percentage of
revenue was 35.3% for both periods.





Selling,
General & Administrative Expense





Selling,
general and administrative expense is comprised of marketing and sales,
fulfillment and distribution, general and administrative, and restructuring
charges in the accompanying consolidated statements of operations. Selling,
general and administrative expense increased $0.5 million, or 0.7%, to
$81.4 million for the year ended December 31, 2008 from
$80.9 million for the year ended December 31, 2007, primarily due to
increased sales and marketing cost of $1.7 million, consulting services due to
SOX compliance of $1.1 million, professional fees related to refinancing our
Term Loans of $2.2 million and restructuring and related expenses of $0.8
million from the Buckle
Down/Optionsreorganizations in 2008.  This increase was offset
by a decrease in general and administrative cost for executive severance of $3.7
million, compensation expense of $1.2 million, related to the restricted stock
issuances in 2007 and other general and administrative cost of $0.6
million.  Selling, general and administrative expense as a percentage
of revenue increased to 47.5% from 47.4%, period over period.





Test-prep and
Intervention.  Selling, general and administrative expense for
the Test-prep and Intervention segment increased $3.5 million, or 8.9%, to
$43.2 million for the year ended December 31, 2008 from
$39.7 million for the year ended December 31, 2007. The increase was
primarily due to increased catalog and direct mail related marketing expenses of
$2.1 million, increased restructuring and related costs from the Buckle Down/Options Publishingreorganization of $0.8 million and increase of $0.6 million in executive
severance in 2008, offset by a $0.3 million decrease in other general and
administrative costs . Selling, general and administrative expenses as a
percentage of revenue for the Test-prep and Intervention segment increased to
51.7% from 46.1% period over period primarily due to the impact of the
restructuring and related costs from the Buckle Down/Options Publishing
reorganization in 2008.





Library.  Selling,
general and administrative expense for the Library segment decreased
$0.5 million, or 1.8%, to $27.7 million for the year ended
December 31, 2008 from $28.2 million for the year ended
December 31, 2007 primarily due to decrease in sales and marketing costs of
$0.4 million and a $0.1 million decrease in severance expense. Selling, general
and administrative expense as a percentage of revenue decreased to 31.7% from
33.4% period over period, primarily due to the favorable impact of the revenue
increase on fixed costs, most notably marketing related costs.





Corporate.  Our
corporate general and administrative expenses decreased $2.5 million to
$10.5 million for the year ended December 31, 2008 from
$13.0 million for the year ended December 31, 2007. The decrease is
primarily due to the decreases in executive severance of $3.1 million,
compensation expense related to the restricted stock issuances of $1.2 million,
decrease in compensation and bonus expense of $0.8 million and other general and
administrative cost of $0.7 million.  The decrease was offset by
increases in professional fees related to refinancing of our term loans of $2.2
million and increase in consulting fees related to our SOX compliance of $1.1
million.





Amortization
of Pre-Publication Costs





Amortization
of pre-publication costs increased $5.1 million to $19.4 million for
the year ended December 31, 2008, from $14.3 million for the year
ended December 31, 2007 primarily due to increased investment in new
product spending, most notably within the Test-prep and intervention segment and
an impairment  charge of $2.9 million of our pre-publication assets at
theTest-prep and intervention segment.





Goodwill
and Asset Impairment Charges





A $31.6
million goodwill impairment charge was recorded in the fourth quarter of
2008.  This impairment charge was determined in connection with
management’s annual evaluation of goodwill, which included the use of outside
independent valuation experts to assist us in determining the value of the
reporting unit and the implied value of goodwill.  This valuation utilized
an income and market approach in valuing our reporting units. The income
approach was selected as management believes it can provide a reliable
indication of the reporting unit’s long term financial outlook and the guideline
company method of the market approach was utilized because the lines of business
and economic risks associated with the guideline companies were considered to be
comparable to those of our reporting unit.


34





The
significant assumptions in the income approach include the discount rates used,
a 14% rate was determined, the terminal value multiples used and the projected
revenues and profits of the Company based on management’s estimates and
historical performance. The significant assumptions in the market approach of
which we used the industry guideline method included the selection of similar
entities for market value and the determination that earnings multiples were the
most indicative measure of value. Under the industry acquisition approach the
significant assumptions include the determination of similar transactions for
similar entities and a determination of the appropriate valuation
multiples.





In
addition, the fourth quarter of 2007 included a restructuring of our Test-prep
and Intervention segment with the consolidating of our Options Publishingbusiness
into our Triumph Learningbusiness. In connection with the consolidation, our building located in
Merrimack, New Hampshire was abandoned and offered for sale resulting in a
$0.6 million impairment charge from a fair value assessment of the building
based on an independent real estate appraisal and our carrying
value.





Depreciation
Expense and Amortization of Intangibles





Depreciation
expense and amortization of intangibles was $4.2 million for the year ended
December 31, 2008 and $3.7 million for the year ended
December 31, 2007, primarily due to the transfer of assets from our Sundance Newbridge business
to our Triumph Learning
business. The depreciation expense related to the transferred assets were $0.6
million for the year ended December 31, 2008.





Interest
Expense





Interest
expense decreased $17.0 million, or 27.6%, to $44.7 million for the
year ended December 31, 2008 from $61.8 million for the year ended
December 31, 2007. This decrease was due to the conversion of our Preferred
B, which was converted into common stock on August 10, 2007, in connection
with the Recapitalization Agreement coupled with the refinancing of our term
loans in 2008. Our total outstanding debt decreased from $414.9 million as
of December 31, 2007 to $381.8 million as of December 31, 2008.
The decline in outstanding debt was due to the repurchased and retired Senior
Notes in the aggregate principal amount of $31.2 million, pay down of term loans
in the aggregate principal amount of $16.7 million offset by an increase of
$15.3 million related to senior discount notes.





Cash
interest expense decreased $3.3 million to $29.6 million for the year
ended December 31, 2008 from $32.9 million for the year ended
December 31, 2007. The average interest rate decreased to 8.97% for the
year ended December 31, 2008 from 9.77% for the year ended
December 31, 2007, reflecting a general decrease in interest rates. Our
cash interest bearing outstanding debt was $248.2 million as of
December 31, 2008 compared to $296.5 million as of December 31,
2007.





The
Senior Discount Notes will not begin to accrue cash interest until February 1,
2009, after which we will be required to make cash interest payments every six
months in arrears on February 1 and August 1, commencing August 1,
2009.





Pursuant
to the terms of the Forbearance Agreement, commencing April 15, 2009, we have
agreed to pay our senior secured term loan lenders the default rate of interest
under our Credit Agreement, an increase of 2% over the stated variable
rate.  The increased rate is 13.25 %, as of April 15,
2009.





Interest
expense consists of the following:





Twelve
      Months Ended
                    December 31,2008
                  
                  
                  2007(In
      thousands)Interest
      expense:Term
      Loans
                  
                  $
                  10,942
                  
                  
                  $
                  12,630113⁄4% senior
      notes
                  
                  
                  18,646
                  
                  
                  
                  19,975121⁄2% senior
      discount notes — non-cash
                  
                  
                  15,258
                  
                  
                  
                  13,515Series B
      senior preferred stock — non-cash
                  
                  
                  -
                  
                  
                  
                  15,061Other
                  
                  
                  36
                  
                  
                  
                  699Total
      interest expense
                  
                  
                  44,882
                  
                  
                  
                  61,880Less:
      capitalized interest
                  
                  
                  (135
                  )
                  
                  
                  (108
                  )Net
      Interest expense
                  
                  $
                  44,747
                  
                  
                  $
                  61,772


35





As of
December 31, 2008 the Company had $108.2 million in aggregate
principal amount outstanding under the Term Loans, with such amount bearing
interest at rates between 8.25% and 12.01%. The average interest rate on the
Term Loans was 8.97% for the year ended December 31, 2008.





Capitalized
interest for years ending December 2008 and 2007 is comprised of interest on an
ERP system implementation project in our Library segment.





Gain
on Troubled Debt Restructuring





On
August 10, 2007, we consummated the Recapitalization Agreement and under
the terms of the Recapitalization Agreement, holders of our previously
outstanding Preferred A, Preferred B and Preferred C converted their shares into
shares of common stock. The Company recorded a gain of $115.5 million on
troubled debt restructuring in the year ended December 31, 2007, based on
the difference in carrying value of the Preferred B compared to the fair value,
based on an independent appraisal, of the common shares exchanged. The gain
includes approximately $1.9 million in transaction costs and a
$2.8 million benefit from consequential balance sheet write offs, primarily
the unamortized portion of the deferred gain on Preferred B. The
recapitalization of the Preferred A and Preferred C also resulted in gains based
on their carrying value compared to the fair value of the common shares
exchanged, but because of their classification as equity instruments, the gains
of $33.0 million and $1.3 million, respectively, are reflected as Gain
on Recapitalization in the calculation of net income available to common
stockholders.





Discontinued
Operations





On June
30, 2008, the assets and liabilities of Oakstone Publishing were sold
for gross proceeds of $47.6 million, consisting of consideration received from
the buyer of $42.8 million and $4.8 million placed in an escrow
account.  A pre-tax gain of $15.5 million less tax expense of $1.8
million, resulted in a gain on disposal of discontinued operation of $13.7
million on the Oakstone
Publishing sale.





On August
27, 2008 the assets of Sundance Newbridge Publishing were sold for
gross proceeds of $5.9 million.  A pre-tax gain on disposal of
discontinued operations of $0.9 million, less tax expense of $0.2 million,
resulted in a gain on disposal of discontinued operations of $0.7 million on the
Sundance Newbridge
Publishing sale. As of
December 31, 2008, there was $0.6 million of accrual remaining which represents
liabilities of the Sundance Newbridge business.





Provision
for Income Taxes





The
provision for income taxes was a benefit of $6.1 million for the year ended
December 31, 2008 and a provision  of $3.5 million for the
year ended December 31, 2007, primarily reflecting deferred income taxes.
The benefit in 2008 results primarily from the utilization of continuing
operating losses to offset the gain on discontinued operations. The deferred
income tax benefit reflects the difference in book and tax basis for goodwill
and other indefinite-lived assets. The income tax expense for the year ended
December 31, 2007 reflects the increase in the valuation allowance on
deferred tax assets required as the deferred tax liabilities related to goodwill
and indefinite lived intangible assets may not be scheduled to reverse against
the Company’s NOL’s.  A current income tax expense of $0.7
million and $0.5 million was recorded for the years ended December 31,
2008 and 2007 , respectively. The current income tax expense relates to our
United Kingdom subsidiary, WF
Howes, which had taxable earnings in the United Kingdom of $2.6 million
and  $1.1 million for the years ended December 31, 2008 and
2007, respectively.





Net
Income and Loss





Net
loss  of $38.0 million was recorded for the year ended
December 31, 2008 compared to a net income of $63.6 million for the
year ended December 31, 2007. The decrease in net income, period over
period is due to the prior year including a $115.5 million gain on troubled
debt restructuring recorded for the recapitalization of our Preferred B on
August 10, 2007, the goodwill impairment charge of $31.6 million in 2008,
an increase in product development impairment charge of $2.9 million in 2008,
offset by gains on the sales of our Oakstone Publishing and Sundance Newbridge Publishing businessesand a decrease in
interest expenses in 2008. Operating income
decreased  $37.5 million to a $13.0 million loss for the year
ended December 31, 2008 from $24.5 million income for the year ended
December 31, 2007 primarily due to the increase in goodwill and other asset
impairment charges, restructuring and related expenses, and sales and marketing
costs, offset by decreases in general and administrative costs related to the
executive severance. The provision for income taxes including discontinued
operations was a benefit of $4.7 million for the year ended
December 31, 2008 and a provision  of $3.8 million for the
year ended December 31, 2007.  The increase in net benefit of
$8.5 million period over period was primarily due to the reversal of deferred
tax liabilities related to basis differences in indefinite lived assets existing
in prior periods, which were sold or impaired in 2008.


36





Results
of Operations





Year
Ended December 31, 2007 Compared To Year Ended December 31,
2006





The
following table summarizes the results of operations and the percentage of total
revenue represented by each category for the year ending December 31, 2007
and 2006:





Years Ended
    December 31,2007
                
                
                2006(Dollar
      amounts in thousands)RevenueTest-Prep
      and Intervention
                
                $
                86,074
                
                
                
                50.5
                %
                
                $
                73,909
                
                
                
                47.6
                %Library
                
                
                84,529
                
                
                
                49.5
                %
                
                
                81,328
                
                
                
                52.4
                %Total
      revenue
                
                
                170,603
                
                
                
                100.0
                %
                
                
                155,237
                
                
                
                100.0
                %Cost
      of goods sold
                
                
                46,607
                
                
                
                27.3
                %
                
                
                42,905
                
                
                
                27.6
                %Selling,
      general and administrative expense:Marketing
      and sales
                
                
                38,351
                
                
                
                22.4
                %
                
                
                34,626
                
                
                
                22.3
                %Fulfillment
      and distribution
                
                
                12,268
                
                
                
                7.2
                %
                
                
                11,094
                
                
                
                7.1
                %General
      and administrative
                
                
                29,104
                
                
                
                17.1
                %
                
                
                21,464
                
                
                
                13.8
                %Restructuring
      charges
                
                
                1,172
                
                
                
                0.7
                %
                
                
                407
                
                
                
                0.3
                %Total
      Selling, general and administrative expense
                
                
                80,895
                
                
                
                47.4
                %
                
                
                67,591
                
                
                
                43.5
                %Amortization
      of pre-publication costs
                
                
                14,279
                
                
                
                8.4
                %
                
                
                12,043
                
                
                
                7.8
                %Goodwill
      and other asset impairment charges(1)
                
                
                565
                
                
                
                0.3
                %
                
                
                10,419
                
                
                
                6.7
                %Depreciation/amortization
      of intangibles
                
                
                3,727
                
                
                
                2.2
                %
                
                
                3,696
                
                
                
                2.4
                %Income
      from operations
                
                
                24,530
                
                
                
                14.4
                %
                
                
                18,583
                
                
                
                12.0
                %Interest
      expense
                
                
                61,772
                
                
                
                36.2
                %
                
                
                65,787
                
                
                
                42.4
                %Gain
      on troubled debt restructuring (2)
                
                
                (115,489
                )
                
                
                (67.7
                )%
                
                
                —
                
                
                
                0.0
                %Other
      expenses, net of interest income
                
                
                500
                
                
                
                0.3
                %
                
                
                469
                
                
                
                0.3
                %Loss
      before income taxes and discontinued operations
                
                
                77,747
                
                
                
                45.6
                %
                
                
                (47,673
                )
                
                
                (30.7
                )%Tax
      benefit (provision)
                
                
                (3,508
                )
                
                
                (2.1
                )%
                
                
                (2,086
                )
                
                
                (1.3
                )%Loss
      before discontinued operations
                
                
                74,239
                
                
                
                43.5
                %
                
                
                (49,759
                )
                
                
                (32.0
                )%Loss
      from discontinued operations(3)
                
                
                (10,689
                )
                
                
                (6.2
                )%
                
                
                (23,096
                )
                
                
                (14.9
                )%Net
      income (loss)
                
                
                63,550
                
                
                
                37.3
                %
                
                
                (72,855
                )
                
                
                (46.9
                )%




(1)
            Results
      of operations for the year ended December 31, 2006 include a goodwill
      impairment charge of $10.4 million of ourOptions Publishingbusiness, which is included within our Test-prep and Intervention
      segment. In addition, the fourth quarter of 2007 included a restructuring
      of our Test-prep and
      Interventionsegment with the consolidating of our Options Publishing
      business into our Triumph Learningbusiness. In connection with the consolidation, our building
      located in Merrimack, New Hampshire was abandoned and offered for sale
      resulting in a $0.6 million impairment charge from a fair value
      assessment of the building.





(2)
            On
      August 10, 2007, we consummated the Recapitalization Agreement and
      under the terms of the Recapitalization Agreement, holders of our
      previously outstanding Preferred A, Preferred B and Preferred C converted
      their shares into shares of common stock. (‘See “Recapitalization
      Transaction” in Note 3 of our consolidated financial statements
      included elsewhere in this Annual Report on Form 10-K). The Company
      recorded a gain of $115.5 million on troubled debt restructuring in
      the year ended December 31, 2007, based on the difference in carrying
      value of the Preferred B compared to the fair value, based on an
      independent appraisal, of the common shares exchanged. The gain includes
      approximately $1.9 million in transaction costs and a
      $2.8 million benefit from consequential balance sheet write offs,
      primarily the unamortized portion of the deferred gain on Preferred B. The
      recapitalization of the Preferred A and Preferred C also resulted in gains
      based on their carrying value compared to the fair value of the common
      shares exchanged, but because of their classification as equity
      instruments, the gains of $33.0 million and $1.3 million,
      respectively, are reflected as Gain on Recapitalization in the calculation
      of net income available to common
stockholders.


37





(3)
            On
      August 27, 2008, the Company sold theSundance Newbridge
      business unit.  As a result of the sale, the results of K-12
      Supplemental Education which had previously been presented as a separate
      reporting segment are included in discontinued operations in the Company’s
      consolidated financial statements for 2008, 2007 and 2006. On June 30,
      2008, the Company sold the Oakstone business
      unit.  As a result of the sale, the results of Medical Education
      which had previously been presented as a separate reporting segment are
      included in discontinued operations in the Company’s consolidated
      financial statements for 2008, 2007 and
2006.





Revenue





Our total
revenue increased $15.4 million, or 9.9%, to $170.6 million for the
year ended December 31, 2007 from $155.2 million for the year ended
December 31, 2006. The increase is due to growth in both the Test-prep and
Intervention and Library segments.





Test-prep and
Intervention.  Revenue for the Test-prep and Intervention
segment increased $12.2 million, or 16.5%, to $86.1 million for the
year ended December 31, 2007, from $73.9 million for the year ended
December 31, 2006. The increase is attributable to the continued success of
our Coachproduct line
and Buckle Down/Options
Publishingpublished state, subject and grade specific test-prep study
and intervention materials, which have benefited from the provisions of the NCLB
Act, as previously detailed. A key provision of the NCLB Act required each state
to implement, beginning with the 2005-2006 school year, increased standardized
testing across many grade levels. The state standardized tests in reading, math,
science and social studies are the subject of Triumph Learning’stest-prep study
materials. Triumph Learningproactively sought to benefit from the demand created by the NCLB Act by
publishing new state, subject and grade specific test-prep study materials
corresponding to these new tests for many but not all states.





Library.  Revenue
for the Library segment increased $3.2 million, or 3.9%, to
$84.5 million for the year ended December 31, 2007, from
$81.3 million for the year ended December 31, 2006. The majority of
the segment revenue growth is attributable to the 7% increase in the core public
library channel, which represented approximately two-thirds of the business for
the year and a 9% increase in the school channel. The library channel growth was
primarily due to strong download audio sales, increased revenue in the United
Kingdom and incremental revenue from Playaway, the new preloaded
digital audio player product offered by Recorded Bookswhile the
school channel revenue was driven by Plugged-in to Reading, the
program developed by Dr. Janet Allen to aid struggling
readers.





Cost
of Goods Sold





Cost of
goods sold increased $3.7 million, or 8.6%, to $46.6 million for the
year ended December 31, 2007 from $42.9 million for the year ended
December 31, 2006. Cost of goods sold as a percentage of revenue was 27.3%
and 27.6% for the years ended December 31, 2007 and 2006,
respectively.





Test-prep and
Intervention.  Cost of goods sold for the Test-prep and
Intervention segment increased $2.1 million, or 14.1%, to
$16.7 million for the year ended December 31, 2007 from
$14.7 million for the year ended December 31, 2006 due to the
corresponding increase in revenue. Cost of goods sold as a percentage of revenue
for the Test-prep and Intervention segment decreased to 19.4% from 19.8% period
over period primarily due to a decrease in inventory obsolescence
provisions.





Library.  Cost of
goods sold for the Library segment increased $1.6 million, or 5.8% to
$29.9 million for the year ended December 31, 2007 from
$28.2 million for the year ended December 31, 2006 due to the
corresponding growth in revenue. Cost of goods sold as a percentage of revenue
increased to 35.3% from 34.7%, period over period, reflecting increased
inventory obsolescence provisions and additional costs associated with the
introduction of MyLibraryDV.





Selling,
General & Administrative Expense





Selling,
general and administrative expense is comprised of marketing and sales,
fulfillment and distribution, general and administrative, and restructuring
charges in the accompanying consolidated statements of operations. Selling,
general and administrative expense increased $13.3 million, or 19.7%, to
$80.9 million for the year ended December 31, 2007 from
$67.6 million for the year ended December 31, 2006, primarily due to
increased general and administrative cost for executive severance, compensation
expense related to the restricted stock issuances and restructuring and related
expenses from the Options Publishingreorganizations.
Selling, general and administrative expense as a percentage of revenue increased
to 47.4% from 43.5%, period over period.


38





Test-prep and
Intervention.  Selling, general and administrative expense for
the Test-prep and Intervention segment increased $6.2 million, or 18.5%, to
$39.7 million for the year ended December 31, 2007 from
$33.5 million for the year ended December 31, 2006. The increase was
primarily due to volume related commission expenses, increased catalog and
direct mail related marketing expenses, increased overhead cost from the
Northborough warehouse facility and restructuring and related costs from the
Options Publishingreorganization. Selling, general and administrative expenses as a
percentage of revenue for the Test-prep and Intervention segment increased to
46.1% from 45.3% period over period primarily due to the impact of the
restructuring and related costs from the Options Publishing
reorganization.





Library.  Selling,
general and administrative expense for the Library segment increased
$0.5 million, or 1.8%, to $28.2 million for the year ended
December 31, 2007 from $27.7 million for the year ended
December 31, 2006 primarily due to severance expense and increased legal
expenses incurred in 2007 related to the negotiations for the MyLibraryDVcontractual
arrangement between Recorded Books and several third parties to distribute video
content. Selling, general and administrative expense as a percentage of revenue
decreased to 33.4% from 34.1% period over period, primarily due to the favorable
impact of the revenue increase on fixed costs, most notably marketing and
fulfillment and distribution related costs.





Corporate.  Our
corporate general and administrative expenses increased $6.6 million to
$13.0 million for the year ended December 31, 2007 from
$6.3 million for the year ended December 31, 2006. The expense for the
year ended December 31, 2007 includes $3.6 million of executive
severance, $1.5 million in compensation expense related to restricted stock
issuances and $1.2 million in Preferred B litigation related
costs.





Amortization
of Pre-Publication Costs





Amortization
of pre-publication costs increased $2.2 million to $14.3 million for
the year ended December 31, 2007, from $12.0 million for the year
ended December 31, 2006 primarily due to increased investment in new
product spending, most notably within the Test-prep and Intervention
segment.





Goodwill
and Asset Impairment Charges





Results
of operations for the year ended December 31, 2006 include goodwill
impairment charges of  $10.4 million of our Options Publishingbusiness,
which is included within our Test-prep and Intervention segment.





The
fourth quarter of 2007 included a restructuring of our Test-prep and
Intervention with the consolidating of our Options Publishingbusiness
into our Triumph Learningbusiness. In connection with the consolidation, our building located in
Merrimack, New Hampshire was abandoned and offered for sale resulting in a
$0.6 million impairment charge from a fair value assessment of the
building.





Depreciation
Expense and Amortization of Intangibles





Depreciation
expense and amortization of intangibles was $3.7 million for the years
ended December 31, 2007 and 2006.





Interest
Expense





Interest
expense decreased $4.0 million, or 6.1%, to $61.8 million for the year
ended December 31, 2007 from $65.8 million for the year ended
December 31, 2006. This decrease was due to the Preferred B that did not
have interest expense accrued beyond August 10, 2007, the date that all of
the Series B was converted into common stock. Our total outstanding debt
decreased from $552.8 million as of December 31, 2006 to
$414.9 million as of December 31, 2007. The decline in outstanding
debt was primarily due to the recapitalization.





Cash
interest expense increased $0.6 million to $32.9 million for the year
ended December 31, 2007 from $32.3 million for the year ended
December 31, 2006. The average interest rate increased to 9.77% for the
year ended December 31, 2007 from 9.31% for the year ended
December 31, 2006, reflecting a general increase in interest rates and a
1.50% penalty on a portion of the term loans resulting from our late SEC
filings. Our cash interest bearing outstanding debt was $296.5 million as
of December 31, 2007 compared to $298.3 million as of
December 31, 2006.


39





Interest
expense consists of the following:




Twelve
      Months Ended
                  December 31,2007
                
                
                2006(In
      thousands)Interest
      expense:Term
      Loans
                
                $
                12,630
                
                
                $
                11,991113⁄4% senior
      notes
                
                
                19,975
                
                
                
                19,975121⁄2% senior
      discount notes — non-cash
                
                
                13,515
                
                
                
                11,972Series B
      senior preferred stock — non-cash
                
                
                15,061
                
                
                
                21,574Other
                
                
                699
                
                
                
                364Total
      interest expense
                
                
                61,880
                
                
                
                65,876Less:
      capitalized interest
                
                
                (108
                )
                
                
                (89
                )Net
      Interest expense
                
                $
                61,772
                
                
                $
                65,787





As
of  December 31, 2007 the Company had $124.9 million in
aggregate principal amount outstanding under the Term Loans, with such amount
bearing interest at rates between 8.37% and 9.37%. The average interest rate on
the Term Loans was 9.77% for the year ended December 31, 2007.





Capitalized
interest for years ending December 2006 and 2007 is comprised of interest on a
ERP system implementation project in our Library segment.





Gain
on Troubled Debt Restructuring





On
August 10, 2007, we consummated the Recapitalization Agreement and under
the terms of the Recapitalization Agreement, holders of our previously
outstanding Preferred A, Preferred B and Preferred C converted their shares into
shares of common stock. The Company recorded a gain of $115.5 million on
troubled debt restructuring in the year ended December 31, 2007, based on
the difference in carrying value of the Preferred B compared to the fair value,
based on an independent appraisal, of the common shares exchanged. The gain
includes approximately $1.9 million in transaction costs and a
$2.8 million benefit from consequential balance sheet write offs, primarily
the unamortized portion of the deferred gain on Preferred B. The
recapitalization of the Preferred A and Preferred C also resulted in gains based
on their carrying value compared to the fair value of the common shares
exchanged, but because of their classification as equity instruments, the gains
of $33.0 million and $1.3 million, respectively, are reflected as Gain
on Recapitalization in the calculation of net income available to common
stockholders.








Discontinued
Operations





We sold
our Oakstone Publishing
and Sundance Newbridge
businesses  in June and August of 2008 and its results of operations
have been presented as a discontinued operation for all periods
presented.  Loss from discounted operation decreased by $12.4 million
or 53.7 % to $10.7 million for the year ended December 31, 2007 from $23.1
million for the year ended December 31, 2006.  For the year ended
December 31, 2006 a $1.0 million loss was recorded from the write down
of the $3.0 million note received in the July 2002 sale of Triumph Learning Collegeand
as a result of the write down the note no longer has a book value.





Provision
for Income Taxes





The
provision for income taxes was an expense of $3.5 million for the year
ended December 31, 2007 and $2.1 million for the year ended
December 31, 2006, primarily reflecting deferred income taxes. The deferred
income tax expense reflects the difference in book and tax basis for goodwill
and other indefinite-lived assets. The income tax expense for the years ended
December 31, 2007 and 2006 reflect the increase in the valuation allowance
on deferred tax assets required as the deferred tax liabilities related to
goodwill and indefinite lived intangible assets may not be scheduled to reverse
against the Company’s NOL’s. A current income tax expense of $0.5 million
and $0.3 million was recorded for the years ended December 31, 2007
and 2006, respectively. The current income tax expense relates to our United
Kingdom subsidiary, WF
Howes, which had taxable earnings in the United Kingdom of
$1.1 million in each of the years ended December 31, 2007 and
2006.





Net
Income and Loss





Net
income of $63.6 million was recorded for the year ended December 31,
2007 compared to a net loss of $72.9 million for the year ended
December 31, 2006. Net income for the year ended December 31, 2007 is
due to the $115.5 million gain on troubled debt restructuring recorded in
the recapitalization of our Preferred B on August 10, 2007. Operating
income increased $5.9 million to $24.5 million for the year ended
December 31, 2007 from $18.6 million for the year ended
December 31, 2006 primarily due to the increase in sales offset by increase
in cost of goods sold, increase in sales and marketing cost and general and
administrative expenses, offset by decrease in goodwill impairment charges. The
provision for income taxes increased $1.4 million period over period,
primarily due to the increase in deferred tax liabilities reflecting the
difference in book and tax basis for goodwill and other indefinite lived
assets.


40





Contractual
Obligations and Commitments





Term
Loan.On August 15, 2008,
Haights Cross entered into a credit agreement (“Credit Agreement”) with DDJ
Capital Management LLC, as administrative agent and collateral agent, and
certain other lenders (collectively, the “Lenders”). Under the Credit Agreement,
Haights Cross borrowed $108.2 million under a senior secured term loan facility
(“Term Loan”).





Haights
Cross Communications and all of its direct and indirect subsidiaries (other than
Haights Cross) have guaranteed Haights Cross’ obligations under the Term Loan.
The Term Loan is secured by first-priority liens on, and first-priority security
interests in, substantially all of the assets of the Company and all guarantors
to the Credit Agreement and a first priority security interest in 100% of the
equity issued by Haights Cross’ direct and indirect subsidiaries.





The final
maturity date for the Term Loan is May 15, 2011. We are required to apply 75% of
our annual consolidated excess cash flow (as defined) to prepay any amounts
outstanding under the Term Loan. In addition, subject to certain exceptions and
reinvestment basket, we are required to use any net proceeds from the sale or
disposition of our assets, net casualty, condemnation proceeds or other
extraordinary proceeds and net proceeds from the issuance or incurrence of debt
or equity to prepay the Term Loan. In general, prepayment premiums are not
applicable to partial prepayments in accordance with the above. However,
prepayment premiums are applicable to (a) partial prepayments on account of debt
or equity issuances above agreed on baskets, (b) voluntary prepayments, and (c)
upon payments of the Term Loan in full on account of any mandatory or voluntary
prepayments. When applicable, the following prepayment premiums apply:
prepayments on or prior to August 15, 2009 are subject to a premium of 102% of
the principal, prepayments after August 15, 2009, but on or before August 15,
2010 are subject to a premium of 101% of the principal. Thereafter, the Company
may make prepayments without paying a premium.





As of
December 31, 2008, all amounts outstanding under the Term Loan bore interest, at
the Company’s option:





(i) at
the three month LIBOR rate (with a floor of 3.00%) plus 8.25% per annum, payable
quarterly; or





(ii) at
the prime rate (with a floor of 5.25%) plus 7.0% per annum, payable
monthly.





A default
under the Term Loan triggers an additional 2.00% interest above the stated
variable rate.





The
Credit Agreement contains affirmative and negative covenants customarily
applicable to senior secured credit facilities, including covenants requiring an
unqualified audit opinion and restricting the ability of the Company, subject to
negotiated exceptions, to incur additional indebtedness and additional liens on
their assets, engage in mergers or acquisitions or dispose of assets in excess
of scheduled amounts, enter into sale-leaseback transactions, make capital
expenditures in excess of scheduled amounts, pay dividends or make other
distributions, voluntarily prepay other indebtedness, enter into transactions
with affiliated persons, make investments, and change the nature of their
businesses.





The
credit facilities require Haights Cross and the other loan parties to maintain a
maximum secured leverage ratio, a minimum fixed charge coverage ratio, and a
minimum net EBITDA (as defined) . The maximum secured leverage ratio is 3.33:1
beginning with the quarter ending September 30, 2008, and then ranges from
3.36:1 to 2.94:1 through the fiscal quarter ending March 31, 2011. The minimum
fixed charge coverage ratio is 0.83:1 beginning with the Company’s fiscal
quarter ending September 30, 2008 and then ranges between 0.80:1.00 and 0.67:1
through the fiscal quarter ending March 31, 2011. The minimum net EBITDA is
$29.8 million beginning with the Company’s fiscal quarter ending September 30,
2008, and then ranges over time between $29.2 million to $33.4 million through
the fiscal quarter ending March 31, 2011. The secured leverage ratio is defined
as the ratio of Haights Cross’ senior secured debt (net of up to $10 million of
balance sheet cash) to the Company’s consolidated net EBITDA for the four-fiscal
quarter period ending on the measurement date. The fixed charge coverage ratio
is defined as the ratio of the Company’s consolidated net EBITDA for the
four-fiscal quarter period ending on the measurement date to the Company’s
consolidated interest expense, plus total taxes and total capital expenditures
(subject to certain limited exceptions) for the same period. These terms, and
the calculation thereof, are defined in further detail in the Credit Agreement.
As of December 31, 2008, the effective interest rate on all borrowings under the
Term Loan was 12.01%.







41




As of
April 15, 2009, we had not completed our audited financial statements as
required under our credit agreement for our senior secured term loan (the
“Credit Agreement”), or filed our Annual Report on Form 10-K with the Securities
and Exchange Commission (the “SEC”) as required under our indentures for our
Senior Notes and our Senior Discount Notes. As of May
29, 2009, we further had not completed our first quarter financial statements
required under the Credit Agreement or filed our Quarterly Report on Form 10-Q
with the SEC as required under the Indentures, resulting in further defaults
under the Credit Agreement and the Indentures.  These
defaults under the indentures also resulted in a
cross-default under the Credit Agreement. In connection with the audit of these
financial statements, our independent registered public accounting firm has
included an explanatory paragraph that indicates that the uncertainties
discussedherein
raise substantial doubt about our ability to continue as a going concern. The
issuance of this report with a  going concern emphasis paragraph also
violates a separate covenant of the Credit Agreement. In addition to our
existing defaults under the Credit Agreement, there is also uncertainty that
we are in compliance with certain financial covenants in the Credit
Agreement. The
Company has requested the Administrative Agent for the Credit Agreement to
indicate their agreement with certain items included in the Company’s
calculations of 2008 financial covenant compliance, however, the Administrative
Agent has not responded to the Company’s request.  Should the
Administrative Agent disagree with the Company’s financial covenant
calculations, this could result in non-compliance with financial covenants
during 2008 and continuing into 2009 which would constitute additional events of
default under the Credit Agreement.
 
 Rights
and remedies of the lenders under the Credit Agreement upon the occurrence of an
event of default include the right to charge a default interest rate,  to
declare the loans outstanding to be due and payable, either in whole or in part,
immediately, and to foreclose on our assets securing our obligations under the
Credit Agreement, including without limitation taking control of our operating
subsidiaries through our pledge of the shares of those subsidiaries, and
blocking our access to cash held in deposit accounts subject to control
agreements (which includes substantially all of our cash) and sweeping that cash
into the Lenders account.  Further, provisions of the Credit Agreement
restrict our ability to make interest payments on our Senior Notes and our
Senior Discount Notes if we are in default under the Credit
Agreement.  We do not expect that our cash on hand and cash generated
from operations will be sufficient to fund the repayment of senior secured term
loan should they be declared due.  In addition, an
acceleration of the senior secured term loan would cause defaults under the
Senior Notes and Senior Discount Notes. As of May
20, 2009, the outstanding principal balances under the Credit Agreement, the
Senior Notes and Senior Discount Notes were $108.2 million, $138.8
million  and $135.0 million, respectively.
 
 On April 15, 2009, weentered into a short-term forbearance agreement with the lenders under
the Credit Agreement relating to our financial reporting defaults, and since
that time  have entered into further forbearance agreements to extend
the applicable forbearance period, including a Fourth Forbearance Agreement and
Amendment No. 1 to Credit Agreement on May 7, 2009 (the “Forbearance Agreement
and Amendment”).  The Forbearance Agreement and Amendment also
provides for a forbearance relating to defaults, if any, resulting from our
failure to satisfy our financial covenants under our Credit Agreement for the
periods ended December 31, 2008 and March 31, 2009. Agreement and
Amendment; or (iii) the occurrence or existence of any event of default under
either of the indentures for the Senior Notes or the Senior Discount
Notes. Upon expiration of the forbearance period, the forbearance shall be
immediately and automatically terminated and be of no further force or effect,
which would permit the lenders to
  Under our
forbearance arrangements, commencing April 15, 2009, we agreed to pay the
Lenders the default rate of interest under the Credit Agreement, an increase of
2% over the stated variable rate.  Effective, May 7, 2009, the Credit
Agreement was amended to increase the base interest rate by 4% over the stated
variable rate (an increase of 2% over the previous default rate), such that the
applicable interest rate under the Credit Agreement is now, at our election,
either:
 
 ·
                the
      three month LIBOR rate (with a floor of 3.00%) plus 12.25% per annum,
      payable monthly (LIBOR rate loans had previously been payable quarterly);
      or
 ·
                the
      prime rate (with a floor of 5.25%) plus 11.0% per annum, payable
      monthly.
 
 In
consideration of this increase, the Lenders have agreed to waive any default
interest during the current forbearance period.  As of May 7, 2009,
our base rate of interest under the Credit Agreement was
15.25%.  Under certain circumstances, we are allowed to make an
election to have a portion of the interest, not to exceed 2% per annum,
paid-in-kind through an increase in the outstanding principal amount of the term
loans.
 
 On May 7,
2009, we received a notice from the trustees under the indentures for our Senior
Notes and Senior Discount Notes that our failure to timely file our SEC reports
constitutes a default under each of those indentures.  The indentures
provide that we have 60 days from receipt of this notice of default to cure
such default before an event of default occurs under the indentures. If an event
of default occurs under the indentures, then the trustee or the holders of 25%
in aggregate principal amount of the Senior Notes or the Senior Discount Notes,
respectively, may thereafter declare the applicable notes to be due and payable
immediately.
  We are in
discussions with our lenders to amend the Credit Agreement, in the context of a
broader debt restructuring. We have engaged a financial advisor to help
implement the Credit Agreement amendment and to explore other potential debt
restructuring alternatives.  If we are unable to restructure our debt
obligations, we do not believe that the lenders would extend their forbearance
and amend the Credit Agreement so as to permit us to make our August 2009
interest payments on our Senior Notes and our Senior Discount
Notes.  Moreover, our Senior Discount Notes are obligations of Haights
Cross Communications.  These obligations are not guaranteed by any of
our subsidiaries and none of our subsidiaries is under any obligation to make
payments to us. The ability of subsidiaries to make any payments to us are
limited by statutory and other contractual restrictions that would depend on the
earnings or financial condition of our subsidiaries and various business and
contractual considerations.  As a result, even if otherwise permitted
under the Credit Agreement, we may not have the ability to pay the interest or
any other obligations under our Senior Discount Notes. Our failure to make interest
payments is a default under the applicable indenture governing those notes and
entitles the trustee or the holders of an applicable percentage of those notes
(after an applicable grace period) to accelerate our obligations under the
notes. This would in turn also trigger further cross defaults under our Credit
Agreement and the indentures for the Senior Notes and Senior Discount
Notes.


42




Although
we intend to attempt to restructure our debt obligations under one or more of
these arrangements, given the current negative conditions in the economy
generally and the credit markets in particular, we cannot give any assurance
that we will be successful in restructuring our debt or finding alternative
financing arrangements on favorable terms, if at all. We do not have any
agreement with holders of our debt obligations to restructure these obligations
and cannot predict or provide assurance we will obtain such
agreement.  A default under one or more of our debt arrangements,
including the Credit Agreement or the indenture governing the Senior Notes or
the Senior Discount Notes, could cause cross defaults of other agreements, any
of which could have a material adverse effect on our business, financial
condition, liquidity and operations and raise substantial doubt about the our
ability to continue as a going concern.  If we are unable to extend
the forbearance under the Credit Agreement and restructure our debt obligations,
we may not be able to continue our operations, and we may be unable to avoid
filing for bankruptcy protection and/or have an involuntary bankruptcy case
filed against us.  Accordingly, amounts outstanding under the
Company’s senior secured term loan, Senior Notes and Senior Discount Notes have
been classified as current liabilities in the accompanying consolidated balance
sheet as of December 31, 2008.





Senior
Notes.  In August 2003,
Haights Cross issued $140.0 million aggregate principal amount of its
113/4% senior notes (“Senior
Notes”), in a transaction led by Bear Stearns & Co. Inc. On
December 10, 2004, Haights Cross issued an additional $30.0 million
aggregate principal amount of its Senior Notes in a transaction led by Bear
Stearns & Co. Inc. These Senior Notes, which were issued under the
existing senior note indenture, are pari passuwith, of the same
series as, and vote on any matter submitted to bondholders with, our existing
Senior Notes.  On August 15, 2008, the Company entered into the Credit
Agreement, repaid its old term loans in full, and repurchased and retired Senior
Notes in the aggregate principal amount of $31.2 million from certain of the
Lenders and their affiliates for a purchase price equal to the aggregate
principal amount of the notes retired, plus accrued but unpaid interest, if
any.  As of December 31, 2008, we had $138.8  million
aggregate principal amount of outstanding Senior Notes.





The
Senior Notes mature on August 15, 2011, are guaranteed by our subsidiaries
and Haights Cross Communications and are effectively subordinated to the Term
Loans to the extent of the collateral securing the Term Loans. The Senior Notes
contain certain restrictive covenants and debt incurrence tests. The Senior
Notes incur interest at a rate of 11 3/4% with payments due
semi-annually on February 15 and on August 15. Interest payments commenced
on February 15, 2004. The Senior Notes are redeemable on or after
August 15, 2008 at a premium of 105.875% of principal plus accrued
interest, which premium reduces over time.





12 1/2% Senior
Discount Notes.On February 2, 2004, Haights Cross Communications issued
$135.0 million aggregate principal amount at maturity of its 12 1/2% Senior
Discount Notes due 2011 (the “Senior Discount Notes”), for which it received net
proceeds of $73.7 million. The Senior Discount Notes mature on August 15, 2011,
with each Senior Discount Note having an accreted value of $1,000 at maturity.
The Senior Discount Notes began to accrue cash interest on February 1, 2009, and
the Company is be required to make cash interest payments every six months in
arrears on February 1 and August 1, commencing August 1, 2009. The Senior
Discount Notes are general unsecured obligations of Haights Cross Communications
and rank equally with all of Haights Cross Communications’ existing and future
unsecured senior indebtedness and are senior to all of its future subordinated
indebtedness. The Senior Discount Notes are effectively subordinated to all of
Haights Cross Communications’ existing and future secured indebtedness, to the
extent of the collateral securing such indebtedness. The Senior Discount Notes
are also structurally subordinated to all existing and future liabilities of our
subsidiaries, including our Term Loan, Senior Notes and trade payables. The
Senior Discount Notes rank pari passuin right of
payment to Haights Cross Communications’ guarantee of the Term Loans and the
Senior Notes. As of February 15, 2008 the Senior Discount Notes became
redeemable by the Company. The Senior Discount Notes contain customary
restrictive covenants and debt incurrence tests.




Application of Net Proceeds from
Oakstone Publishing Sale. 
 On June
30, 2008, we sold our Oakstone
Publishingbusiness for gross proceeds of $47.5 million, prior to the
escrow adjustment discussed in Note 4 “Dispositions”, consisting of
consideration received from the buyer of $42.8 million in cash and $4.8 million
placed in an escrow account to satisfy working capital adjustments and
indemnification obligations, if any. At December 31, 2008 $3.8 million remained
in the escrow account.  Under the indentures for the Senior Notes and
the Senior Discount Notes, within 365 days after the receipt of the net proceeds
from an asset sale, such as the Oakstone Publishingsale, we
may apply the net proceeds, at our option to (i) repay obligations under our
senior secured credit facilities, (ii) to acquire all or substantially all of
the assets of, or any capital stock or, another permitted business, (iii) to
make capital expenditures, or to acquire any other assets that are not
classified as current assets under generally accepted accounting principles and
that are used or useful in a permitted business. Any net proceeds that are not
applied or invested within 365 days as provided above will constitute excess
proceeds. If the aggregate excess proceeds were to exceed $10 million, the
indentures for our Senior Notes and Senior Discount Notes would require us to
offer to apply the excess proceeds to the repayment of our term loans and/or
such notes. Our Credit Agreement for our Term Loan further requires us to apply
such excess proceeds to the repayment of the Term Loan no later than the date
that is 30 days prior to the date on which we would have to apply such proceeds
as dictated by the indentures for the Senior Notes and Senior Discount Notes. As
of December 31, 2008, there was less than approximately $4 million in
excess of the $10 million that has not been otherwise applied as provided
above.  We anticipate that we will apply any such excess for other
permitted uses, such as capital expenditures, by the end of the 365 day
period.


Off
      Balance Sheet Arrangements





We have
no variable interest (otherwise known as “special purpose”) entities or off
balance sheet debt, other than as related to operating leases in the ordinary
course of business.





As of
December 31, 2008, due to the Term Loan  default described
above,  our Term Loans, Senior Discount Notes and Senior
Notes  are classified as a current liabilities in the accompanied
financial statement. The following table summarizes our contractual cash
obligations, including interest as of December 31, 2008.





Payments Due By PeriodContractual Obligations
                      
                      Less Than
                        1 Year
                      
                      
                      1-2 Years
                      
                      
                      3-5 Years
                      
                      
                      After
                        5 Years
                      
                      
                      Total(In
      thousands)Operating
      leases
                      
                      $
                      1,890
                      
                      
                      $
                      1,007
                      
                      
                      $
                      452
                      
                      
                      $
                      —
                      
                      
                      $
                      3,349Term
      Loan(1)
                      
                      
                      13,176
                      
                      
                      
                      126,248
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      139,42411
      3/4% Senior notes
                      
                      
                      16,309
                      
                      
                      
                      171,418
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      187,72712
      1/2% Senior discount notes
                      
                      
                      8,438
                      
                      
                      
                      169,406
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      177,844Total
                      
                      $
                      39,813
                      
                      
                      $
                      468,079
                      
                      
                      $
                      452
                      
                      
                      $
                      —
                      
                      
                      $
                      508,344


43





(1)
            Term
      Loan is a floating rate instruments. The interest for this schedule was
      calculated using the effective interest for the fourth quarter
      2008.





Liquidity
and Capital Resources





We have
relied primarily on our available cash balance to fund our working capital,
capital expenditures, business acquisition and debt service requirements. As of
December 31, 2008, we had an available cash balance of $47.4 million. During the
year ended December 31, 2008, we funded $19.0 million in pre-publication costs
for new product development, $1.2 million of capital expenditures for property
and equipment, and $32.4 million of cash interest payments. We have a working
capital deficiency of $320.5 million (including long term debt in default
classified as current of $381.8 million) as of December 31, 2008.





As of
December 31, 2008, we had total indebtedness outstanding of $381.8 million,
including our Term Loan in the principal amount of $108.2 million, Senior Notes
in the aggregate principal amount of $140.0 million and Senior Discount Notes in
the aggregate accreted amount of $133.6 million. See Note 15 to our Consolidated
Financial Statements. On August 15, 2008 we repaid the Term Loans with a
combination of the net proceeds of a new term loan in the principal amount of
$108.2 million and cash on hand, including net proceeds from our sale of our
Oakstone Publishingbusiness. In addition, on August 15, 2008 we repurchased from certain of
the Lenders and their affiliates and retired at par, $31.2 million in principal
amount of our Senior Notes. The Senior Notes which remain outstanding are
general unsecured obligations of our subsidiary, Haights Cross, and also are
guaranteed by our other subsidiaries and Haights Cross Communications. The
Senior Notes are effectively subordinated to the Term Loan to the extent of the
collateral securing the Term Loan. The Senior Discount Notes are general
unsecured obligations of Haights Cross Communications, ranking equally with all
of Haights Cross Communications’ senior debt. However, the Senior Discount Notes
are structurally subordinated to all existing and future liabilities of our
subsidiaries, including the Term Loans and the Senior Notes, and are effectively
subordinated to the Term Loan to the extent of the value of the collateral
securing the Term Loan.





The
accompanying financial statements have been prepared assuming that we will
continue as a going concern.  We have incurred a loss before
discontinued operations of $52.6 million for the year ended December 31, 2008,
have a stockholders deficit of $186.6 million and a working capital deficiency
of $320.5 million (including long term debt in default classified as current of
$381.8 million) as of December 31, 2008.




As of
April 15, 2009, we had not completed our audited financial statements as
required under our credit agreement for our senior secured term loan (the
“Credit Agreement”), or filed our Annual Report on Form 10-K with the Securities
and Exchange Commission (the “SEC”) as required under our indentures for our
Senior Notes and our Senior Discount Notes. As of May
29, 2009, we further had not completed our first quarter financial statements
required under the Credit Agreement or filed our Quarterly Report on Form 10-Q
with the SEC as required under the Indentures, resulting in further defaults
under the Credit Agreement and the Indentures.  These
defaultsunder the indentures also resulted in a cross-default under the Credit
Agreement. In connection with the audit of these financial statements, our
independent registered public accounting firm has included an explanatory
paragraph that indicates that the uncertainties discussedherein raise substantial
doubt about our ability to continue as a going concern. The issuance of this
report with a  going concern emphasis paragraph also violates a
separate covenant of the Credit Agreement. In addition to our existing defaults
under the Credit Agreement, there is also uncertainty that we are in
compliance with certain financial covenants in the Credit Agreement. The
Company has requested the Administrative Agent for the Credit Agreement to
indicate their agreement with certain items included in the Company’s
calculations of 2008 financial covenant compliance, however, the Administrative
Agent has not responded to the Company’s request.  Should the
Administrative Agent disagree with the Company’s financial covenant
calculations, this could result in non-compliance with financial covenants
during 2008 and continuing into 2009 which would constitute additional events of
default under the Credit Agreement.
 
 Rights
and remedies of the lenders under the Credit Agreement upon the occurrence of an
event of default include the right to charge a default interest rate, to declare
the loans outstanding to be due and payable, either in whole or in part,
immediately, and to foreclose on our assets securing our obligations under the
Credit Agreement, including without limitation taking control of our operating
subsidiaries through our pledge of the shares of those subsidiaries, and
blocking our access to cash held in deposit accounts subject to control
agreements (which includes substantially all of our cash) and sweeping that cash
into the Lenders account.  Further, provisions of the Credit Agreement
restrict our ability to make interest payments on our Senior Notes and our
Senior Discount Notes if we are in default under the Credit
Agreement.  We do not expect that our cash on hand and cash generated
from operations will be sufficient to fund the repayment of our senior secured
term loan should they be declared due.  In addition, an
acceleration of the senior secured term loan would cause defaults under the
Senior Notes and Senior Discount Notes. As of May
20, 2009, the outstanding principal balances under the Credit Agreement, the
Senior Notes and Senior Discount Notes were $108.2 million, $138.8
million  and $135.0 million, respectively.
 
 On April 15, 2009, weentered into a short-term forbearance agreement with the lenders under
the Credit Agreement relating to our financial reporting defaults, and since
that time  have entered into further forbearance agreements to extend
the applicable forbearance period, including a Fourth Forbearance Agreement and
Amendment No. 1 to Credit Agreement on May 7, 2009 (the “Forbearance Agreement
and Amendment”).  The Forbearance Agreement and Amendment also
provides for a forbearance relating to defaults, if any, resulting from our
failure to satisfy our financial covenants under our Credit Agreement for the
periods ended December 31, 2008 and March 31, 2009. Agreement and
Amendment; or (iii) the occurrence or existence of any event of default under
either of the indentures for the Senior Notes or the Senior Discount
Notes. Upon expiration of the forbearance period, the forbearance shall be
immediately and automatically terminated and be of no further force or effect,
which would permit the lenders to
  Under our
forbearance arrangements, commencing April 15, 2009, we agreed to pay the
Lenders the default rate of interest under the Credit Agreement, an increase of
2% over the stated variable rate.  Effective, May 7, 2009, the Credit
Agreement was amended to increase the base interest rate by 4% over the stated
variable rate (an increase of 2% over the previous default rate), such that the
applicable interest rate under the Credit Agreement is now, at our election,
either:
 
 ·
                the
      three month LIBOR rate (with a floor of 3.00%) plus 12.25% per annum,
      payable monthly (LIBOR rate loans had previously been payable quarterly);
      or
 ·
                the
      prime rate (with a floor of 5.25%) plus 11.0% per annum, payable
      monthly.
 
 In
consideration of this increase, the Lenders have agreed to waive any default
interest during the current forbearance period.  As of May 7, 2009,
our base rate of interest under the Credit Agreement was
15.25%.  Under certain circumstances, we are allowed to make an
election to have a portion of the interest, not to exceed 2% per annum,
paid-in-kind through an increase in the outstanding principal amount of the term
loans.
 
 On May 7,
2009, we received a notice from the trustees under the indentures for our Senior
Notes and Senior Discount Notes that our failure to timely file our SEC reports
constitutes a default under each of those indentures.  The indentures
provide that we have 60 days from receipt of this notice of default to cure
such default before an event of default occurs under the indentures. If an event
of default occurs under the indentures, then the trustee or the holders of 25%
in aggregate principal amount of the Senior Notes or the Senior Discount Notes,
respectively, may thereafter declare the applicable notes to be due and payable
immediately.


44





Our
Credit Agreement prohibits Haights Cross from making distributions to Haights
Cross Communications to pay interest on the Senior Discount Notes during a
default under our Credit Agreement.  As described above we are
currently in default under our Credit Agreement, though we have obtained a
short-term forbearance from our term loan lenders.  As of December 31,
2008, Haights Cross Communications had cash and cash equivalents of
approximately $4.0 million and has an interest payment due on August 1, 2009 of
$8.4 million.





We are in
discussions with our lenders to amend the Credit Agreement, in the context of a
broader debt restructuring. We have engaged a financial advisor to help
implement the Credit Agreement amendment and to explore other potential debt
restructuring alternatives.  If we are unable to restructure our debt
obligations, we do not believe that the lenders would extend their forbearance
and amend the Credit Agreement so as to permit us to make our August 2009
interest payments on our Senior Notes and our Senior Discount
Notes.  Moreover, our Senior Discount Notes are obligations of Haights
Cross Communications.  These obligations are not guaranteed by any of
our subsidiaries and none of our subsidiaries is under any obligation to make
payments to us. The ability of subsidiaries to make any payments to us are
limited by statutory and other contractual restrictions that would depend on the
earnings or financial condition of our subsidiaries and various business and
contractual considerations.  As a result, even if otherwise permitted
under the Credit Agreement, we may not have the ability to pay the interest or
any other obligations under our Senior Discount Notes. Our failure to make interest
payments is a default under the applicable indenture governing those notes and
entitles the trustee or the holders of an applicable percentage of those notes
(after an applicable grace period) to accelerate our obligations under the
notes. This would in turn also trigger further cross defaults under our Credit
Agreement and the indentures for the Senior Notes and Senior Discount
Notes.





Although
we intend to attempt to restructure our debt obligations under one or more of
these arrangements, given the current negative conditions in the economy
generally and the credit markets in particular, we cannot give any assurance
that we will be successful in restructuring our debt or finding alternative
financing arrangements on favorable terms, if at all. We do not have any
agreement with holders of our debt obligations to restructure these obligations
and cannot predict or provide assurance we will obtain such
agreement.  A default under one or more of our debt arrangements,
including the Credit Agreement or the indenture governing the Senior Notes or
the Senior Discount Notes, could cause cross defaults of other agreements, any
of which could have a material adverse effect on our business, financial
condition, liquidity and operations and raise substantial doubt about the our
ability to continue as a going concern.  If we are unable to extend
the forbearance under the Credit Agreement and restructure our debt obligations,
we may not be able to continue our operations, and we may be unable to avoid
filing for bankruptcy protection and/or have an involuntary bankruptcy case
filed against us.  Accordingly, amounts outstanding under the our
senior secured term loan, Senior Notes and Senior Discount Notes have been
classified as current liabilities in the accompanying consolidated balance sheet
as of December 31, 2008.





These
uncertainties raise substantial doubt about our ability to continue as a going
concern.  The financial statements do not include any adjustments that
might result from the outcome of these uncertainties.





Cash
Flows





Net cash
provided by operating activities was $11.1 million for the year ended
December 31, 2008 compared to $15.0 million of cash provided by
operating activities for the year ended December 31, 2007. The decline in
cash from operating activities was primarily due to a loss from continuing
operations in 2008 compared to an income in 2007 and an increase in the cash
used for working capital during 2008.





Cash
provided by investing activities increased to $29.6 million for the year
ended December 31, 2008 from cash used in investing activities
$19.6 million for the year ended December 31, 2007, primarily due to
proceeds from the sale of the Oakstone Publishingand Sundance Newbridgebusinesses. Cash
used in investing activities consists of expenditures for pre-publication costs
and property, plant and equipment which increased by $0.7 million from 2007 to
2008.





Cash used
in financing activities increased to $50.9 million for the year ended
December 31, 2008 from $3.4 million for year ended December 31,
2007. The period over period increase  primarily reflecting the net
cash used in the refinancing of our Term Loans and Senior Notes and an
additional $3.1 million of expenditures for deferred financing
costs.





Capital
Expenditures





Capital
expenditures — pre-publication costs relate to the costs incurred in the
development of new products. For the year ended December 31, 2008, we had
$19.0 million of pre-publication expenditures compared to
$18.0 million during the year ended December 31, 2007. We plan
expenditures of $17.9 million for pre-publication costs in 2009. This level
of spending is intended to support our successful core products and allow for
the development of new products.


45


Capital
expenditures — property and equipment relate to the purchase of tangible
fixed assets such as computers, software and leasehold improvements. For the
year ended December 31, 2008, we had $1.2 million of property,
building and equipment expenditures compared to $1.5 million for the year
ended December 31, 2007. We plan expenditures of $1.9 million for
property and equipment in 2009.





Seasonality
and Quarterly Results of Operations





Our
business is subject to moderate seasonal fluctuations. Our revenue and income
from operations have historically been higher during the second and third
calendar quarters. In addition, our quarterly results of operations have
fluctuated in the past and can be expected to continue to fluctuate in the
future, as a result of many factors, including, without limitation, general
economic trends; the traditional cyclical nature of educational material sales;
school, library and consumer purchasing decisions; the unpredictable funding of
schools and libraries by federal, state and local governments; consumer
preferences and spending trends; and the timing of introductions of new
products.





The
unaudited quarterly information includes all normal recurring adjustments that
management considers necessary for a fair presentation of the information shown.
Because of the seasonality of our business and other factors, results for any
interim period are not necessarily indicative of the results that may be
achieved for the full fiscal year.





Year Ended December 31, 2007First Quarter
                    
                    
                    Second Quarter
                    
                    
                    Third Quarter
                    
                    
                    Fourth Quarter(Dollars in thousands)Revenue
                    
                    $
                    40,184
                    
                    
                    $
                    40,850
                    
                    
                    $
                    47,583
                    
                    
                    $
                    41,986Income
      (loss) from operations
                    
                    
                    7,025
                    
                    
                    
                    6,885
                    
                    
                    
                    6,085
                    
                    
                    
                    4,535Net
      income (loss)(1)
                    
                    
                    (12,643
                    )
                    
                    
                    (14,406
                    )
                    
                    
                    107,013
                    
                    
                    
                    (16,414
                    )





Year Ended December 31, 2008First Quarter
                          
                          
                          Second Quarter
                          
                          
                          Third Quarter
                          
                          
                          Fourth Quarter(Dollars in thousands)Revenue
                          
                          $
                          41,291
                          
                          
                          $
                          44,719
                          
                          
                          $
                          49,077
                          
                          
                          $
                          35,992Income
      (loss) from operations(3)
                          
                          
                          4,743
                          
                          
                          
                          6,764
                          
                          
                          
                          10,451
                          
                          
                          
                          (34,942
                          )Net
      income(loss)(2)(3)
                          
                          
                          (9,892
                          )
                          
                          
                          16,338
                          
                          
                          
                          (591
                          )
                          
                          
                          (43,862
                          )








(1)
            Net
      income for the third quarter ended September 30, 2007 benefited from the
      $115.6 million gain on troubled debt
  restructuring.





(2)
            Net
      income for second quarter ended June 30, 2008 benefited from gain on sale
      of Oakstone
      Medical business.





(3)
            The
      fourth quarter 2008 loss from operations and net loss was impacted by a
      goodwill impairment charge of $31.6 million related to our Test Prep and Interventionsegment.





Inflation





Inflation
has not had a significant impact on our operations in the past three years.
Paper as a raw material is a meaningful component of many of our educational
products and direct mail materials, but the cost of printing services for our
4-color products and direct marketing materials represents the majority of the
total cost, and are not subject to the same inflationary factors as raw
materials, including paper. Significant increases in the price of paper took
place during 2005 and future increases may have an unfavorable effect on our
future results. To manage the potential effect of inflation on paper costs, we
negotiate arrangements of up to 1 year with brokers to ensure a supply of
needed paper at fixed pricing, and when advantageous, we purchase and inventory
raw material paper in advance of our production needs. Shipping and postage for
product distribution and direct mail solicitations is also one of our
significant expenses. While we distribute many of our products under a contract
with the United Parcel Service, shipping and postage costs increase periodically
and can be expected to increase in the future. If the costs of paper or postage
increase and we are unable to pass on these increased costs to our customers,
our operating results could be unfavorably affected.





Item 7A.Quantitative and
Qualitative Disclosures About Market Risk.





In the
normal course of business, our financial position and results of operations are
routinely subject to a variety of risks. These risks include market risk
associated with interest rate movements on borrowings and investments that we
make on variable interest rates.


46


We
regularly assess these market risks and have established policies and business
practices to protect against the adverse effect of these and other potential
exposures. We utilize cash from operations and short-term borrowings to fund our
working capital and investment needs. Cash balances are normally invested in
high-grade securities with terms shorter than three-month periods. Because of
the short-term nature of these investments, changes in interest rates would not
materially affect the fair value of these financial instruments.





As of
December 31, 2008, a hypothetical 10% change in interest costs of our
variable rate debt would change interest expense on an annual basis by
$1.1 million. As of December 31, 2008, a hypothetical 10% change in
the interest rate applicable to our investments would change interest income on
an annual basis by $0.1 million. These amounts are determined by
calculating the effect of a hypothetical interest rate change on our variable
rate debt and our investments, and without regard to the effects of other
possible occurrences, such as actions to mitigate these risks or changes in our
financial structure.





As of
December 31, 2008, we had $108.2 million in aggregate principal amount
outstanding under the Term Loans. The applicable interest rates on the Term
Loans, which are based on LIBOR plus an applicable spread, was 12.01%
..





The
functional currency of the company’s foreign operations is the local currency,
or UK pounds.  Accounts of foreign operations are translated into U.S.
dollars using year-end exchange rates for assets and liabilities and average
monthly exchange rates for revenue and expense accounts.  Adjustments
resulting from translation are included in accumulated other comprehensive
income (loss), a separate component of shareholders’ equity.  A 10%
unfavorable change in the UK-to-US dollar exchange rate would not materially
impact our December 31, 2008 balance sheet.  Gains and losses
resulting from foreign currency transactions are included in determining net
income (loss), and were immaterial for the years ended December 31, 2008, 2007
and 2006.





Item 8.Financial Statements and
Supplementary Data




INDEX
 Report
      of Ernst & Young LLP, Independent Registered Public Accounting
      Firm
                48Consolidated
      Balance Sheets
                49Consolidated
      Statements of Operations
                50Consolidated
      Statements of Changes in Stockholders’ Deficit
                51Consolidated
      Statements of Cash Flows
                52Notes
      to Consolidated Financial Statements
                532. Financial Statement
      SchedulesSchedule I —
      Condensed Financial Information
                81Schedule II —
      Valuation and Qualifying Account Summary
                82


47


Report
of Independent Registered Public Accounting Firm





The Board
of Directors and Stockholders of


Haights
Cross Communications, Inc.





We have
audited the accompanying consolidated balance sheets of Haights Cross
Communications, Inc. and subsidiaries (the “Company”) as of December 31,
2008 and 2007, and the related consolidated statements of operations, changes in
stockholders’ deficit, and cash flows for each of the three years in the period
ended December 31, 2008. Our audits also included the financial statement
schedules listed in the Index at Item 15(a). These financial statements and
schedules are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Haights Cross
Communications, Inc. and subsidiaries at December 31, 2008 and 2007, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2008, in conformity with
U.S. generally accepted accounting principles. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As more fully described in Note 1
to the consolidated financial statements, the Company has incurred a loss before
discontinued operations of $52.6 million for the year ended December 31, 2008,
has a stockholders deficit of $186.6 million and a working capital deficiency of
$320.5 million as of December 31, 2008.  In addition, the Company is
in default of its senior secured term loan agreement. The
Company entered into a short-term forbearance agreement with the senior secured
term loan lender, whereby the lenders have agreed to forbear exercising any
rights and remedies under the credit agreement until June 5, 2009, unless there
are events of default, other than events covered by the forbearance agreement,
or there is an existence of any event of default under either of the indentures
of the Company’s Senior Notes or Senior Discount Notes.  On May 7,
2009, the Company received a notice from the trustees under the indentures for
its Senior Notes and Senior Discount Notes that its failure to timely file its
SEC reports constitutes a default under each of those indentures.  The
indentures provide that the Company has 60 days from receipt of notice to cure
such default before an event of default occurs under the indentures. The
defaults under the senior secured term loan, if not resolved, prevent the
Company from paying interest on its Senior Notes and Senior Discount Notes in
August 2009 which would be events of default on such indentures and cause
additional cross defaults of other obligations.  Moreover, the Senior
Discount Notes are obligations of Haights Cross Communications.  These
obligations are not guaranteed by any of its subsidiaries and none of its
subsidiaries is under any obligation to make payments to the
Company.  The ability of subsidiaries to make any payments to the
Company are limited by statutory and other contractual restrictions that would
depend on the earnings or financial condition of its subsidiaries and various
business and contractual considerations.  As a result, even if
otherwise permitted under the senior secured term loan agreement, the Company
may not have the ability to pay interest or any other obligations under its
Senior Discount Notes.  Its failure to make interest payments would be
a default under the applicable indenture.There is uncertainty as to
whether the Company will be able to obtain waivers, amendments and/or
modifications to remedy the defaults under the agreements.  These
uncertainties raise substantial doubt about the Company’s ability to continue as
a going concern.  The financial statements do not include any
adjustments that might result from the outcome of these
uncertainties.





As
discussed in Note 14 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, effective
January 1, 2007.





/s/ Ernst
& Young LLP





New York,
New York


May 26,
2009


48


HAIGHTS
CROSS COMMUNICATIONS, INC. AND SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS




December 31,2008
                            
                            2007(In thousands, except per share data)ASSETSCurrent
      assets:Cash
      and cash equivalents
                            
                            $
                            47,414
                            
                            
                            $
                            61,784Accounts
      receivable, net
                            
                            
                            15,237
                            
                            
                            
                            21,444Inventory,
      net
                            
                            
                            18,852
                            
                            
                            
                            16,914Direct
      response advertising costs , net
                            
                            
                            2,547
                            
                            
                            
                            2,470Prepaid
      royalties
                            
                            
                            5,151
                            
                            
                            
                            6,005Prepaid
      expenses and other current assets
                            
                            
                            2,509
                            
                            
                            
                            2,004Escrow
      receivable (Note
      7)
                            
                            
                            3,836
                            
                            
                            
                            —Assets
      of discontinued operations
                            
                            
                            —
                            
                            
                            
                            51,035Total
      current assets
                            
                            
                            95,546
                            
                            
                            
                            161,656Pre-publication
      costs, net
                            
                            
                            36,242
                            
                            
                            
                            36,678Property
      and equipment, net
                            
                            
                            6,934
                            
                            
                            
                            7,878Goodwill
                            
                            
                            83,401
                            
                            
                            
                            115,001Intangible
      assets, net
                            
                            
                            14,601
                            
                            
                            
                            16,805Deferred
      financing costs, net
                            
                            
                            6,260
                            
                            
                            
                            6,499Other
      assets
                            
                            
                            392
                            
                            
                            
                            255Total
      assets
                            
                            $
                            243,376
                            
                            
                            $
                            344,772LIABILITIES
      AND STOCKHOLDERS’ DEFICITCurrent
      liabilities:Accounts
      payable and accrued liabilities
                            
                            $
                            23,817
                            
                            
                            $
                            25,311Accrued
      interest
                            
                            
                            6,161
                            
                            
                            
                            8,948Deferred
      subscription revenue
                            
                            
                            4,054
                            
                            
                            
                            4,798Term
      loans (Note
      15)
                            
                            
                            108,200
                            
                            
                            
                            124,850113⁄4% senior
      notes (Note
      15)
                            
                            
                            139,999
                            
                            
                            
                            —121⁄2% senior
      discount notes (Note
      15)
                            
                            
                            133,620
                            
                            
                            
                            —Liabilities
      of discontinued operations
                            
                            
                            215
                            
                            
                            
                            23,128Total
      current liabilities
                            
                            
                            416,066
                            
                            
                            
                            187,035Long
      term liabilities:113⁄4% senior
      notes
                            
                            
                            —
                            
                            
                            
                            171,670121⁄2% senior
      discount notes
                            
                            
                            —
                            
                            
                            
                            118,362Deferred
      tax liability
                            
                            
                            13,798
                            
                            
                            
                            14,119Other
      long term liabilities
                            
                            
                            95
                            
                            
                            
                            415Total
      long term liabilities
                            
                            
                            13,893
                            
                            
                            
                            304,566Commitments
      (Note 18)Stockholders’
      deficit:Common
      stock, $.0003 par value, 30,000,000 shares authorized,
      9,958,112 shares issued and outstanding at December 31, 2008 and
      9,966,229 shares issued and outstanding at December 31,
      2007
                            
                            
                            3
                            
                            
                            
                            3Accumulated
      other comprehensive income
                            
                            
                            (1,237
                            )
                            
                            
                            755Accumulated
      deficit
                            
                            
                            (185,349
                            )
                            
                            
                            (147,587
                            )Total
      stockholders’ deficit
                            
                            
                            (186,583
                            )
                            
                            
                            (146,829
                            )Total
      liabilities and stockholders’ deficit
                            
                            $
                            243,376
                            
                            
                            $
                            344,772




See
accompanying notes.


49


HAIGHTS
CROSS COMMUNICATIONS, INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF OPERATIONS





Year Ended
December 31,2008
                
                
                2007
                
                
                2006(In
      thousands)Revenue
                
                $
                171,079
                
                
                $
                170,603
                
                
                $
                155,237Costs
      and expenses:Cost
      of goods sold, exclusive of depreciation expense and amortization of
      pre-publication costs
                
                
                47,441
                
                
                
                46,607
                
                
                
                42,905Marketing
      and sales
                
                
                40,012
                
                
                
                38,351
                
                
                
                34,626Fulfillment
      and distribution
                
                
                12,510
                
                
                
                12,268
                
                
                
                11,094General
      and administrative
                
                
                26,892
                
                
                
                29,104
                
                
                
                21,464Restructuring
      charges
                
                
                2,008
                
                
                
                1,172
                
                
                
                407Amortization
      of pre-publication costs
                
                
                19,359
                
                
                
                14,279
                
                
                
                12,043Goodwill
      impairment charges
                
                
                31,600
                
                
                
                —
                
                
                
                10,419Asset
      impairment charges
                
                
                —
                
                
                
                565
                
                
                
                —Depreciation
      expense and amortization of intangibles
                
                
                4,241
                
                
                
                3,727
                
                
                
                3,696Total
      costs and expenses
                
                
                184,063
                
                
                
                146,073
                
                
                
                136,654(Loss)
      income from operations
                
                
                (12,984
                )
                
                
                24,530
                
                
                
                18,583Other
      (income) expenses:Interest
      expense
                
                
                44,747
                
                
                
                61,772
                
                
                
                65,787Interest
      income
                
                
                (1,394
                )
                
                
                (3,173
                )
                
                
                (2,921
                )Amortization
      deferred financing costs
                
                
                3,298
                
                
                
                3,423
                
                
                
                3,381Gain
      on troubled debt restructuring
                
                
                —
                
                
                
                (115,489
                )
                
                
                —Other
      (income)expense
                
                
                (1,002
                )
                
                
                250
                
                
                
                9Total
      other expenses (income)
                
                
                45,649
                
                
                
                (53,217
                )
                
                
                66,256(Loss)
      income before income taxes and discontinued operations
                
                
                (58,633
                )
                
                
                77,747
                
                
                
                (47,673
                )(Provision)
      benefit for income taxes
                
                
                6,075
                
                
                
                (3,508
                )
                
                
                (2,086
                )(Loss)
      income before discontinued operations
                
                
                (52,558
                )
                
                
                74,239
                
                
                
                (49,759
                )Discontinued
      operations:Income
      (loss)from operations of discontinued operations, net of tax
      expense  of  $0.3 million and $0.5 million in 2008 and
      2007, respectively and tax benefit of $3.7 million in 2006
                
                
                345
                
                
                
                (10,567
                )
                
                
                (21,960
                )Income
      (loss) on disposal of discontinued operations, net of taxes of $2.0
      million in 2008
                
                
                14,206
                
                
                
                (122
                )
                
                
                (1,136
                )Total
      income (loss)  from discontinued operations
                
                
                14,551
                
                
                
                (10,689
                )
                
                
                (23,096
                )Net
      income (loss)
                
                
                (38,007
                )
                
                
                63,550
                
                
                
                (72,855
                )Gain
      on recapitalization
                
                
                —
                
                
                
                34,353
                
                
                
                —Preferred
      stock dividends and accretion
                
                
                —
                
                
                
                (2,182
                )
                
                
                (3,334
                )Net
      income (loss) available to common stockholders
                
                $
                (38,007
                )
                
                $
                95,721
                
                
                $
                (76,189
                )





See
accompanying notes.


50


HAIGHTS
CROSS COMMUNICATIONS, INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT





AccumulatedOther
                      
                      
                      
                      
                      
                      TotalCommon Stock
                      
                      
                      Comprehensive
                      
                      
                      Accumulated
                      
                      
                      Stockholders’Shares
                      
                      
                      Amount
                      
                      
                      Income
                      
                      
                      Deficit
                      
                      
                      Deficit(In
      thousands)Balance
      as of January 1, 2006
                      
                      
                      20,008
                      
                      
                      $
                      20
                      
                      
                      $
                      284
                      
                      
                      $
                      (228,425
                      )
                      
                      $
                      (228,121
                      )Comprehensive
      loss: Net loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (72,855
                      )
                      
                      
                      (72,855
                      )Foreign
      currency translation adjustment
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      374
                      
                      
                      
                      
                      
                      
                      
                      374Total
      comprehensive loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (72,481
                      )Stock
      based compensation expense
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      7
                      
                      
                      
                      7Issuances
      pursuant to stock options
                      
                      
                      5
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      11
                      
                      
                      
                      11Preferred
      stock dividends and accretion
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (3,334
                      )
                      
                      
                      (3,334
                      )Balance
      as of December 31, 2006
                      
                      
                      20,013
                      
                      
                      $
                      20
                      
                      
                      $
                      658
                      
                      
                      $
                      (304,596
                      )
                      
                      $
                      (303,918
                      )Comprehensive
      loss: Net loss
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      63,550
                      
                      
                      
                      63,550Foreign
      currency translation adjustment
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      97
                      
                      
                      
                      —
                      
                      
                      
                      97Total
      comprehensive loss
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      63,647Recapitalization
      transactions
                      
                      
                      (10,384
                      )
                      
                      
                      (11
                      )
                      
                      
                      —
                      
                      
                      
                      59,746
                      
                      
                      
                      59,735Stock
      based compensation expense
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      4
                      
                      
                      
                      4Issuances
      pursuant to stock options
                      
                      
                      337
                      
                      
                      
                      1
                      
                      
                      
                      —
                      
                      
                      
                      1,531
                      
                      
                      
                      1,532Change
      in par value of common stock
                      
                      
                      —
                      
                      
                      
                      (7
                      )
                      
                      
                      —
                      
                      
                      
                      7
                      
                      
                      
                      —Gain
      on recapitalization
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      34,353
                      
                      
                      
                      34,353Preferred
      stock dividends and accretion
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (2,182
                      )
                      
                      
                      (2,182
                      )Balance
      as of December 31, 2007
                      
                      
                      9,966
                      
                      
                      
                      3
                      
                      
                      
                      755
                      
                      
                      
                      (147,587
                      )
                      
                      
                      (146,829
                      )Comprehensive
      income: Net loss
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (38,007
                      )
                      
                      
                      (38,007
                      )Foreign
      currency translation adjustment
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (1,992
                      )
                      
                      
                      —
                      
                      
                      
                      (1,992
                      )Total
      comprehensive loss
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (39,999
                      )Stock
      based compensation expense
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      245
                      
                      
                      
                      245Forfeitures
      of restricted stock
                      
                      
                      (8
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Balance
      as of December 31, 2008
                      
                      
                      9,958
                      
                      
                      $
                      3
                      
                      
                      $
                      (1,237
                      )
                      
                      $
                      (185,349
                      )
                      
                      $
                      (186,583
                      )





See
accompanying notes.


51


HAIGHTS
CROSS COMMUNICATIONS, INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year Ended
December 31,2008
                    
                    
                    2007
                    
                    
                    2006(In
      thousands)Operating
      activities from Continuing OperationsNet
      (loss) income from continuing operations
                    
                    $
                    (52,558
                    )
                    
                    $
                    74,239
                    
                    
                    $
                    (49,759
                    )Adjustments
      to reconcile net income (loss) from continuing operations to net cash
      provided by operating activities:Gain
      on troubled debt restructuring — non-cash
                    
                    
                    —
                    
                    
                    
                    (115,489
                    )
                    
                    
                    —Non-cash
      interest expense
                    
                    
                    15,257
                    
                    
                    
                    28,576
                    
                    
                    
                    33,546Allowance
      for doubtful accounts
                    
                    
                    2,988
                    
                    
                    
                    2,605
                    
                    
                    
                    3,958Allowance
      for obsolescence
                    
                    
                    1,753
                    
                    
                    
                    2,487
                    
                    
                    
                    1,735Depreciation
      and amortization of property and equipment, pre-publication costs and
      intangibles
                    
                    
                    23,600
                    
                    
                    
                    18,006
                    
                    
                    
                    15,739Amortization
      of deferred financing costs
                    
                    
                    3,298
                    
                    
                    
                    3,423
                    
                    
                    
                    3,382Amortization
      of premium on 113⁄4% senior notes
                    
                    
                    (471
                    )
                    
                    
                    (476
                    )
                    
                    
                    (484
                    )Goodwill
      impairment charges
                    
                    
                    31,600
                    
                    
                    
                    
                    
                    
                    
                    10,419Asset
      impairment charges
                    
                    
                    —
                    
                    
                    
                    565
                    
                    
                    
                    —Income
      tax benefit allocation — non-cash
                    
                    
                    (6,409
                    )
                    
                    
                    —
                    
                    
                    
                    —Deferred
      taxes — non-cash
                    
                    
                    (321
                    )
                    
                    
                    3,039
                    
                    
                    
                    1,748Foreign
      exchange transaction gain
                    
                    
                    (623
                    )
                    
                    
                    —
                    
                    
                    
                    —Other
      non-operating income — non-cash
                    
                    
                    (1,066
                    )
                    
                    
                    2,218
                    
                    
                    
                    11Changes
      in operating assets and liabilities:Accounts
      receivable
                    
                    
                    3,218
                    
                    
                    
                    (6,275
                    )
                    
                    
                    (5,519
                    )Inventory
                    
                    
                    (3,624
                    )
                    
                    
                    (779
                    )
                    
                    
                    (4,867
                    )Prepaid
      expenses, royalty advances and other current assets
                    
                    
                    375
                    
                    
                    
                    (1,079
                    )
                    
                    
                    (931
                    )Direct
      response advertising costs
                    
                    
                    (77
                    )
                    
                    
                    (405
                    )
                    
                    
                    (292
                    )Other
      assets
                    
                    
                    (136
                    )
                    
                    
                    4
                    
                    
                    
                    (17
                    )Accounts
      payable, accrued and other liabilities
                    
                    
                    (2,223
                    )
                    
                    
                    3,034
                    
                    
                    
                    1,846Accrued
      interest
                    
                    
                    (2,787
                    )
                    
                    
                    (91
                    )
                    
                    
                    168Deferred
      subscription revenue
                    
                    
                    (743
                    )
                    
                    
                    1,352
                    
                    
                    
                    718Net
      cash provided by operating activities from continuing
      operations
                    
                    
                    11,051
                    
                    
                    
                    14,954
                    
                    
                    
                    11,401Investing
      activities from Continuing OperationsAdditions
      to pre-publication costs
                    
                    
                    (19,003
                    )
                    
                    
                    (17,985
                    )
                    
                    
                    (17,108
                    )Additions
      to property and equipment
                    
                    
                    (1,248
                    )
                    
                    
                    (1,545
                    )
                    
                    
                    (1,506
                    )Additions
      to intangible assets
                    
                    
                    (27
                    )
                    
                    
                    (29
                    )
                    
                    
                    (16
                    )Proceeds
      from sale of business
                    
                    
                    48,716
                    
                    
                    
                    —
                    
                    
                    
                    500Proceeds
      from sale of assets
                    
                    
                    1,183
                    
                    
                    
                    6
                    
                    
                    
                    —Net
      cash provided by (used in) investing activities from continuing
      operations
                    
                    
                    29,621
                    
                    
                    
                    (19,553
                    )
                    
                    
                    (18,130
                    )Financing
      activities from Continuing OperationsTransaction
      cost-troubled debt restructuring and recapitalization
                    
                    
                    —
                    
                    
                    
                    (2,038
                    )
                    
                    
                    —Repayment
      of senior secured term loan
                    
                    
                    (124,850
                    )
                    
                    
                    (1,300
                    )
                    
                    
                    (1,300
                    )Repayment
      of principal – senior notes
                    
                    
                    (31,200
                    )
                    
                    
                    —
                    
                    
                    
                    —Proceeds
      from New Term loans
                    
                    
                    108,200
                    
                    
                    
                    —
                    
                    
                    
                    —Proceeds
      from exercise of stock options
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    11Additions
      to deferred financing costs
                    
                    
                    (3,059
                    )
                    
                    
                    (88
                    )
                    
                    
                    (104
                    )Net
      cash used in financing activities from continuing
    operations
                    
                    
                    (50,909
                    )
                    
                    
                    (3,426
                    )
                    
                    
                    (1,393
                    )Effect
      of exchange rates on cash
                    
                    
                    (1,046
                    )
                    
                    
                    89
                    
                    
                    
                    245Cash
      flows of discontinued operationsOperating
      cash flows
                    
                    
                    (808
                    )
                    
                    
                    (5,250
                    )
                    
                    
                    14,236Investing
      cash flows
                    
                    
                    (2,279
                    )
                    
                    
                    5,377
                    
                    
                    
                    (6,104
                    )Net
      cash (used in) provided by discontinued operations
                    
                    
                    (3,087
                    )
                    
                    
                    (127
                    )
                    
                    
                    8,132Net
      (decrease) increase in cash and cash equivalents
                    
                    
                    (14,370
                    )
                    
                    
                    (8,063
                    )
                    
                    
                    255Cash
      and cash equivalents at beginning of year
                    
                    
                    61,784
                    
                    
                    
                    69,847
                    
                    
                    
                    69,592Cash
      and cash equivalents at end of year
                    
                    $
                    47,414
                    
                    
                    $
                    61,784
                    
                    
                    $
                    69,847Supplemental
      disclosureCash
      paid during the year for:Interest
                    
                    $
                    32,375
                    
                    
                    $
                    32,885
                    
                    
                    $
                    32,102Income
      taxes
                    
                    $
                    780
                    
                    
                    $
                    371
                    
                    
                    $
                    523


See
accompanying notes.


52


HAIGHTS
CROSS COMMUNICATIONS, INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


December 31,
2008


(In
thousands)





1.  Nature
of Business and Organization





Haights
Cross Communications, Inc., a Delaware corporation (together with its
subsidiaries, “we,” “our,” the “Company” or “Haights Cross Communications”),
whose predecessor was formed in January 1997, is a holding company that conducts
all of its operations through its direct and indirect subsidiaries, including,
without limitation, its wholly-owned subsidiary Haights Cross Operating Company
(“Haights Cross”). Between November 2007 and January 2008, we initiated a sales
process for all of our operating businesses. On June 30, 2008 we sold the
subsidiary that contained our Oakstone Publishing business,
which operated our Medical Education segment. On August 27, 2008, we sold the
subsidiary that contained our Sundance Newbridgebusiness,
which operated our K-12 Supplemental Education segment. As a result of these
dispositions, the results of Oakstone Publishingand Sundance Newbridgehave been
reclassified as discontinued operations for all periods presented in the
consolidated financial statements. On July 1, 2008 we announced the suspension
of our sale process to offer for sale our Triumph Learningand Recorded Books
businesses.





The
Company is a developer and publisher of products for the K-12 Education and
library markets. The Company’s products include state-specific test preparation
materials, skills assessment and intervention books and unabridged audiobooks.
The Company’s products are sold primarily to schools and libraries.





The
Company’s business is subject to moderate seasonal fluctuations as a result of
many factors, including general economic trends; the traditional cyclical nature
of educational material sales; school, library, and consumer purchasing
decisions; the unpredictable funding of schools and libraries by federal, state,
and local governments; consumer preferences and spending trends; and the timing
of introductions of new products. The Company’s revenue and income from
operations have historically been higher during the second and third calendar
quarters.





The
following summarizes the Company’s two segments:





•
            Test-prep and Intervention:We publish state-specific test preparation materials for K-12
      competency tests under our well-recognized imprints and brands such as
      Triumph Learning,
      Coachand Buckle Down. We also
      offer skills assessment products and intervention materials for struggling
      math and reading students under the widely known Options Publishingimprint.





•
            Library:We publish
      unabridged audiobooks and other products for adults and children under the
      Recorded Booksbrand, and market these titles, as well as selected non-proprietary
      audiobooks and other products, primarily to public libraries and
      schools.





Basis
of Presentation





Going
Concern Considerations





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  The Company has incurred a loss
before discontinued operations of $52.6 million for the year ended December 31,
2008, has a stockholders deficit of $186.6 million and a working capital
deficiency of $320.5 million (including long term debt in default classified as
current of $381.8 million) as of December 31, 2008.  As of April 15,
2009, the Company had not completed its audited financial statements as required
under its credit agreement for its senior secured term loan (the “Credit
Agreement”), or filed its Annual Report on Form 10-K with SEC as required
under its indentures for its Senior Notes and its Senior Discount
Notes.  As of May
29, 2009, we further had not completed our first quarter financial statements
required under the Credit Agreement or filed our Quarterly Report on Form 10-Q
with the SEC as required under the Indentures, resulting in further defaults
under the Credit Agreement and the Indentures.  These
defaultsunder the indentures also resulted in a cross-default under the Credit
Agreement. In connection with the audit of these financial statements, the
Company’s independent registered public accounting firm has included an
explanatory paragraph that indicates that the uncertainties discussedherein raise substantial
doubt about the Company’s ability to continue as a going concern. The issuance
of this report with a  going concern emphasis paragraph also violates
a separate covenant of the Credit Agreement. In addition to the Company’s
existing defaults under the Credit Agreement, there is also uncertainty that the
Company was in compliance with certain financial covenants in the Credit
Agreement.  The
Company has requested the Administrative Agent for the Credit Agreement to
indicate their agreement with certain items included in the Company’s
calculations of 2008 financial covenant compliance, however, the Administrative
Agent has not responded to the Company’s request.  Should the
Administrative Agent disagree with the Company’s financial covenant
calculations, this could result in non-compliance with financial covenants
during 2008 and continuing into 2009 which would constitute additional events of
default under the Credit Agreement.


53





Rights
and remedies of the lenders under the Credit Agreement upon the occurrence of an
event of default include the right to charge a default interest rate, to declare
the loans outstanding to be due and payable, either in whole or in part,
immediately, and to foreclose on our assets securing our obligations under the
Credit Agreement, including without limitation taking control of our operating
subsidiaries through our pledge of the shares of those subsidiaries, and
blocking our access to cash held in deposit accounts subject to control
agreements (which includes substantially all of our cash) and sweeping that cash
into the Lenders account. Further, provisions of the Credit Agreement restrict
the Company’s ability to make interest payments on its Senior Notes and its
Senior Discount Notes if the Company is in default under the Credit
Agreement.  The Company does not expect that its cash on hand and cash
generated from operations will be sufficient to fund the repayment of our senior
secured term loan should they be declared due.  In addition, an
acceleration of the senior secured term loan would cause defaults under the
Senior Notes and Senior Discount Notes. As of May
20, 2009, the outstanding principal balances under the Credit Agreement, the
Senior Notes and Senior Discount Notes were $108.2 million, $138.8
million  and $135.0 million, respectively.





On April 15, 2009, the
Companyentered into a short-term forbearance agreement with the lenders
under the Credit Agreement relating to its financial reporting defaults, and
since that time has entered into further forbearance agreements to extend the
applicable forbearance period, including a Fourth Forbearance Agreement and
Amendment No. 1 to Credit Agreement on May 7, 2009 (the “Forbearance Agreement
and Amendment”).  The Forbearance Agreement and Amendment also
provides for a forbearance relating to defaults, if any, resulting from the
Company’s failure to satisfy its financial covenants under the Credit Agreement
for the periods ended December 31, 2008 and March 31, 2009. Agreement and Amendment;
or (iii) the occurrence or existence of any event of default under either of the
indentures for the Senior Notes or the Senior Discount Notes.  Upon
expiration of the forbearance period, the forbearance shall be immediately and
automatically terminated and be of no further force or effect, which would
permit the lenders to





Under the
forbearance arrangements, commencing April 15, 2009, the Company agreed to pay
the Lenders the default rate of interest under the Credit Agreement, an increase
of 2% over the stated variable rate.  Effective, May 7, 2009, the
Credit Agreement was amended to increase the base interest rate by 4% over the
stated variable rate (an increase of 2% over the previous default rate), such
that the applicable interest rate under the Credit Agreement is now, at its
election, either:
 
 ·
              the
      three month LIBOR rate (with a floor of 3.00%) plus 12.25% per annum,
      payable monthly (LIBOR rate loans had previously been payable quarterly);
      or
 ·
              the
      prime rate (with a floor of 5.25%) plus 11.0% per annum, payable
      monthly.
 
 In
consideration of this increase, the Lenders have agreed to waive any default
interest during the current forbearance period.  As of May 7, 2009,
the base rate of interest under the Credit Agreement was
15.25%.  Under certain circumstances, the Company is allowed to make
an election to have a portion of the interest, not to exceed 2% per annum,
paid-in-kind through an increase in the outstanding principal amount of the term
loans.
 
 On May 7,
2009, the Company received a notice from the trustees under the indentures for
our Senior Notes and Senior Discount Notes that its failure to timely file our
SEC reports constitutes a default under each of those indentures.  The
indentures provide that the Company has 60 days from receipt of this notice
of default to cure such default before an event of default occurs under the
indentures. If an event of default occurs under the indentures, then the trustee
or the holders of 25% in aggregate principal amount of the Senior Notes or the
Senior Discount Notes, respectively, may thereafter declare the applicable notes
to be due and payable immediately.
  The
Company is in discussions with the lenders to amend the Credit Agreement, in the
context of a broader debt restructuring. The Company has engaged a financial
advisor to help implement the Credit Agreement amendment and to explore other
potential debt restructuring alternatives.  If the Company is unable
to restructure its debt obligations, it does not believe that the lenders would
extend their forbearance and amend the Credit Agreement so as to permit it to
make its August 2009 interest payments on its Senior Notes and Senior Discount
Notes.  Moreover, the Senior Discount Notes are obligations of Haights
Cross Communications.  These obligations are not guaranteed by any of
its subsidiaries and none of its subsidiaries is under any obligation to make
payments to the Company. The ability of subsidiaries to make any payments to the
Company are limited by statutory and other contractual restrictions that would
depend on the earnings or financial condition of its subsidiaries and various
business and contractual considerations.  As a result, even if
otherwise permitted under the Credit Agreement, the Company may not have the
ability to pay the interest or any other obligations under its Senior Discount
Notes. Its failure
to make interest payments is a default under the applicable indenture governing
those notes and entitles the trustee or the holders of an applicable percentage
of those notes (after an applicable grace period) to accelerate its obligations
under the notes. This would in turn also trigger further cross defaults under
our Credit Agreement and the indentures for the Senior Notes and Senior Discount
Notes.


Although
the Company intends to attempt to restructure its debt obligations under one or
more of these arrangements, given the current negative conditions in the economy
generally and the credit markets in particular, the Company cannot give any
assurance that it will be successful in restructuring its debt or finding
alternative financing arrangements on favorable terms, if at all. The Company
does not have any agreement with holders of its debt obligations to restructure
these obligations and cannot predict or provide assurance it will obtain such
agreement.  A default under one or more of the Company’s debt
arrangements, including the Credit Agreement or the indenture governing the
Senior Notes or the Senior Discount Notes, could cause cross defaults of other
agreements, any of which could have a material adverse effect on the Company’s
business, financial condition, liquidity and operations and raise substantial
doubt about the Company’s ability to continue as a going concern.  If
the Company is unable to extend the forbearance under the Credit Agreement and
restructure its debt obligations, the Company may not be able to continue its
operations, and the Company may be unable to avoid filing for bankruptcy
protection and/or have an involuntary bankruptcy case filed against
it.  Accordingly, amounts outstanding under the Company’s senior
secured term loan, Senior Notes and Senior Discount Notes have been classified
as current liabilities in the accompanying consolidated balance sheet as of
December 31, 2008.





These
uncertainties raise substantial doubt about the Company’s ability to continue as
a going concern.  The financial statements do not include any
adjustments that might result from the outcome of these uncertainties. See “Risk
Factors” and “Management’s Discussion and Analysis of Financial Conditions and
Results of Operations – Liquidity and Capital Resources.





2.  Summary
of Significant Accounting Policies





Principles
of Consolidation





The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and include the
accounts of the Company and its subsidiaries. All material intercompany accounts
and transactions have been eliminated in consolidation. On June 30, 2008 we sold
the subsidiary that contained our Oakstone Publishing business,
which operated our Medical Education segment. On August 27, 2008 we sold the
subsidiary that contained our Sundance Newbridgebusiness,
which operated our K-12 Supplemental Education segment. As a result of these
dispositions, the results of Oakstone Publishingand Sundance Newbridgehave been
reclassified as discontinued operations for all periods presented in the
consolidated financial statements.


54


Use
of Estimates





The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. These estimates and assumptions include
management’s judgment related to the collectability of accounts receivable,
sales returns reserves, inventory obsolescence reserves, the lives and
recoverability of direct response advertising costs, the lives and
recoverability of pre-publication costs, deferred tax valuation allowances,
useful lives of fixed assets and long-lived assets and impairments of goodwill
and long lived assets. Actual results may differ from those
estimates.





Concentrations
of Credit Risk





Concentrations
of credit risk with respect to trade accounts receivable are limited due to the
number of entities comprising the Company’s customer base. The Company performs
ongoing credit evaluations of its customers’ financial condition and does not
require collateral. The Company maintains reserves for credit losses, and such
losses have been within management’s expectations. Customers are concentrated in
the library and educational markets of the United States of America. No single
customer accounted for more than 4% of revenue.





Fair
Value and Credit Risk of Financial Instruments





All
current assets and liabilities are carried at cost, which approximates fair
value due to the short-term maturities of those instruments. The fair value of
the Company’s 113⁄4% Senior Notes and 121⁄2% Senior Discount Notes are
estimated based on market quotes. The Company’s Term Loan is a floating rate
instrument and fair value is estimated based on market quotes.




Estimated
fair values of the Company’s long term debt instruments are as
follows:





December 31, 2008Carrying Value
                
                
                Fair ValueTerm
      Loan
                
                $
                108,200
                
                
                $
                86,560113⁄4% senior
      notes
                
                
                139,999
                
                
                
                85,708121⁄2% senior
      discount notes
                
                
                133,620
                
                
                
                33,750


55


Cash
Equivalents





The
Company considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.





Revenue
and Expense Recognition





We
recognize revenue from books and other non-subscription sales when the product
is shipped to the customer. Product shipment terms are FOB shipping point and
collectability is reasonably assured at the time of shipment. Subscription
revenue is deferred and recognized as the subscription is fulfilled. Short term
rental revenue for audiobooks is recognized at the time of the rental and
audiobook lease revenue is deferred and recognized ratably over the term of the
lease. Revenue is recognized net of provisions for estimated returns. These
estimated return provisions are based upon historical experience and other
company and specific customer factors including management’s expectations.
Actual return experience is monitored and any significant change from
management’s expectations results in an adjustment in the reserve rates utilized
to estimate returns.





Cost of
goods sold is recognized when the related revenue is recognized and primarily
consists of paper, media, printing, binding and duplication and author royalty
expenses.





Shipping
and Handling





Shipping
and handling costs are included in fulfillment and distribution expenses, while
fees charged to customers for shipping and handling are included in revenue in
the accompanying consolidated statements of operations. The Company incurred
$4.9 million, $5.1 million and $4.6 million in shipping and handling
costs for the years ended December 31, 2008, 2007 and 2006, respectively.
Shipping and handling revenue included in the accompanying consolidated
financial statement for the years ended 31, 2008, 2007 and 2006, were $6.9
million, $7.8 million and $7.0 million, respectively.





Inventory
and Related Obsolescence





Inventory
consists primarily of books, CDs and audiocassettes, which are valued at the
lower of cost or market, as determined by the first-in, first-out method.
Obsolescence reserves on slow-moving or excess merchandise are recorded, where
applicable, based upon regular reviews of inventories on-hand and estimated
future demand. If a book is taken out of print, superseded by a later version or
ceases to sell, it is considered obsolete and all related inventory amounts are
written-off. If quantities of a book exceed expected future demand based on
historical sales of that title, the excess inventory is also written
off.





Prepaid
Royalties





Royalty
advances are recorded as cash is advanced to authors and are expensed as related
revenues are earned by authors or when future recovery appears
doubtful.





Advertising





Advertising
expenses relating to book and non-subscription publishing operations are
expensed as incurred. The Company incurred $0.9 million, $0.8 million
and $0.7 million in advertising expenses for the years ended
December 31, 2008, 2007 and 2006, respectively, which is included in
marketing and sales expenses in the accompanying consolidated statements of
operations. The Company incurred $6.9 million, $3.2 million and
$4.2 million for amortization of direct response advertising costs for the
years ended December 31, 2008, 2007 and 2006, respectively. Amortization of
direct response advertising costs is included in marketing and sales expense in
the accompanying consolidated statements of operations.





Direct
response advertising costs are incurred to solicit sales from potential new
customers who can be shown to have responded specifically to an advertising
campaign that results in probable future economic benefits. We have two types of
direct response advertising costs: direct mail and catalogs. We are able to
track the revenue, costs and profitability from these advertising efforts at the
campaign level. Both the direct mail and catalog campaign costs are capitalized
and the net recoverability is evaluated on a product-by-product basis at the
campaign level. The life and amortization rate are determined by historical
experience with similar products at the same business. Direct mail costs are
amortized over lives ranging up to 12 months.





Catalog
costs are amortized over the estimated life of the catalog, generally between
one and eighteen months with greater than 90% of catalog costs being amortized
in the first year. The estimated life and amortization rate are based on the
sales experience of similar catalogs at the same business segment. If a direct
mail solicitation or catalog is determined to be unprofitable, all remaining
capitalized costs are written-off at that time.


56


Prepaid
marketing materials include printed promotional marketing pieces which are
initially capitalized and expensed upon mailing and are included in prepaid
expenses and other current assets in the accompanying consolidated balance
sheets.





Pre-Publication
Costs





We
capitalize the costs associated with the development of our new products. These
costs primarily include author fees under work-for-hire agreements (excluding
royalties), the costs associated with artwork, photography and master tapes,
other external creative costs, internal editorial staff costs and pre-press
costs that are directly attributable to the products. These costs are tracked at
the product title or product series level and are amortized beginning in the
month the product is introduced to market. These costs are amortized over the
estimated life cycle of the book or product, based upon the sales performance of
similarly existing products that are sold in the same business segment, for
periods ranging from eighteen months to five years. The amortization rate is
determined by the expected annual performance during the life cycle and,
accordingly, in many cases an accelerated amortization method is utilized. Costs
determined to be unrecoverable are written off. A write-off occurs most often
when sales of a product are lower than anticipated or when a later version of
the product is released. In addition, life cycles are periodically monitored for
changes in length or rate of sales during the life cycle. When changes are
significant, the amortization rate and period are adjusted.





Property
and Equipment





Furniture,
equipment and leasehold improvements are stated at cost and are depreciated
using the straight-line method over their estimated useful lives, generally
ranging from three to seven years. Maintenance and repairs are charged to
operations as incurred. Buildings are depreciated over 30 years, and
leasehold improvements are amortized over the shorter of their estimated useful
life or the remaining term of the lease. The Company capitalizes internal use
software in accordance with the American Institute of Certified Public
Accountants Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. Such costs are amortized
over an estimated useful life ranging from two to five years.





Goodwill
and Other Intangible Assets





Goodwill
represents the excess of net acquisition cost over the estimated fair value of
net assets acquired of purchased companies. Under Statement of Financial
Accounting Standards No. 142, “Goodwill and Other Intangible Assets”
(“SFAS No. 142”), intangible assets considered to have indefinite
lives, such as goodwill, are no longer amortized to expense but are periodically
evaluated for impairment at the reporting unit level. Intangible assets with
finite lives continue to be amortized to expense over their useful
lives.





Under
SFAS No. 142, goodwill and other indefinite lived intangible assets
are subject to an annual impairment test as well as an interim test if an event
occurs or circumstances change between annual tests indicating that the asset
might be impaired. The impairment test for goodwill is a two-step process.
First, the fair value of the reporting unit is compared to its carrying value.
If the fair value is less than the carrying value, a second step is performed.
In the second step, an implied goodwill value is determined by deducting the
fair value of all tangible and intangible net assets of the reporting unit from
the fair value of the reporting unit. If the implied fair value of the goodwill,
as calculated, is less than the carrying amount of the goodwill, an impairment
charge is taken for the difference. The impairment test for the trademark is
performed by comparing the fair value of the trademark to the carrying
value.  If the carrying value is more than the fair value an impairment is
recorded. The Company tests the goodwill of each of its reporting units and the
trademark annually, and more frequently if impairment indicators
exist.





Long-Lived
Assets





On
January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (“SFAS No. 144”). Under
SFAS No. 144, impairment is recognized for long-lived assets when the
carrying value exceeds the long-lived asset’s estimated future undiscounted cash
flows. Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be fully
recoverable. In addition, the Company performs an annual evaluation of the
recoverability of its pre-publication and direct response advertising
costs.


57


Stock-Based
Compensation





Prior to
the recapitalization pursuant to the Recapitalization Agreement, we administered
a stock option plan, pursuant to which we granted stock options to employees
that vested both over time and based on the achievement of performance
criteria.





In
connection with the recapitalization pursuant to the Recapitalization Agreement
(Note 3), our stock option plan was terminated and all outstanding options
canceled. We do not intend at this time to grant stock options in the
future.





Income
Taxes





We
account for income taxes pursuant to the provisions of Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes”
(“SFAS No. 109”). Under SFAS No. 109, deferred tax assets
and liabilities are recorded to reflect the future tax consequences attributable
to the effects of differences between carrying amounts of existing assets and
liabilities for financial reporting and for income tax purposes. A history of
generating taxable income is required in order to substantiate the recording of
a net tax asset.





Foreign
Currency Translation





The
Company has determined that the functional currency of its foreign subsidiary is
the subsidiary’s local currency. The assets and liabilities of this subsidiary
are translated at the applicable exchange rate as of the balance sheet date and
revenue and expenses are translated at an average rate over the period. Currency
translation adjustments are recorded as a component of accumulated other
comprehensive income (loss). Gains and losses on inter-company transactions are
recorded in operating expenses and have not been material for the periods
presented.


58


Recent
Accounting Pronouncements





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 141R, Business Combinations (“SFAS
141R”). SFAS 141R establishes revised principles and requirements for how the
Company will recognize and measure assets and liabilities acquired in a business
combination. SFAS 141R is effective for business combinations completed on or
after the beginning of the Company’s 2009 fiscal year. The Company will adopt
SFAS 141R at the beginning of its 2009 fiscal year, as required. The Company
does not believe that the adoption of SFAS 141R will have an impact on the
Company’s consolidated financial statements.





In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, Noncontrolling Interests
in Consolidated Financial Statements, an amendment of ARB No.
51(“SFAS 160”). SFAS 160 establishes accounting and reporting standards
for the noncontrolling interests in a subsidiary and for the deconsolidation of
a subsidiary. SFAS 160 is effective at the beginning of the Company’s 2009
fiscal year. The Company does not believe that the adoption of SFAS 160 will
have an impact on the Company’s consolidated financial statements.





On
January 1, 2008, the Company adopted FASB Statement of Financial Accounting
Standard No. 157, Fair Value
Measurements (“SFAS 157”)for certain financial assets and liabilities.
This standard establishes a framework for measuring fair value and requires
enhanced disclosures about far value measurements. SFAS 157 clarifies that fair
value is an exit price, representing the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants. SFAS 157 also establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair
value.  The statement requires that assets and liabilities carried at
fair value to be classified and disclosed in one of the following three
categories: Level 1: Quoted market prices in active markets for identical assets
or liabilities; Level 2:Quoted prices in active markets for similar assets and
liabilities in markets that are not active and models for which all significant
inputs are observable either directly or indirectly; and  Level 3:
Unobservable inputs reflecting the reporting entity’s own assumptions or
external inputs for inactive markets. The determination of where assets and
liabilities fall within this hierarchy is based upon lowest level of input that
is significant to the fair value measurement. As of December 31, 2008, the
Company holds approximately $47.4 million of “Level 1” overnight cash deposits,
of which fair value approximates carrying value. The Company does not have any
assets and liabilities that are based on “Level 2” or “Level 3”
inputs.




The
provisions of SFAS 157 related to other nonfinancial assets and liabilities will
be effective for the Company on January 1, 2009, and will be applied
prospectively. The Company does not believe the provisions of SFAS 157 related
to other nonfinancial assets and liabilities will have a significant impact
on the Company’s consolidated financial statements.





In
February 2007, the FASB issued Statement of Financial Accounting Standard No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities — Including an Amendment
of SFAS 115(“SFAS 159”), which permits but does not require us to
measure financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected are
reported in earnings. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007. As the Company has
not elected to fair value any of its financial instruments under the provisions
of SFAS 159, the adoption of this statement does not have any impact on the
Company’s consolidated financial statements.





3.  Recapitalization
Transaction





Recapitalization





On August
10, 2007, we consummated the recapitalization pursuant to the Recapitalization
Agreement. The recapitalization simplified the Company’s capital structure and
resolved litigation between certain Preferred B holders of the Company and the
Company.  As a result of the recapitalization, the preference related
to the Company’s outstanding shares of preferred stock including the Company’s
Preferred B shares, which had a mandatory redemption feature, were extinguished
improving the Company’s financial position and the former holders of the
Company’s Preferred B shares received approximately 82% of the outstanding
shares of Common Stock and thus voting control of the Company.


59


Under the
terms of the Recapitalization Agreement, holders of our previously outstanding
Preferred B converted their shares of Preferred B into approximately 82% of our
outstanding shares of common stock, holders of our previously outstanding
Preferred A, Preferred C and Preferred Warrants converted their shares and
warrants into shares of common stock and common stock warrants representing
approximately 15% of our outstanding shares of common stock, and certain members
of management acquired new shares of common stock under the terms of management
stock purchase agreements representing approximately 3% of our outstanding
common stock. Pursuant to the management stock purchase agreements, management
paid $0.001 per share to acquire the shares of common stock. In connection with
the foregoing, all previously outstanding shares of common stock were
effectively eliminated through the reclassification into one share of common
stock in a reverse split and all outstanding Common Warrants and options to
purchase common stock were similarly effectively eliminated by the reverse split
of the common stock. As a result of the closing of the transactions contemplated
by the Recapitalization Agreement, the Company has only outstanding common stock
and common stock warrants and no shares of Preferred A, Preferred B or Preferred
C, or stock options remain outstanding.





In
connection with the recapitalization, each Preferred A share and Preferred C
share was reclassified into shares of Common Stock at the rate of one share of
Common Stock for each $31.481 of accrued liquidation value of Preferred A share
or Preferred C share as of June 30, 2007.  Each Preferred B share
was converted into approximately 4.09953 shares of Common Stock.





All of
the Company’s previously outstanding warrants to purchase its Preferred A shares
were automatically adjusted to become exercisable to purchase 70,301 shares of
the Company’s Common Stock at a purchase price of $0.0003 per share of Common
Stock.  All of such rights were currently exercisable at the time of
the closing of the recapitalization and have expiration dates of December 10,
2011.





The
closing of the Recapitalization Agreement was subject to the satisfaction of
certain stated conditions, including the waiver by the requisite holders of our
Term Loans, Senior Notes and Senior Discount Notes of applicable “change of
control” covenants that, absent such waiver, might have applied in connection
with the conversion of the Preferred C, Preferred B, and Preferred A into common
stock. All required waivers were obtained.





In
connection with the recapitalization, the Company recorded a gain on troubled
debt restructuring of $115.5 million in the year ended December 31,
2007, based on the difference in carrying value of the Preferred B compared to
the fair value, based on an independent appraisal, of the common shares
exchanged. The gain includes approximately $1.9 million in transaction cost
and a $2.8 million benefit from consequential balance sheet write offs,
primarily the unamortized portion of the deferred gain on Preferred B. The
recapitalization of the Preferred A and Preferred C also resulted in gains based
on their carrying value compared to the fair value of the common shares
exchanged, but because of their classification as equity instruments, the gains
of $33.0 million and $1.3 million, respectively, are reflected as Gain
on Recapitalization in the calculation of net income available to common
stockholders.





The
independent appraisal of the Company’s Common Stock was conducted utilizing
three approaches: (i) a multi-period income approach, specifically a discounted
cash flow method, (ii) a review of industry guideline companies and (iii) a
review of industry acquisitions.





The
significant assumptions in the discounted cash flow method include the discount
rates used, which range from 15 to 17%, the terminal value multiples used and
the projected revenues and profits of the Company based on management’s
estimates and historical performance. The significant assumptions in the
industry guideline approach included the selection of similar entities for
market value and the determination that earnings multiples were the most
indicative measure of value. Under the industry acquisition approach the
significant assumptions include the determination of similar transactions for
similar entities and a determination of the appropriate valuation
multiples.





Once the
value from each method was determined and weighted, a range of value was
determined and a discount factor based on lack of marketability of 20% was
applied to the values.





The
adjustment of $59,746 to the accumulated deficit in our statement of changes in
stockholders’ deficit for 2007 was calculated based on the fair value of shares
issued in the recapitalization less the related legal fees and less the par
value of the cancelled Common Stock.





4.  Dispositions





Oakstone
Publishing





On June
30, 2008, the Company sold the Oakstone Publishingbusiness,
reported within the Medical Education segment. The sale of this business was in
accordance with the strategic plan initiated by our Board of Directors upon the
completion of our recapitalization in August 2007. The Oakstone Publishing business
published and marketed to doctors and dentists subscription based continuing
education materials on a variety of medical, dental and allied health specialty
topics and publishes and markets subscription based wellness information, such
as newsletters and calendars, to companies seeking to improve employee awareness
of health and wellness issues.


60


The
results of operations of the Oakstone Publishingbusiness
have been classified as discontinued operations in the accompanying consolidated
financial statements for all periods presented.





The
operating results of the Oakstone Publishingbusiness
for the years ended December 31, 2008, 2007 and 2006 were as
follows:





2008
                  
                  
                  2007
                  
                  
                  2006Revenue
                  
                  $
                  14,458
                  
                  
                  $
                  34,050
                  
                  
                  $
                  32,471Cost
      of goods sold
                  
                  
                  4,329
                  
                  
                  
                  9,939
                  
                  
                  
                  9,700Marketing
      and sales
                  
                  
                  5,290
                  
                  
                  
                  9,731
                  
                  
                  
                  9,228Fulfillment
      and distribution
                  
                  
                  1,802
                  
                  
                  
                  3,385
                  
                  
                  
                  3,250General
      and administrative
                  
                  
                  1,951
                  
                  
                  
                  3,523
                  
                  
                  
                  3,480Amortization
      of pre-publication costs
                  
                  
                  756
                  
                  
                  
                  1,248
                  
                  
                  
                  1,154Depreciation
      expense
                  
                  
                  650
                  
                  
                  
                  1,148
                  
                  
                  
                  974Income
      from operations of Oakstone Publishing
      before provision for income taxes
                  
                  $
                  (320
                  )
                  
                  $
                  5,076
                  
                  
                  $
                  4,685Benefit
      (provision) for income taxes
                  
                  
                  (313
                  )
                  
                  
                  (530
                  )
                  
                  
                  293Net
      income (loss) from operations of Oakstone
      Publishing
                  
                  $
                  (633
                  )
                  
                  $
                  4,546
                  
                  
                  $
                  4,978





On June
30, 2008, the assets and liabilities of the Oakstone Publishing business
were sold for gross proceeds of $47.6 million prior to the escrow adjustments
discussed below, consisting of consideration received from the buyer of $42.8
million in cash and $4.8 million placed in an escrow account to satisfy working
capital adjustments and indemnification obligations, if any. An adjusted gain of
$13.7 million, as shown below, is presented as a gain on disposal of
discontinued operations.  This gain includes tax expense of $1.8
million.  On December 23, 2008, the Company agreed with the buyer to
settle a claim made against representations and warranties for $0.6 million and
released escrow funds equal to this amount plus $0.3 million for a working
capital adjustment.   The Company had recognized an accrual for
the working capital adjustment in the quarter ended June 30, 2008.  As
part of the settlement, the buyer and the Company agreed to establish a $0.1
million basket for any future claims.  At this time, the Company is
not aware of any pending claims against escrowed funds and believes the
remaining balance will be released on June 30, 2009.  The Company has
no substantive obligations to fulfill in order to receive the remaining balance.
The carrying amounts of Oakstone Publishingassets
and liabilities as of June 30, 2008 were as follows:





June
      30,
                    2008Assets
      and liabilities:Working
      capital, net (excluding cash)
                  
                  $
                  1,292Pre-publication
      costs, net
                  
                  
                  1,884Property
      and equipment, net
                  
                  
                  1,720Goodwill
                  
                  
                  20,565Intangibles,
      net
                  
                  
                  4,537Net
      assets on date of sale
                  
                  $
                  29,998Calculation
      of gain on sale:Proceeds
                  
                  $
                  47,552Less:Escrow
      settlement
                  
                  
                  (600
                  )Tax
      provision
                  
                  
                  (1,764
                  )Transaction
      costs
                  
                  
                  (1,489
                  )Book
      value of net assets sold
                  
                  
                  (29,998
                  )Gain
      on disposal of Oakstone
      Publishing
                  
                  $
                  13,701





The gain
on disposal of discontinued operations includes the effect of the write-off of
deferred tax assets and liabilities associated with Oakstone
Publishing.


61




Sundance
Newbridge





On August
27, 2008 we sold the assets of the subsidiary that contained our Sundance Newbridgebusiness,
which operated our K-12 Supplemental Education segment. The Sundanceimprint publishes
supplemental educational materials for shared reading, guided reading,
independent reading, phonics, and comprehension skills for students in PreK-8.
Sundancealso markets
non-proprietary, supplemental literature products for students in grades K-6.
The Newbridge imprint
publishes nonfiction, guided reading materials, Big Books and teachers’ guides
in the content areas of standards-based science, social studies, and math for
students in PreK-8.





The
results of operations of the Sundance Newbridgebusiness
have been classified as discontinued operations in the accompanying consolidated
financial statements for all periods presented.





The
operating results of the Sundance Newbridgebusiness
for the years ended December 31, 2008, 2007 and 2006 were as
follows:




2008
                  
                  
                  2007
                  
                  
                  2006Revenue
                  
                  $
                  14,069
                  
                  
                  $
                  27,293
                  
                  
                  $
                  34,296Cost
      of goods sold
                  
                  
                  3,050
                  
                  
                  
                  8,842
                  
                  
                  
                  9,824Marketing
      and sales
                  
                  
                  3,657
                  
                  
                  
                  11,201
                  
                  
                  
                  14,702Fulfillment
      and distribution
                  
                  
                  1,631
                  
                  
                  
                  3,350
                  
                  
                  
                  3,683General
      and administrative
                  
                  
                  1,730
                  
                  
                  
                  2,983
                  
                  
                  
                  3,775Restructuring
      charges
                  
                  
                  1,072
                  
                  
                  
                  1,460
                  
                  
                  
                  —Asset
      impairment charges
                  
                  
                  —
                  
                  
                  
                  10,158
                  
                  
                  
                  2,886Goodwill
      impairment charges
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  24,393Amortization
      of pre-publication costs
                  
                  
                  1,720
                  
                  
                  
                  3,505
                  
                  
                  
                  4,536Depreciation
      expense
                  
                  
                  231
                  
                  
                  
                  907
                  
                  
                  
                  829Income
      (loss) from operations of Sundance Newbridgebefore provision for income taxes
                  
                  
                  978
                  
                  
                  
                  (15,113
                  )
                  
                  
                  (30,332
                  )Benefit
      (provision) for income taxes
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3,394Net
      income (loss) from operations of Sundance
      Newbridge
                  
                  $
                  978
                  
                  
                  $
                  (15,113
                  )
                  
                  $
                  (26,938
                  )





On August
27, 2008, the assets of the Sundance Newbridgebusiness
were sold for gross proceeds of $5.9 million. A gain of $0.7 million, as shown
below, presented as a gain on disposal of discontinued operations, net of a tax
effect of $0.2 million, was recorded on the sale. At December 31, 2008, there
was $0.6 million of remaining liabilities of the Sundance Newbridgebusiness.





December 31,
                  2008Calculation
      of gain on sale:Proceeds
                
                $
                5,912Less:Tax
      provision
                
                
                (219
                )Transaction
      costs
                
                
                (337
                )Book
      value of net assets sold
                
                
                (4,246
                )Assumed
      liabilities
                
                
                (361
                )Gain
      on disposal of Sundance
      Newbridge
                
                $
                749





We also
entered into a post acquisition service agreement with the purchaser of Sundance Newbridgeunder
which Triumph Learningprovides warehouse, distribution and customer service to the purchaser
under an arms length agreement. The revenues and expenses of this arrangement
are reported in other income and expense and included $0.6 million of revenues
and $0.4 million of expense for the year ended December 31,
2008.  This agreement will terminate effective May 16,
2009.





In
addition to the gain on the disposal of Oakstone Publishingand Sundance Newbridge, a $0.2 million
expense for Chelsea Housewas recorded for the year ending December 31, 2008. Chelsea Housewas discontinued during
2005. Total income from discontinued operations, for the year ending December
31, 2008 was $14.6 million.





62





5.  Accounts
Receivable





Accounts
receivable consists of the following:





December 31,2008
                
                
                2007Accounts
      receivable
                
                $
                17,112
                
                
                $
                23,657Less
      allowance for doubtful accounts
                
                
                1,875
                
                
                
                2,213Accounts
      receivable, net
                
                $
                15,237
                
                
                $
                21,444





6.  Inventory





Inventory
consists of the following:





December 31,2008
                
                
                2007Supplies
                
                $
                1,224
                
                
                $
                1,114Work-in-process
                
                
                357
                
                
                
                429Finished
      goods
                
                
                20,632
                
                
                
                17,91922,213
                
                
                
                19,462Less
      allowance for obsolescence
                
                
                3,361
                
                
                
                2,548Inventory,
      net
                
                $
                18,852
                
                
                $
                16,914





An
inventory obsolescence charge of $0.6 million was determined at year end based
on the anticipated usage and recorded in allowance for obsolescence for the year
ended December 31, 2008.





7.  Pre-publication
Costs





Pre-publication
costs consists of the following:





December 31,2008
                
                
                2007Pre-publication
      costs
                
                $
                100,941
                
                
                $
                87,519Less
      accumulated amortization
                
                
                64,699
                
                
                
                50,841Pre-publication
      costs, net
                
                $
                36,242
                
                
                $
                36,678





During
the fourth quarter 2008 the Company completed an impairment test of the
pre-publication costs of  the Test Prep& Interventionsegment, which consist
of Triumph LearningandOptions/Buckledownbusiness.  The pre-publication assets were tested for
impairment and a charge of $2.9 million was recorded as the carrying value of
our pre-publication assets at Triumph LearningandOptions/Buckledownbusinesswere in excess of the
fair value as determined from the discounted cash flows from the
assets.





8.  Property
and Equipment





Property
and equipment consists of the following:





December 31,2008
                
                
                2007Furniture
      and fixtures
                
                $
                2,080
                
                
                $
                1,986Office
      equipment and software
                
                
                7,868
                
                
                
                6,525Land
      and building
                
                
                2,916
                
                
                
                4,041Leasehold
      improvements
                
                
                2,337
                
                
                
                1,98915,201
                
                
                
                14,541Less
      accumulated depreciation
                
                
                8,267
                
                
                
                6,663Property
      and equipment, net
                
                $
                6,934
                
                
                $
                7,878





Depreciation
expense for the years ended December 31, 2008, 2007 and 2006 was
$2.0 million, $1.5 million and $1.5 million,
respectively.





During
2007, in the process of restructuring Options Publishing(See
Note 12) the Company tested the land and building assets of Options Publishingfor impairment and
determined based on an independent appraisal that carrying value of these asset
were in excess of the fair market value. The valuation resulted in an asset
impairment charge of $0.6 million that was recorded to “asset impairment
charges” in the income from continuing operations for its Test-prep and
Intervention segment for the year ended December 31, 2007 (See
Note 13).





63





9.  Goodwill





Goodwill
and other intangible assets with indefinite lives are tested for impairment
annually, as required by SFAS No. 142, “Goodwill and Other Intangible
Assets” (“SFAS 142”). First, the fair value of the reporting unit is
compared to its carrying value. If the fair value is less than the carrying
value, a second step is performed. In the second step, an implied goodwill value
is determined by deducting the fair value of all tangible and intangible net
assets of the reporting unit from the fair value of the reporting unit. If the
implied fair value of the goodwill as calculated is less than the carrying
amount of the goodwill, an impairment charge is recorded for the
difference.





As
indicated above, the goodwill impairment assessment is a two step process. When
the Company performed the annual goodwill and trademark impairment testing as of
October 1, 2006, the value determined in step one of the assessment process
indicated that the carrying value of the assets net of liabilities of the Options Publishingbusiness
which for 2008 was included in the Triumph Learningreporting
unit, was in excess of the fair market value of that reporting unit. The Company
completed step two of the impairment process during the fourth quarter of 2006
and recorded a $10.4 million goodwill impairment charge to Income from
Operations for its Test-prep and Intervention Segment.





A $31.6
million goodwill impairment charge was recorded in the fourth quarter of
2008.  This impairment charge was determined by management’s annual
evaluation of goodwill, which included the use of outside independent valuation
experts to assist us in determining the value of the reporting unit and the
implied value of goodwill.  This valuation utilized an income and market
approach in valuing our reporting units. The income approach was selected as
management believes it can provide a reliable indication of the reporting unit’s
long term financial outlook and the guideline company method of the market
approach was utilized because the lines of business and economic risks
associated with the guideline companies were considered to be comparable to
those of our reporting unit.





The
significant assumptions in the income approach include the discount rates used,
a 14% rate was determined, the terminal value multiples used and the projected
revenues and profits of the Company based on management’s estimates and
historical performance. The significant assumptions in the market approach of
which we used the industry guideline method included the selection of similar
entities for market value and the determination that earnings multiples were the
most indicative measure of value. Under the industry acquisition approach the
significant assumptions include the determination of similar transactions for
similar entities and a determination of the appropriate valuation
multiples.





Once the
value from each method was determined and weighted, a range of value was
determined and a discount factor based on a control premium of 20% adjusted to
17% to reflect a normalized capital structure was determined to be appropriate
and applied to the values.





A summary
of the change in the Company’s goodwill for the years ended December 31,
2008 and 2007 is as follows:





Goodwill,
      January 1, 2006
                
                $
                125,420Goodwill
      impairment charge- Options
      Publishing
                
                
                (10,419
                )December 31,
      2006 and 2007
                
                
                115,001Goodwill
      impairment charge- Triumph
      Learning
                
                
                (31,600
                )Goodwill,
      December 31, 2008
                
                $
                83,401





64





10.  Intangibles





Intangible
assets consist primarily of customer relationships, non-compete agreements and
trademarks. Intangible assets with finite lives are amortized on a straight-line
basis to expense over their useful lives of three to ten years. The Company
reassesses the estimated remaining useful lives of these assets in accordance
with SFAS No. 144 and has determined that such estimated lives are
appropriate. A summary of intangible assets is as follows:





Definite Life Assets
              
              Lives
              
              December 31,
                2008
              
              
              December 31,
                2007Customer
      list
              
              10 years
              
              $
              20,380
              
              
              $
              20,380Non-compete
      agreements
              
              3-5 years
              
              
              850
              
              
              
              850Other
              
              5 years
              
              
              164
              
              
              
              13721,394
              
              
              
              21,367Less:
      accumulated amortization
              
              
              
              
              (9,534
              )
              
              
              (7,303
              )11,860
              
              
              
              14,064Trademarks
              
              Indefinite
              
              
              2,741
              
              
              
              2,741Net
      intangible assets
              
              
              
              $
              14,601
              
              
              $
              16,805





Amortization
expense was $2.2 million for each of the years ended December 31,
2008, 2007 and 2006. Accumulated amortization by asset class as of
December 31, 2008 was $8.7 million for customer lists,
$0.7 million for non-compete agreements and $0.1 million for other
intangible assets.  Accumulated amortization amounts by asset type as
of December 31, 2007 were $6.7 million for customer list,
$0.5 million for non-compete agreements and $0.1 million for other
intangible assets.





Based on
the current amount of intangibles subject to amortization, the estimated
amortization expense for each of the succeeding five years is as
follows:





TotalAmortization
      of intangibles:2009
                
                
                2,1832010
                
                
                2,0512011
                
                
                2,0452012
                
                
                2,0412013
                
                
                2,039Thereafter
                
                
                1,501$
                11,860





11.  Accounts
Payable and Accrued Liabilities





Accounts
payable and accrued liabilities consists of the following:





December 31,2008
                
                
                2007Trade
      accounts payable
                
                $
                8,136
                
                
                $
                9,131Accrued
      liabilities
                
                
                9,840
                
                
                
                9,179Accrued
      management incentive
                
                
                2,141
                
                
                
                3,727Accrued
      compensation and related taxes and benefits
                
                
                2,363
                
                
                
                2,527Accrued
      restructuring costs
                
                
                879
                
                
                
                697Accrued
      disposition costs
                
                
                458
                
                
                
                50Accounts
      payable and accrued liabilities
                
                $
                23,817
                
                
                $
                25,311





12.  Restructuring
Charges





During
the first quarter of 2006, the Company initiated a restructuring project under
which it consolidated the Iowa-based warehousing, customer service and order
fulfillment functions of its Buckle Down Publishingbusiness with our existing shared service facility in Northborough,
Massachusetts. The objective of the warehouse consolidation was to reduce
payroll costs and avoid expected increases in lease costs, while providing
faster and more accurate order and delivery services. The restructuring project
resulted in costs associated with the severance of seven employees based in
Iowa, the movement of inventory to the new facility and net lease payments that
are being made through the end of the lease term. The Company completed the
restructuring process during the second quarter of 2006 and incurred a total
restructuring charge of approximately $0.4 million in connection with this
effort. Restructuring activity for the warehouse and order fulfillment
consolidation relates to Buckle Down Publishingand is
therefore reported within the Test-prep and Intervention segment.





65





On
September 28, 2007, the Board of Directors authorized a restructuring of
Options Publishingand
Triumph Learning,
whereas the management of Options Publishing was merged
into Triumph Learningand the warehouse functions of Options Publishing were
consolidated into the shared services division; the accounting functions were
taken over by the Triumph
Learninggeneral accounting group located in New York City; customer
services, warehousing and fulfillment were incorporated into the shared service
facility in Northborough, MA; and the manufacturing and product purchasing
functions were consolidated into a new shared manufacturing group that was
formed in our Iowa City location. The purpose of this restructuring was to save
operational costs and to improve the product development process. Furthermore,
certain functions of Triumph
Learningwere moved to other locations to improve processes, leverage
shared resources and take advantage of lower cost facilities. The accounts
receivable and cash applications functions were relocated to Northborough, MA;
and the manufacturing functions located in NY were moved into the previously
discussed shared manufacturing function in Iowa City. Additionally, as of
January 1, 2008, the Triumph Learningaccounting
group took over certain accounting functions from Sundance/Newbridgerelated to
the shared service facility in Northborough, MA. The Company completed the
restructuring process during the first quarter of 2008.





In
November 2008, the board approved the consolidation of the management of the
Buckle Down/Options
operations in Iowa under the Triumph Learning management
in New York City.  This resulted in the elimination of the President
of Buckle Down; the
moving of the marketing function to the company’s New York City facility, the
consolidation of sales management  and product development to be
managed in the New York office.  In addition to reducing costs, this
action better allowed the company to leverage its resources and coordinate
activities in product development, sales and marketing.





Restructuring
activities are reported within the Test-prep and Intervention
segment.





The cost
of the restructuring activity by type of cost for the years ended
December 31, 2006, 2007 and 2008 is as follows:





Severance
                  and
                  Related
                
                
                Lease
                  Terminations
                  Costs
                
                
                Relocation
                  and
                  Other
                
                
                Total
                  ConsolidationBuckle
      Down — Warehouse and Order Fulfillment ConsolidationAmount
      expected to be incurred
                
                $
                65
                
                
                $
                404
                
                
                $
                162
                
                
                $
                631Accrued
      restructuring liability as of January 1, 2006
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Restructuring
      expense
                
                
                65
                
                
                
                180
                
                
                
                162
                
                
                
                407Cash
      paid
                
                
                (65
                )
                
                
                (75
                )
                
                
                (162
                )
                
                
                (302
                )Accrued
      restructuring liability as of December 31, 2006
                
                
                —
                
                
                
                105
                
                
                
                —
                
                
                
                105Restructuring
      expense
                
                
                —
                
                
                
                75
                
                
                
                —
                
                
                
                75Cash
      paid
                
                
                —
                
                
                
                (109
                )
                
                
                —
                
                
                
                (109
                )Accrued
      restructuring liability as of December 31, 2007
                
                
                —
                
                
                
                71
                
                
                $
                —
                
                
                
                71Restructuring
      expense
                
                
                —
                
                
                
                75
                
                
                
                —
                
                
                
                75Cash
      paid
                
                
                —
                
                
                
                (114
                )
                
                
                —
                
                
                
                (114
                )Accrued
      restructuring liability as of December 31, 2008
                
                $
                —
                
                
                $
                32
                
                
                $
                —
                
                
                $
                32Options
      Publishing — Consolidation with Buckle DownAmount
      expected to be incurred
                
                $
                1,021
                
                
                $
                —
                
                
                $
                102
                
                
                $
                1,123Accrued
      restructuring liability as of January 1, 2007
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Restructuring
      expense
                
                
                845
                
                
                
                —
                
                
                
                61
                
                
                
                906Cash
      paid
                
                
                (219
                )
                
                
                —
                
                
                
                (61
                )
                
                
                (280
                )Accrued
      restructuring liability as of December 31, 2007
                
                
                626
                
                
                
                —
                
                
                
                —
                
                
                
                626Restructuring
      expense
                
                
                176
                
                
                
                —
                
                
                
                41
                
                
                
                217Cash
      paid
                
                
                (802
                )
                
                
                —
                
                
                
                (41
                )
                
                
                (843
                )Accrued
      restructuring liability as of December 31, 2008
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —Buckle
      Down/Options  — Management consolidation with Triumph
      LearningAmount
      expected to be incurred
                
                $
                1,681
                
                
                $
                —
                
                
                $
                127
                
                
                $
                1,808Accrued
      restructuring liability as of January 1, 2008
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Restructuring
      expense
                
                
                1,611
                
                
                
                —
                
                
                
                105
                
                
                
                1,716Cash
      paid
                
                
                (764
                )
                
                
                —
                
                
                
                (105
                )
                
                
                (869
                )Accrued
      restructuring liability as of December 31, 2008
                
                
                847
                
                
                
                —
                
                
                
                —
                
                
                
                847





66





13.  Asset
Impairment Charges





The
fourth quarter of 2007 included a restructuring of our Test-prep and Interventionsegment with the
consolidating of our Options
Publishingbusiness into our Triumph Learningbusiness. In
connection with the consolidation, our building located in Merrimack, New
Hampshire was abandoned and offered for sale resulting in a $0.6 million
impairment charge from a fair value assessment of the building.





14.  Income
Taxes





Effective
January 1, 2007, the Company adopted FASB Financial Interpretation No. 48,
“Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No.
109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in the financial statements by prescribing a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. As
a result of the implementation of FIN 48, the Company did not recognize any
adjustments in the liability for unrecognized tax benefits. The Company does not
have any accrued interest or penalties associated with unrecognized tax
benefits. The Company’s continuing policy is to recognize interest and penalties
related to income tax matters as tax expense. There were no significant interest
and penalty expense related to income tax matters recorded during the years
ended December 31, 2008, 2007 and 2006.





The
Company files income tax returns in the U.S. federal, state, local and foreign
jurisdictions. Income tax returns filed for fiscal year 2004 and earlier are no
longer subject to examination by U.S., state, local and foreign federal
authorities. Certain income tax returns for fiscal years 2005 through 2007
remain open to examination by U.S. federal, state, local and foreign tax
authorities. Currently none of the federal or state tax returns are under
examination. The Company believes that no provisions are required for all income
tax uncertainties pertaining to these open tax years.





The
Company has recorded an income tax benefit in continuing operations of $6.4
million as a result of the gain on the disposal of the Oakstone Publishingand Sundance Newbridgebusinesses, included within discontinued operations. The deferred income
tax expense reflects the increase in deferred tax liabilities as a result of the
amortization for income tax purposes of goodwill and indefinite lived assets not
reflected in book income.





The
benefit (provision) for income taxes consists of the following:





December 31,2008
                
                
                2007
                
                
                2006Current
      income tax expense:Foreign
                
                $
                (655
                )
                
                $
                (469
                )
                
                $
                (338
                )Benefit
      recognized as a result of the discontinued operations gain
                
                
                6,409
                
                
                
                —
                
                
                
                —Deferred
      income tax expense:U.S.
      Federal
                
                
                321
                
                
                
                (3,039
                )
                
                
                (1,748
                )Total
      benefit (provision for) income taxes
                
                $
                6,075
                
                
                $
                (3,508
                )
                
                $
                (2,086
                )





Foreign
income tax expense is based on taxable UK earnings, of $2.6 million,
$1.1 million and $1.1 million for the years ended December 31,
2008, 2007 and 2006, respectively. Current income taxes has been reduced by
approximately $4.5 million as a result of the utilization of
net  operating loss carryforwards.





67





Deferred
tax assets (liabilities) consist of the following:





December 31,2008
                
                
                2007Deferred
      tax assets:Net
      operating loss carryforwards
                
                $
                48,257
                
                
                $
                53,225Goodwill
                
                
                9,716
                
                
                
                1,772Interest
      on 121⁄2% Senior Discount Note
                
                
                17,606
                
                
                
                13,126Allowance
      for doubtful accounts and notes
                
                
                1,627
                
                
                
                1,788Inventory
      reserves
                
                
                1,277
                
                
                
                885Other
      definite life intangible assets
                
                
                3,378
                
                
                
                2,592Restructuring
                
                
                343
                
                
                
                272Other
                
                
                189
                
                
                
                204Total
      deferred tax assets
                
                
                82,393
                
                
                
                73,864Deferred
      tax liabilities:Goodwill
      and other indefinite life assets
                
                
                (13,798
                )
                
                
                (14,119
                )Direct
      response advertising
                
                
                (993
                )
                
                
                (963
                )Depreciation
                
                
                (321
                )
                
                
                (577
                )Total
      deferred tax liabilities
                
                
                (15,112
                )
                
                
                (15,659
                )Net
      deferred tax assets before valuation allowance
                
                
                67,281
                
                
                
                58,205Less
      valuation allowance
                
                
                (81,079
                )
                
                
                (72,324
                )Net
      deferred tax liabilities
                
                $
                (13,798
                )
                
                $
                (14,119
                )





The net
deferred tax liability of $13.8 million at December 31, 2008 and
$14.1 million at December 31, 2007 relates to the Company’s goodwill
and other indefinite life assets. Goodwill and indefinite life assets are
amortizable over 15 years in accordance with tax law but are not amortized
for book purposes in accordance with SFAS 142. This deferred tax liability
is not offset against the Company’s deferred tax assets when determining the
amount of required valuation allowance under U.S. generally accepted
accounting principles since it relates to indefinite-lived assets and,
therefore, we cannot anticipate when it will reverse.





As of
December 31, 2008, the Company had federal net operating loss carryforwards
of approximately $123.7 million expiring through 2027.





The
Company provided a full valuation allowance for the net deferred tax assets
exclusive of the goodwill related deferred tax liability noted above, as a
result of management’s uncertainty as to the realization of such assets. The
valuation allowance increased $8.8 million.





A
reconciliation of the statutory Federal income tax rate to the effective rate is
as follows:





December 31,2008
                
                
                2007
                
                
                2006Statutory
      rate
                
                
                34
                %
                
                
                34
                %
                
                
                34
                %State
      and local income taxes (net of federal benefit)
                
                
                5
                %
                
                
                5
                %
                
                
                6
                %Change
      in valuation allowance
                
                
                (36
                )%
                
                
                16
                %
                
                
                (23
                )%Non-deductible
      interest expense
                
                
                —
                %
                
                
                8
                %
                
                
                (18
                )%Gain
      on troubled debt restructuring
                
                
                —
                %
                
                
                (58
                )%
                
                
                5
                %Benefit
      recognized as a result of the discontinued operations gain
                
                
                11
                %
                
                
                —
                %
                
                
                —
                %Other
                
                
                (4
                )%
                
                
                —
                %
                
                
                (3
                )%Effective
      tax rate
                
                
                10
                %
                
                
                5
                %
                
                
                (4
                )%





Under
Section 382 of the Internal Revenue Service Code, based on the change of
control discussed in Note 3 there could be limitations on the utilization
of the Company’s NOL deductions in future periods. The annual limitation on
utilization of NOL’s is expected to be approximately $20 million. The
Company has evaluated the impact of this change of control on the utilization of
our NOL’s and believes the impact of the 382 limitation will not be significant
as built-in gains relating to businesses sold within 5 years of the change
in control serve to increase the annual section 382
limitation.





68





15.  Financing
Arrangements





As of
April 15, 2009, the Company had not completed its audited financial statements
as required under its credit agreement for its senior secured term loan (the
“Credit Agreement”), or filed its Annual Report on Form 10-K with SEC as
required under its indentures for its Senior Notes and its Senior Discount
Notes. As of May
29, 2009, we further had not completed our first quarter financial statements
required under the Credit Agreement or filed our Quarterly Report on Form 10-Q
with the SEC as required under the Indentures, resulting in further defaults
under the Credit Agreement and the Indentures.  These
defaults  The
Company has requested the Administrative Agent for the Credit Agreement to
indicate their agreement with certain items included in the Company’s
calculations of 2008 financial covenant compliance, however, the Administrative
Agent has not responded to the Company’s request.  Should the
Administrative Agent disagree with the Company’s financial covenant
calculations, this could result in non-compliance with financial covenants
during 2008 and continuing into 2009 which would constitute additional events of
default under the Credit Agreement.




Rights
and remedies of the lenders under the Credit Agreement upon the occurrence of an
event of default include the right to charge a default interest rate, to declare
the loans outstanding to be due and payable, either in whole or in part,
immediately, and to foreclose on our assets securing our obligations under the
Credit Agreement, including without limitation taking control of our operating
subsidiaries through our pledge of the shares of those subsidiaries, and
blocking our access to cash held in deposit accounts subject to control
agreements (which includes substantially all of our cash) and sweeping that cash
into the Lenders account. Further, provisions of the Credit Agreement restrict
the Company’s ability to make interest payments on its Senior Notes and its
Senior Discount Notes if the Company is in default under the Credit
Agreement.  The Company does not expect that its cash on hand and cash
generated from operations will be sufficient to fund the repayment of its senior
secured term loans should they be declared due.  In addition, an
acceleration of the senior secured term loan would cause defaults under the
Senior Notes and Senior Discount Notes. As of May
11, 2009, the outstanding principal balances under the Credit Agreement, the
Senior Notes and Senior Discount Notes were $108.2 million, $138.8
million  and $135.0 million, respectively.





On April 15, 2009, the
Companyentered into a short-term forbearance agreement with the lenders
under the Credit Agreement relating to its financial reporting defaults, and
since that time has entered into further forbearance agreements to extend the
applicable forbearance period, including a Fourth Forbearance Agreement and
Amendment No. 1 to Credit Agreement on May 7, 2009 (the “Forbearance Agreement
and Amendment”).  The latest Forbearance Agreement and Amendment also
provides for a forbearance relating to defaults, if any, resulting from the
Company’s failure to satisfy its financial covenants under the Credit Agreement
for the periods ended December 31, 2008 and March 31, 2009. Agreement and Amendment;
or (iii) the occurrence or existence of any event of default under either of the
indentures for the Senior Notes or the Senior Discount Notes.  Upon
expiration of the forbearance period, the forbearance shall be immediately and
automatically terminated and be of no further force or effect, which would
permit the lenders to





Under the
forbearance arrangements, commencing April 15, 2009, the Company agreed to pay
the Lenders the default rate of interest under the Credit Agreement, an increase
of 2% over the stated variable rate.  Effective, May 7, 2009, the
Credit Agreement was amended to increase the base interest rate by 4% over the
stated variable rate (an increase of 2% over the previous default rate), such
that the applicable interest rate under the Credit Agreement is now, at its
election, either:
 
 ·
              the
      three month LIBOR rate (with a floor of 3.00%) plus 12.25% per annum,
      payable monthly (LIBOR rate loans had previously been payable quarterly);
      or
 ·
              the
      prime rate (with a floor of 5.25%) plus 11.0% per annum, payable
      monthly.
 
 In
consideration of this increase, the Lenders have agreed to waive any default
interest during the current forbearance period.  As of May 7, 2009,
the base rate of interest under the Credit Agreement was
15.25%.  Under certain circumstances, the Company is allowed to make
an election to have a portion of the interest, not to exceed 2% per annum,
paid-in-kind through an increase in the outstanding principal amount of the term
loans.
 
 On May 7,
2009, the Company received a notice from the trustees under the indentures for
our Senior Notes and Senior Discount Notes that its failure to timely file our
SEC reports constitutes a default under each of those indentures.  The
indentures provide that the Company has 60 days from receipt of this notice
of default to cure such default before an event of default occurs under the
indentures. If an event of default occurs under the indentures, then the trustee
or the holders of 25% in aggregate principal amount of the Senior Notes or the
Senior Discount Notes, respectively, may thereafter declare the applicable notes
to be due and payable immediately.
  The
Company is in discussions with the lenders to amend the Credit Agreement, in the
context of a broader debt restructuring. The Company has engaged a financial
advisor to help implement the Credit Agreement amendment and to explore other
potential debt restructuring alternatives.  If the Company is unable
to restructure its debt obligations, it does not believe that the lenders would
extend their forbearance and amend the Credit Agreement so as to permit it to
make its August 2009 interest payments on its Senior Notes and Senior Discount
Notes.  Moreover, the Senior Discount Notes are obligations of Haights
Cross Communications.  These obligations are not guaranteed by any of
its subsidiaries and none of its subsidiaries is under any obligation to make
payments to the Company. The ability of subsidiaries to make any payments to the
Company are limited by statutory and other contractual restrictions that would
depend on the earnings or financial condition of its subsidiaries and various
business and contractual considerations.  As a result, even if
otherwise permitted under the Credit Agreement, the Company may not have the
ability to pay the interest or any other obligations under its Senior Discount
Notes. Its failure
to make interest payments is a default under the applicable indenture governing
those notes and entitles the trustee or the holders of an applicable percentage
of those notes (after an applicable grace period) to accelerate its obligations
under the notes. This would in turn also trigger further cross defaults under
our Credit Agreement and the indentures for the Senior Notes and Senior Discount
Notes.








Although
the Company intends to attempt to restructure its debt obligations under one or
more of these arrangements, given the current negative conditions in the economy
generally and the credit markets in particular, the Company cannot give any
assurance that it will be successful in restructuring its debt or finding
alternative financing arrangements on favorable terms, if at all. The Company
does not have any agreement with holders of its debt obligations to restructure
these obligations and cannot predict or provide assurance it will obtain such
agreement.  A default under one or more of the Company’s debt
arrangements, including the Credit Agreement or the indenture governing the
Senior Notes or the Senior Discount Notes, could cause cross defaults of other
agreements, any of which could have a material adverse effect on the Company’s
business, financial condition, liquidity and operations and raise substantial
doubt about the Company’s ability to continue as a going concern.  If
the Company is unable to extend the forbearance under the Credit Agreement and
restructure its debt obligations, the Company may not be able to continue its
operations, and the Company may be unable to avoid filing for bankruptcy
protection and/or have an involuntary bankruptcy case filed against
it.  Accordingly, amounts outstanding under the Company’s senior
secured term loan, Senior Notes and Senior Discount Notes have been classified
as current liabilities in the accompanying consolidated balance sheet as of
December 31, 2008.





69





Senior Secured
Revolving Credit Facility, Term Loan, 11 3/4% Senior Notes





Prior to
the Credit Agreement, Haights Cross had entered into a $30.0 million Senior
Secured Revolving Credit Facility (the “Facility”) and a $130.0 million Senior
Secured Term Loan (the “First Term Loan”), and also issued $140.0 million
aggregate principal amount of its 11 3/4% Senior Notes due 2011 (“Senior
Notes”).





On August
15, 2007, we terminated the Facility, which Haights Cross had never drawn upon
and was scheduled to expire by its terms in May 2008.





The First
Term Loan matured on August 15, 2008, and was secured by a lien on all of the
Company’s property and assets (tangible and intangible), including all capital
stock of existing and future subsidiaries (except future excluded subsidiaries).
The First Term Loan contained customary restrictive covenants and debt
incurrence tests. The First Term Loan accrued interest at a variable rate based
on the Eurodollar (subject to a 2% floor), plus an applicable margin based on a
graduated rate schedule. Beginning on November 15, 2003 and continuing through
maturity, the Company was required to make principal payments on the First Term
Loan of $250,000 per quarter.





On
December 10, 2004, Haights Cross issued an additional $30.0 million aggregate
principal amount of its Senior Notes under its existing indenture. These Senior
Notes are pari passuwith, of the same series as and vote on any matter submitted to
bondholders, the original Senior Notes. In connection with the issuance of the
additional Senior Notes, Haights Cross entered into a new $30.0 million Senior
Secured Term Loan (the “Second Term Loan” and, together with the First Term
Loan, the “Term Loans”). Amounts borrowed under the Second Term Loan rank
equally with the amounts borrowed under the First Term Loan. The Second Term
Loan also matured on August 15, 2008.





The
Senior Notes mature on August 15, 2011, and were effectively subordinated to the
Term Loans to the extent of the collateral securing the Term Loans. The Senior
Notes contain customary restrictive covenants and debt incurrence tests. The
Senior Notes bear interest at a fixed rate of 11 3/4% with payments due
semi-annually on February 15 and on August 15. Interest payments commenced on
February 15, 2004. On August 15, 2008, the Company entered into a new Credit
Agreement, repaid its Term Loans in full, and repurchased and retired Senior
Notes in the aggregate principal amount of $31.2 million from certain of the
Lenders and their affiliates for a purchase price equal to the aggregate
principal amount of the notes retired, plus accrued but unpaid interest, if
any.





The
Senior Notes are fully and unconditionally guaranteed, jointly and severally, by
the Company and each of Haights Cross’ existing and future restricted
subsidiaries. (See Note 21).





Term Loan Refinancing.On
August 15, 2008, Haights Cross entered into a new credit agreement (“Credit
Agreement”) with DDJ Capital Management LLC, as administrative agent and
collateral agent, and certain other lenders (collectively, the “Lenders”). Under
the Credit Agreement, Haights Cross borrowed $108.2 million under a senior
secured term loan facility (“New Term Loan”). Haights Cross used a combination
of the net proceeds of the New Term Loan and cash on hand, including the net
proceeds from its previous sale of its Oakstone Publishingbusiness,
to repay the Term Loans due August 15, 2008 in full.





Haights
Cross Communications and all of its direct and indirect subsidiaries (other than
Haights Cross) have guaranteed Haights Cross’ obligations under the New Term
Loan. The New Term Loan is secured by first-priority liens on, and
first-priority security interests in, substantially all of the assets of the
Company and all guarantors to the Credit Agreement and a first priority security
interest in 100% of the equity issued by Haights Cross’ direct and indirect
subsidiaries.





The final
maturity date for the New Term Loan is May 15, 2011. We are required to apply
75% of our annual consolidated excess cash flow (as defined) to prepay any
amounts outstanding under the New Term Loan. In addition, subject to certain
exceptions and reinvestment basket, we are required to use any net proceeds from
the sale or disposition of our assets, net casualty, condemnation proceeds or
other extraordinary proceeds and net proceeds from the issuance or incurrence of
debt or equity to prepay the New Term Loan. In general, prepayment premiums are
not applicable to partial prepayments in accordance with the above. However,
prepayment premiums are applicable to (a) partial prepayments on account of debt
or equity issuances above agreed on baskets, (b) voluntary prepayments, and (c)
upon payments of the New Term Loan  in full on account of any
mandatory or voluntary prepayments (See Note 18). When applicable, the following
prepayment premiums apply: prepayments on or prior to August 15, 2009 are
subject to a premium of 102% of the principal, prepayments after August 15,
2009, but on or before August 15, 2010 are subject to a premium of 101% of the
principal. Thereafter, the Company may make prepayments without paying a
premium.





As of
December 31, 2008, all amounts outstanding under the New Term Loan bore
interest, at the Company’s option:





(i) at
the three month LIBOR rate (with a floor of 3.00%) plus 8.25% per annum, payable
quarterly; or





(ii) at
the prime rate (with a floor of 5.25%) plus 7.0% per annum, payable
monthly.





70





The
Credit Agreement contains affirmative and negative covenants customarily
applicable to senior secured credit facilities, including covenants restricting
the ability of the Company, subject to negotiated exceptions, to incur
additional indebtedness and additional liens on their assets, engage in mergers
or acquisitions or dispose of assets in excess of scheduled amounts, enter into
sale-leaseback transactions, make capital expenditures in excess of scheduled
amounts, pay dividends or make other distributions, voluntarily prepay other
indebtedness, enter into transactions with affiliated persons, make investments,
and change the nature of their businesses.





The
credit facilities require Haights Cross and the other loan parties to maintain a
maximum secured leverage ratio, a minimum fixed charge coverage ratio, and a
minimum net EBITDA (as defined) . The maximum secured leverage ratio is 3.33:1
beginning with the quarter ending September 30, 2008, and then ranges from
3.36:1 to 2.94:1 through the fiscal quarter ending March 31, 2011. The minimum
fixed charge coverage ratio is 0.83:1 beginning with the Company’s fiscal
quarter ending September 30, 2008 and then ranges between 0.80:1.00 and 0.67:1
through the fiscal quarter ending March 31, 2011. The minimum net EBITDA is
$29.8 million beginning with the Company’s fiscal quarter ending September 30,
2008, and then ranges over time between $29.2 million to $33.4 million through
the fiscal quarter ending March 31, 2011. The secured leverage ratio is defined
as the ratio of Haights Cross’ senior secured debt (net of up to $10 million of
balance sheet cash) to the Company’s consolidated net EBITDA for the four-fiscal
quarter period ending on the measurement date. The fixed charge coverage ratio
is defined as the ratio of the Company’s consolidated net EBITDA for the
four-fiscal quarter period ending on the measurement date to the Company’s
consolidated interest expense, plus total taxes and total capital expenditures
(subject to certain limited exceptions) for the same period. These terms, and
the calculation thereof, are defined in further detail in the Credit
Agreement.





As of
December 31, 2008, the effective interest rate on all borrowings under the New
Term Loan was 12.01%.  Commencing as of April 15, 2009, pursuant to
our Forbearance Agreement we agreed to pay the Lenders under the New Term Loan
the default rate of interest under the Credit Agreement, an increase of 2% over
the stated variable rate.  As discussed above, as of May 7, 2009, this
default rate of interest was 15.25%.





12 1/2% Senior
Discount Notes





On
February 2, 2004, Haights Cross Communications issued $135.0 million aggregate
principal amount at maturity of its 12 1/2% Senior Discount Notes due 2011 (the
“Senior Discount Notes”), for which it received net proceeds of $73.7 million.
The Senior Discount Notes mature on August 15, 2011, with each Senior Discount
Note having an accreted value of $1,000 at maturity. The Senior Discount Notes
will not begin to accrue cash interest until February 1, 2009, after which the
Company will be required to make cash interest payments every six months in
arrears on February 1 and August 1, commencing August 1, 2009. The Senior
Discount Notes are general unsecured obligations of Haights Cross Communications
and rank equally with all of Haights Cross Communications’ existing and future
unsecured senior indebtedness and are senior to all of its future subordinated
indebtedness. The Senior Discount Notes are effectively subordinated to all of
Haights Cross Communications’ existing and future secured indebtedness, to the
extent of the collateral securing such indebtedness. The senior discount notes
are also structurally subordinated to all existing and future liabilities of our
subsidiaries, including our New Term Loan, Senior Notes and trade
payables. The Senior Discount Notes rank pari passuin right of
payment to Haights Cross Communications’ guarantee of the Term Loans and the
Senior Notes. As of February 15, 2008 the Senior Discount Notes became
redeemable by the Company. The Senior Discount Notes contain customary
restrictive covenants and debt incurrence tests.





As of
December 31, 2008, due to the Term Loan  default described
above,  our Term Loans, Senior Discount Notes and Senior
Notes  are classified as a current liabilities in the accompanied
financial statement. The following table is a summary of the Company’s current
outstanding debt as of December 31, 2008 (in thousands):





Instrument
                Issuance
                  Date
                Due
                  Date
                
                Face
                  Amount
                
                
                Premium
                  (Discount)
                  At
                  Issuance
                
                
                Interest Rate
                  As of
                  December 31,
                  2008
                
                
                Book Value
                  As of
                  December 31,
                  2008Haights
      Cross:New
      Term Loan
                08/15/08
                05/15/11
                
                $
                108,200
                
                
                
                ––
                
                
                
                12.01
                %
                
                $
                108,200113/4%
      Senior notes
                08/20/03
                08/15/11
                
                $
                108,800
                
                
                
                ––
                
                
                
                11.75
                %
                
                
                108,800113/4%
      Senior notes
                12/10/04
                08/15/11
                
                $
                30,000
                
                
                $
                3,150
                
                
                
                11.75
                %
                
                
                31,199139,999Haights
      Cross Communications:121/2%
      Senior discount notes
                02/02/04
                08/15/11
                
                $
                135,000
                
                
                $
                (61,347
                )
                
                
                12.5
                %
                
                
                133,620Total
      debt
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                381,819





71





16.  Equity
and Redeemable Preferred Stock





On
December 10, 1999, the Company issued 22,476 shares of voting
Series A preferred stock (the “Preferred A”). The Preferred A had a
liquidation value of $1,000 per share, plus any accrued but unpaid dividends,
accrued quarterly cumulative dividends at an annual rate of 8%,and was redeemable at the
option of the holders thereof beginning on December 31, 2019 at a
redemption price equal to $1,000 per share, plus any accrued but unpaid
dividends. Upon the closing of the Recapitalization Agreement, all outstanding
shares of Preferred A were converted to common stock at an agreed upon rate, and
no shares of Preferred A remain outstanding.





On
December 10, 1999, the Company issued 2,400,000 shares of nonvoting
Series B senior preferred stock (the “Preferred B”). The Preferred B had a
liquidation value of $25 per share, plus any accrued but unpaid dividends
accrued quarterly cumulative dividends at an annual rate of 16%, and was
mandatorily redeemable by the Company on December 10, 2011 at a redemption
price equal to its liquidation value, plus any accrued but unpaid dividends.
Upon the closing of the Recapitalization Agreement, all outstanding shares of
Preferred B were converted to common stock at an agreed upon rate, and no shares
of Preferred B remain outstanding.





In
connection with the issuance of the Preferred B on December 10, 1999, the
Company also issued warrants to acquire common stock (the “Common Warrants”),
and warrants to acquire Preferred A (the “Preferred Warrants”). Upon the closing
of the Recapitalization Agreement, all outstanding Common Warrants were canceled
and all outstanding Preferred Warrants were converted into warrants to acquire
common stock at an agreed upon rate.





On
April 15, 2004, in connection with the acquisition of Buckle Down Publishing, the
Company issued 3,500 shares of Series C preferred stock (the
“Preferred C”). The Preferred C had a liquidation value of $1,000 per share,
plus any accrued but unpaid dividends, accrued quarterly cumulative dividends at
an annual rate of 5%, was automatically convertible into common stock upon the
consummation of the Company’s initial public offering, was redeemable at the
option of the holder thereof beginning on April 15, 2012 at a redemption
price equal to $1,000 per share plus any accrued but unpaid dividends,and was redeemable at the
option of the Company at a redemption price equal to 101% of the per share
liquidation value plus any accrued but unpaid dividends. Upon the closing of the
Recapitalization Agreement, all outstanding shares of Preferred C were converted
to common stock at an agreed upon rate, and no shares of Preferred C remain
outstanding.





See
Note 3 for a description of the Recapitalization Agreement referred to
above.





17.  Stock
Based Compensation





Total
stock-based compensation expense is recognized as a “general and administrative
expense” in the consolidated statements of operations on a ratable basis over
the vesting period for each option. The Company did not issue any form of Stock
Options for the years ended December 31, 2007 or December 31, 2008. For the
years ended December 31, 2007 and 2006, compensation expense recorded
relating to the grant of stock options was de minimus.However as
described below Restricted Shares were issued to the directors and related
compensation expense was recorded.





On
August 10, 2007, we consummated a recapitalization agreement (the
“Recapitalization Agreement”) (See Note 3). In connection with the
consummation of the Recapitalization Agreement, our stock option plan was
terminated and all outstanding options canceled. We do not intend at this time
to grant stock options in the future.





Additionally,
pursuant to Management Stock Purchase Agreements dated August 10, 2007,
Messrs. Crecca and Quandt purchased for $0.001 a share 75,000 and
225,000 shares of restricted stock, respectively. Mr. Quandt’s
225,000 shares of common stock were deemed to be fully vested at the time
of his resignation. Mr. Crecca’s restricted shares are subject to a three
year vesting period. Each non-employee member of the Board of Directors received
a restricted stock award of 8,117 shares of our common stock with the
Chairman receiving 12,175 shares. The restricted stock granted pursuant to
all of these awards was to vest in February 2008. During the year ended
December 31, 2007 for $0.001 per share director Eugene I. Davis purchased
12,175 shares of restricted stock, and directors John A. McKenna, Jr.,
Curry E. Ford and T.J. Vigliotta have purchased 8,117 shares of restricted
stock each. In January 2008, prior to the vesting of his restricted stock,
Mr. Vigliotta elected to forfeit all of his restricted stock. Mr. Vigliotta
resigned from the Board of Directors on May 8, 2009. In January 2008, prior to
the vesting of his restricted stock, Mr. Curry elected to forfeit all of
his restricted stock in exchange for an issuance by the Company to Glenview
Capital Management, LLC, of an equivalent amount under the same terms and
conditions. Subsequently, we issued to Glenview Capital Management, LLC, which
has designated Mr. Ford to serve as our director, a restricted stock award
of 8,117 shares. All outstanding restricted stock awards fully vested on
February 10, 2008 for issuances to Mr. Davis and Glenview Capital
Management, LLC and February 21, 2008 for the issuance to Mr. McKenna.
Total stock-based compensation expense is recognized as a “general and
administrative expense” in the consolidated statements of operations on a
ratable basis over the vesting period. The compensation expense recorded for
these restricted shares was $0.2 million for the year ended
December 31, 2008 and $1.5 million for the year ended
December 31, 2007.





72





18.  Commitments





The
Company has leased facilities in the states of  New York, Maryland,
Massachusetts, Pennsylvania, Iowa, Texas, and the United Kingdom. The aggregate
future minimum lease payments under non-cancelable operating leases that have
initial or remaining lease terms in excess of one year as of December 31,
2008 are as follows:





Occupancy
                  Space
                
                
                EquipmentYear
      ending December 31:2009
                
                $
                1,789
                
                
                $
                1022010
                
                
                613
                
                
                
                812011
                
                
                247
                
                
                
                652012
                
                
                244
                
                
                
                532013
                
                
                120
                
                
                
                35Total
      minimum payments
                
                $
                3,013
                
                
                $
                336





Rent
expense on the occupied space for the years ended December 31, 2008, 2007
and 2006 was $1.1 million, $1.2 million and $1.1 million,
respectively. Expenses relating to equipment leases for the years ended
December 31, 2008, 2007 and 2006 was $0.1 million, $0.2 million
and $0.2 million, respectively.





From time
to time, the Company may be involved in various litigation relating to claims
which have arisen in the ordinary course of its business. We are not presently
involved in any legal proceedings that we expect individually or in the
aggregate to have a material adverse effect on our financial condition, results
of operations or liquidity.





Application of Net Proceeds from
Oakstone Publishing Sale.On June 30, 2008, the Company sold its Oakstone Publishingbusiness
for gross proceeds of $47.5 million, consisting of consideration received from
the buyer of $42.8 million and $4.8 million placed in an escrow account to
satisfy working capital adjustments and indemnification obligations, if any. The
cash consideration from the sale was received on July 1, 2008. Under the
indentures for the Senior Notes and the Senior Discount Notes, within 365 days
after the receipt of the net proceeds from an asset sale, such as the Oakstone Publishingsale, the
Company may apply such net proceeds, at its option to (i) repay obligations
under any credit facilities (as defined), (ii) to acquire all or substantially
all of the assets of, or any capital stock or, another permitted business (as
defined), (iii) to make capital expenditures, or to acquire any other assets
that are not classified as current assets under generally accepted accounting
principles and that are used or useful in a permitted business. Any net proceeds
that are not applied or invested within 365 days as provided above will
constitute excess proceeds. If the aggregate excess proceeds were to exceed $10
million, the indentures for our Senior Notes and Senior Discount Notes would
require the Company to offer to apply such proceeds to the repayment of the
Company’s term loans and/or such notes. The Credit Agreement for its New Term
Loan (see Note 15) further requires Haights Cross to apply such excess proceeds
to the repayment of the New Term Loan no later than the date that is 30 days
prior to the date on which Haights Cross would have to apply such proceeds as
dictated by the indentures for the Senior Notes and Senior Discount Notes. As of
December 31, 2008, there was less than approximately $4 million in excess
of the $10 million that has not been otherwise applied as provided
above.  We anticipate that we will apply any such excess for other
permitted uses, such as capital expenditures, by the end of the 365 day
period.





73





19.  Savings
Plan





The
Company has a defined contribution plan for eligible employees under
Section 401(k) of the Internal Revenue Code. The Haights Cross
Communications, Inc. 401(k) Savings Plan (“Savings Plan”) provides for eligible
employees to contribute up to 15% of eligible compensation with a Company match
of 50% of the first 6% of employee contributions. All employees are eligible to
participate in the Savings Plan after one year of service, reaching age 21,
and completing 1,000 hours of service within a calendar year. The Company
may, at its discretion, make additional contributions to the Savings Plan, on a
pro rata basis. Participants vest under five-year graded vesting in the Company
match and 100% in their own contributions to the Savings Plan. Distributions can
be paid either in a lump sum or monthly installments.





The
Company’s contributions and administrative fees for the years ended
December 31, 2008, 2007 and 2006 were $0.4 million, $0.5 million
and $0.5 million, respectively.





20.  Segment
Reporting





The
Company’s operating segments are regularly reviewed by the chief operating
decision maker for purposes of allocating resources and assessing
performance.





The
Company’s financial reporting is organized into two business segments: Test-prep
and Intervention and Library.





Our
Test-Prep and Intervention segment is comprised of our Triumph Learning and Buckle Down Publishing/
Options Publishingproduct lines. Our Library segment is comprised of our
Recorded Books
business. Our Medical Education segment was comprised of our Oakstone Publishingbusiness which was
sold on June 30, 2008 and our K-12 Supplemental Education segment was comprised
of our Sundance Newbridgebusiness, which was sold on August 27, 2008. As a result of these
dispositions, the results of Oakstone Publishingand Sundance Newbridgehave been
reclassified as discontinued operations for all periods presented in the
consolidated financial statements and Medical Education and K-12 Supplemental
Education segments are not included in the information below. (See Note 4
“Dispositions”)





The
information presented below includes certain expense allocations between the
corporate office and the operating business segments. The information is
presented after all intercompany and intersegment eliminations and is therefore
not necessarily indicative of the results that would be achieved had the
business segments been stand-alone businesses. Corporate general and
administrative expenses consist of general corporate administration expenses not
allocated to the operating business segments.





The
results of operations and other data for the two operating segments and
corporate for the years ending December 31, 2008, 2007 and 2006 are as
follows:





Test-Prep &
                    Intervention
                  
                  
                  Library
                  
                  
                  Corporate
                  
                  
                  Consolidated2008Revenue
                  
                  $
                  83,668
                  
                  
                  $
                  87,411
                  
                  
                  $
                  —
                  
                  
                  $
                  171,079Cost
      of goods sold
                  
                  
                  16,568
                  
                  
                  
                  31,873
                  
                  
                  
                  —
                  
                  
                  
                  47,441Marketing
      and sales
                  
                  
                  25,827
                  
                  
                  
                  14,185
                  
                  
                  
                  —
                  
                  
                  
                  40,012Fulfillment
      and distribution
                  
                  
                  6,668
                  
                  
                  
                  5,842
                  
                  
                  
                  —
                  
                  
                  
                  12,510General
      and administrative
                  
                  
                  8,719
                  
                  
                  
                  7,714
                  
                  
                  
                  10,459
                  
                  
                  
                  26,892Restructuring
      charges
                  
                  
                  2,008
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,008Goodwill
      impairment charges
                  
                  
                  31,600
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  31,600Amortization
      of pre-publication costs
                  
                  
                  13,542
                  
                  
                  
                  5,817
                  
                  
                  
                  —
                  
                  
                  
                  19,359Depreciation
      expense and amortization of intangibles
                  
                  
                  3,474
                  
                  
                  
                  721
                  
                  
                  
                  46
                  
                  
                  
                  4,241(Loss)
      income from operations
                  
                  $
                  (24,738
                  )
                  
                  $
                  21,259
                  
                  
                  $
                  (10,505
                  )
                  
                  $
                  (12,984
                  )Interest
      expense
                  
                  $
                  16,779
                  
                  
                  $
                  3,111
                  
                  
                  $
                  24,857
                  
                  
                  $
                  44,747Capital
      expenditures — property and equipment
                  
                  
                  459
                  
                  
                  
                  766
                  
                  
                  
                  23
                  
                  
                  
                  1,248Capital
      expenditures — pre- publication costs
                  
                  
                  12,466
                  
                  
                  
                  6,537
                  
                  
                  
                  —
                  
                  
                  
                  19,003Goodwill
                  
                  
                  18,888
                  
                  
                  
                  64,513
                  
                  
                  
                  —
                  
                  
                  
                  83,401Total
      assets
                  
                  
                  80,638
                  
                  
                  
                  105,151
                  
                  
                  
                  57,587
                  
                  
                  
                  243,376





74





Test-Prep &
                    Intervention
                  
                  
                  Library
                  
                  
                  Corporate
                  
                  
                  Consolidated2007Revenue
                  
                  $
                  86,074
                  
                  
                  $
                  84,529
                  
                  
                  $
                  —
                  
                  
                  $
                  170,603Cost
      of good sold
                  
                  
                  16,734
                  
                  
                  
                  29,873
                  
                  
                  
                  —
                  
                  
                  
                  46,607Marketing
      and sales
                  
                  
                  23,725
                  
                  
                  
                  14,626
                  
                  
                  
                  —
                  
                  
                  
                  38,351Fulfillment
      and distribution
                  
                  
                  6,427
                  
                  
                  
                  5,841
                  
                  
                  
                  —
                  
                  
                  
                  12,268General
      and administrative
                  
                  
                  8,379
                  
                  
                  
                  7,768
                  
                  
                  
                  12,957
                  
                  
                  
                  29,104Restructuring
      charges
                  
                  
                  1,172
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,172Asset
      impairment charges
                  
                  
                  565
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  565Amortization
      of pre-publication costs
                  
                  
                  8,891
                  
                  
                  
                  5,388
                  
                  
                  
                  —
                  
                  
                  
                  14,279Depreciation
      expense and amortization of intangibles
                  
                  
                  2,879
                  
                  
                  
                  794
                  
                  
                  
                  54
                  
                  
                  
                  3,727Income
      (loss) from operations
                  
                  $
                  17,302
                  
                  
                  $
                  20,239
                  
                  
                  $
                  (13,011
                  )
                  
                  $
                  24,530Interest
      expense
                  
                  $
                  17,317
                  
                  
                  $
                  4,878
                  
                  
                  $
                  39,577
                  
                  
                  $
                  61,772Capital
      expenditures — property and equipment
                  
                  
                  734
                  
                  
                  
                  731
                  
                  
                  
                  80
                  
                  
                  
                  1,545Capital
      expenditures — pre- publication costs
                  
                  
                  11,940
                  
                  
                  
                  6,045
                  
                  
                  
                  —
                  
                  
                  
                  17,985Goodwill
                  
                  
                  50,488
                  
                  
                  
                  64,513
                  
                  
                  
                  —
                  
                  
                  
                  115,001Total
      assets
                  
                  
                  117,476
                  
                  
                  
                  107,353
                  
                  
                  
                  119,943
                  
                  
                  
                  344,772





Test-Prep &
                      Intervention
                    
                    
                    Library
                    
                    
                    Corporate
                    
                    
                    Consolidated2006Revenue
                    
                    $
                    73,909
                    
                    
                    $
                    81,328
                    
                    
                    $
                    —
                    
                    
                    $
                    155,237Cost
      of good sold
                    
                    
                    14,666
                    
                    
                    
                    28,239
                    
                    
                    
                    —
                    
                    
                    
                    42,905Marketing
      and sales
                    
                    
                    19,982
                    
                    
                    
                    14,644
                    
                    
                    
                    —
                    
                    
                    
                    34,626Fulfillment
      and distribution
                    
                    
                    5,171
                    
                    
                    
                    5,923
                    
                    
                    
                    —
                    
                    
                    
                    11,094General
      and administrative
                    
                    
                    7,957
                    
                    
                    
                    7,172
                    
                    
                    
                    6,335
                    
                    
                    
                    21,464Restructuring
      charges
                    
                    
                    407
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    407Amortization
      of pre-publication costs
                    
                    
                    7,212
                    
                    
                    
                    4,831
                    
                    
                    
                    —
                    
                    
                    
                    12,043Goodwill
      impairment charges
                    
                    
                    10,419
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    10,419Depreciation
      expense and amortization of intangibles
                    
                    
                    2,800
                    
                    
                    
                    834
                    
                    
                    
                    62
                    
                    
                    
                    3,696Income
      (loss) from operations
                    
                    $
                    5,295
                    
                    
                    $
                    19,685
                    
                    
                    $
                    (6,397
                    )
                    
                    $
                    18,583Interest
      expense
                    
                    $
                    14,399
                    
                    
                    $
                    5,355
                    
                    
                    $
                    46,033
                    
                    
                    $
                    65,787Capital
      expenditures — property and equipment
                    
                    
                    438
                    
                    
                    
                    1,059
                    
                    
                    
                    9
                    
                    
                    
                    1,506Capital
      expenditures — pre-publication costs
                    
                    
                    11,709
                    
                    
                    
                    5,399
                    
                    
                    
                    —
                    
                    
                    
                    17,108Goodwill
                    
                    
                    50,488
                    
                    
                    
                    64,513
                    
                    
                    
                    —
                    
                    
                    
                    115,001Total
      assets
                    
                    
                    118,274
                    
                    
                    
                    103,972
                    
                    
                    
                    140,440
                    
                    
                    
                    362,686





75





21.  Condensed
Consolidated Financial Statements





On
August 20, 2003, Haights Cross Operating Company (“HCOC”), a subsidiary of
the Company, issued $140.0 million of 113⁄4% senior notes due 2011. HCOC
and the guarantor subsidiaries are 100% owned, directly or indirectly, by the
Company. These notes have been fully and unconditionally, jointly and severally
guaranteed by Holdings and each of the existing and future restricted
subsidiaries of HCOC. Subject to certain exceptions, HCOC is restricted in its
ability to make funds available to the Company. The following unaudited interim
condensed consolidating financial information of the Company is being provided
pursuant to Article 3-10(d) of Regulation S-X.





Condensed
Consolidating Statements of Operations:





Year Ended December 31, 2008Parent
                  Guarantor
                
                
                HCOC
                
                
                Guarantor
                  Subsidiaries
                
                
                Eliminations
                
                
                Consolidated(In
      thousands)Revenue
                
                $
                —
                
                
                $
                —
                
                
                $
                171,079
                
                
                $
                —
                
                
                $
                171,079Costs
      and expenses
                
                
                507
                
                
                
                9,998
                
                
                
                173,558
                
                
                
                —
                
                
                
                184,063Income
      (loss) from operations
                
                
                (507
                )
                
                
                (9,998
                )
                
                
                (2,479
                )
                
                
                —
                
                
                
                (12,984
                )Equity
      in the income (loss) of subsidiaries
                
                
                (28,577
                )
                
                
                (30,147
                )
                
                
                —
                
                
                
                58,724
                
                
                
                —Loss(income)
      from discontinued operations
                
                
                —
                
                
                
                (12,738
                )
                
                
                (1,813
                )
                
                
                —
                
                
                
                (14,551
                )Other
      (income) expenses
                
                
                8,923
                
                
                
                1,170
                
                
                
                29,481
                
                
                
                —
                
                
                
                39,574Net
      income (loss)
                
                $
                (38,007
                )
                
                $
                (28,577
                )
                
                $
                (30,147
                )
                
                $
                58,724
                
                
                $
                (38,007
                )





Year Ended December 31, 2007Parent
                  Guarantor
                
                
                HCOC
                
                
                Guarantor
                  Subsidiaries
                
                
                Eliminations
                
                
                Consolidated(In
      thousands)Revenue
                
                $
                —
                
                
                $
                —
                
                
                $
                170,603
                
                
                $
                —
                
                
                $
                170,603Costs
      and expenses
                
                
                264
                
                
                
                12,747
                
                
                
                133,062
                
                
                
                —
                
                
                
                146,073Income
      (loss) from operations
                
                
                (264
                )
                
                
                (12,747
                )
                
                
                37,541
                
                
                
                —
                
                
                
                24,530Equity
      in the income (loss) of subsidiaries
                
                
                (19,363
                )
                
                
                (11,076
                )
                
                
                —
                
                
                
                30,439
                
                
                
                —Loss
      from discontinued operations
                
                
                —
                
                
                
                122
                
                
                
                10,567
                
                
                
                —
                
                
                
                10,689Other
      (income) expenses
                
                
                (83,177
                )
                
                
                (4,582
                )
                
                
                38,050
                
                
                
                —
                
                
                
                (49,709
                )Net
      income (loss)
                
                $
                63,550
                
                
                $
                (19,363
                )
                
                $
                (11,076
                )
                
                $
                30,439
                
                
                $
                63,550





Year Ended December 31, 2006Parent
                  Guarantor
                
                
                HCOC
                
                
                Guarantor
                  Subsidiaries
                
                
                Eliminations
                
                
                Consolidated(In
      thousands)Revenue
                
                $
                —
                
                
                $
                —
                
                
                $
                155,237
                
                
                $
                —
                
                
                $
                155,237Costs
      and expenses
                
                
                125
                
                
                
                6,272
                
                
                
                130,257
                
                
                
                —
                
                
                
                136,654Income
      (loss) from operations
                
                
                (125
                )
                
                
                (6,272
                )
                
                
                24,980
                
                
                
                —
                
                
                
                18,583Equity
      in the income (loss) of subsidiaries
                
                
                (37,101
                )
                
                
                (29,937
                )
                
                
                —
                
                
                
                67,038
                
                
                
                —Loss
      from discontinued operations
                
                
                —
                
                
                
                1,136
                
                
                
                21,960
                
                
                
                —
                
                
                
                23,096Other
      (income) expenses
                
                
                35,629
                
                
                
                (244
                )
                
                
                32,957
                
                
                
                —
                
                
                
                68,342Net
      income (loss)
                
                $
                (72,855
                )
                
                $
                (37,101
                )
                
                $
                (29,937
                )
                
                $
                67,038
                
                
                $
                (72,855
                )





76





Condensed
Consolidating Balance Sheets:





As of December 31,
2008Parent
                  Guarantor
                
                
                HCOC
                
                
                Guarantor
                  Subsidiaries
                
                
                Eliminations
                
                
                Consolidated(In
      thousands)AssetsCurrent
      assets
                
                $
                3,991
                
                
                $
                47,290
                
                
                $
                44,265
                
                
                $
                —
                
                
                $
                95,546Investment
      in subsidiaries
                
                
                (44,206
                )
                
                
                160,755
                
                
                
                —
                
                
                
                (116,549
                )
                
                
                —Long
      term assets
                
                
                1,050
                
                
                
                5,283
                
                
                
                141,497
                
                
                
                —
                
                
                
                147,830Total
      assets
                
                $
                (38,165
                )
                
                $
                213,328
                
                
                $
                185,762
                
                
                $
                (116,549
                )
                
                $
                243,376Liabilities
      and Stockholders’ DeficitCurrent
      liabilities
                
                $
                133,620
                
                
                $
                257,534
                
                
                $
                24,912
                
                
                $
                —
                
                
                $
                416,066Long
      term liabilities
                
                
                13,798
                
                
                
                —
                
                
                
                95
                
                
                
                —
                
                
                
                13,893Stockholders’
      deficit:Common
      stock
                
                
                3
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                3Accumulated
      deficit
                
                
                (186,586
                )
                
                
                (44,206
                )
                
                
                160,755
                
                
                
                (116,549
                )
                
                
                (186,586
                )Total
      stockholders’ deficit
                
                
                (186,583
                )
                
                
                (44,206
                )
                
                
                160,755
                
                
                
                (116,549
                )
                
                
                (186,583
                )Total
      liabilities and stockholders’ deficit
                
                $
                (38,165
                )
                
                $
                213,328
                
                
                $
                185,762
                
                
                $
                (116,549
                )
                
                $
                243,376





As of December 31,
2007Parent
                      Guarantor
                    
                    
                    HCOC
                    
                    
                    Guarantor
                      Subsidiaries
                    
                    
                    Eliminations
                    
                    
                    Consolidated(In
      thousands)AssetsCurrent
      assets
                    
                    $
                    3,872
                    
                    
                    $
                    56,759
                    
                    
                    $
                    101,025
                    
                    
                    $
                    —
                    
                    
                    $
                    161,656Investment
      in subsidiaries
                    
                    
                    (19,669
                    )
                    
                    
                    231,094
                    
                    
                    
                    —
                    
                    
                    
                    (211,425
                    )
                    
                    
                    —Long
      term assets
                    
                    
                    1,449
                    
                    
                    
                    6,275
                    
                    
                    
                    175,392
                    
                    
                    
                    —
                    
                    
                    
                    183,116Total
      assets
                    
                    $
                    (14,348
                    )
                    
                    $
                    294,128
                    
                    
                    $
                    276,417
                    
                    
                    $
                    (211,425
                    )
                    
                    $
                    344,772Liabilities
      and Stockholders’ DeficitCurrent
      liabilities
                    
                    $
                    —
                    
                    
                    $
                    141,909
                    
                    
                    $
                    45,126
                    
                    
                    $
                    —
                    
                    
                    $
                    187,035Long
      term liabilities
                    
                    
                    132,481
                    
                    
                    
                    171,888
                    
                    
                    
                    197
                    
                    
                    
                    —
                    
                    
                    
                    304,566Stockholders’
      deficit:Common
      stock
                    
                    
                    3
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    3Accumulated
      deficit
                    
                    
                    (146,832
                    )
                    
                    
                    (19,669
                    )
                    
                    
                    231,094
                    
                    
                    
                    (211,425
                    )
                    
                    
                    (146,832
                    )Total
      stockholders’ deficit
                    
                    
                    (146,829
                    )
                    
                    
                    (19,669
                    )
                    
                    
                    231,094
                    
                    
                    
                    (211,425
                    )
                    
                    
                    (146,829
                    )Total
      liabilities and stockholders’ deficit
                    
                    $
                    (14,348
                    )
                    
                    $
                    294,128
                    
                    
                    $
                    276,417
                    
                    
                    $
                    (211,425
                    )
                    
                    $
                    344,772





77





Condensed
Consolidating Statements of Cash Flows:





Year Ended December 31,
      2008Parent
                  Guarantor
                
                
                HCOC
                
                
                Guarantor
                  Subsidiaries
                
                
                Eliminations
                
                
                Consolidated(In
      thousands)Cash
      provided by (used in):Operating
      activities of continuing operations
                
                $
                (503
                )
                
                $
                (11,491
                )
                
                $
                23,045
                
                
                $
                —
                
                
                $
                11,051Investing
      activities from continuing operations:Additions
      to pre-publication costs
                
                
                —
                
                
                
                —
                
                
                
                (19,003
                )
                
                
                —
                
                
                
                (19,003
                )Additions
      to property and equipment
                
                
                —
                
                
                
                (23
                )
                
                
                (1,225
                )
                
                
                —
                
                
                
                (1,248
                )Additions
      to intangibles
                
                
                —
                
                
                
                —
                
                
                
                (27
                )
                
                
                —
                
                
                
                (27
                )Intercompany
      activity
                
                
                566
                
                
                
                4,134
                
                
                
                (4,700
                )
                
                
                —
                
                
                
                —Proceeds
      from sale of businesses
                
                
                —
                
                
                
                48,716
                
                
                
                —
                
                
                
                —
                
                
                
                48,716Proceeds
      from sale of assets
                
                
                —
                
                
                
                1,181
                
                
                
                2
                
                
                
                —
                
                
                
                1,183Net
      cash provided by (used in) investing activities
                
                
                566
                
                
                
                54,008
                
                
                
                (24,953
                )
                
                
                —
                
                
                
                29,621Financing
      activities of continuing operations:Proceeds
      from term loan
                
                
                
                
                
                
                108,200
                
                
                
                
                
                
                
                
                
                
                
                108,200Repayment
      of senior secured term loan
                
                
                —
                
                
                
                (124,850
                )
                
                
                —
                
                
                
                —
                
                
                
                (124,850
                )Repayment
      of principal- senior notes
                
                
                
                
                
                
                (31,200
                )
                
                
                
                
                
                
                
                
                
                
                (31,200
                )Additions
      to deferred financing costs
                
                
                —
                
                
                
                (3,059
                )
                
                
                —
                
                
                
                —
                
                
                
                (3,059
                )Net
      cash provided by (used in) financing activities
                
                
                
                
                
                
                (50,909
                )
                
                
                —
                
                
                
                —
                
                
                
                (50,909
                )Effect
      of exchange rates on cash
                
                
                —
                
                
                
                —
                
                
                
                (1,046
                )
                
                
                —
                
                
                
                (1,046
                )Net
      cash used by discontinued operations
                
                
                —
                
                
                
                (4,724
                )
                
                
                1,637
                
                
                
                —
                
                
                
                (3,087
                )Net
      change in cash and cash equivalents
                
                
                63
                
                
                
                (13,116
                )
                
                
                (1,317
                )
                
                
                —
                
                
                
                (14,370
                )Cash
      and cash equivalents at beginning of period
                
                
                3,872
                
                
                
                56,237
                
                
                
                1,675
                
                
                
                —
                
                
                
                61,784Cash
      and cash equivalents at end of period
                
                $
                3,935
                
                
                $
                43,121
                
                
                $
                358
                
                
                $
                —
                
                
                $
                47,414





Year Ended December 31,
      2007Parent
                    Guarantor
                  
                  
                  HCOC
                  
                  
                  Guarantor
                    Subsidiaries
                  
                  
                  Eliminations
                  
                  
                  Consolidated(In
      thousands)Cash
      provided by (used in):Operating
      activities of continuing operations
                  
                  $
                  (110
                  )
                  
                  $
                  (2,722
                  )
                  
                  $
                  17,786
                  
                  
                  $
                  —
                  
                  
                  $
                  14,954Investing
      activities from continuing operations:Additions
      to pre-publication costs
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (17,985
                  )
                  
                  
                  —
                  
                  
                  
                  (17,985
                  )Additions
      to property and equipment
                  
                  
                  —
                  
                  
                  
                  (80
                  )
                  
                  
                  (1,465
                  )
                  
                  
                  —
                  
                  
                  
                  (1,545
                  )Additions
      to intangibles
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (29
                  )
                  
                  
                  —
                  
                  
                  
                  (29
                  )Intercompany
      activity
                  
                  
                  2,303
                  
                  
                  
                  (7,764
                  )
                  
                  
                  5,461
                  
                  
                  
                  —
                  
                  
                  
                  —Proceeds
      from sale of businesses and assets
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  6
                  
                  
                  
                  —
                  
                  
                  
                  6Net
      cash used in investing activities
                  
                  
                  2,303
                  
                  
                  
                  (7,844
                  )
                  
                  
                  (14,012
                  )
                  
                  
                  —
                  
                  
                  
                  (19,553
                  )Financing
      activities of continuing operations:Transaction
      cost- troubled debt restructuring and recapitalization
                  
                  
                  (2,038
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (2,038
                  )Repayment
      of senior secured term loan
                  
                  
                  —
                  
                  
                  
                  (1,300
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (1,300
                  )Additions
      to deferred financing costs
                  
                  
                  
                  
                  
                  
                  (88
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (88
                  )Net
      cash provided by financing activities
                  
                  
                  (2,038
                  )
                  
                  
                  (1,388
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (3,426
                  )Effect
      of exchange rates on cash
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  89
                  
                  
                  
                  —
                  
                  
                  
                  89Net
      cash provided by discontinued operations
                  
                  
                  —
                  
                  
                  
                  4,201
                  
                  
                  
                  (4,328
                  )
                  
                  
                  —
                  
                  
                  
                  (127
                  )Net
      change in cash and cash equivalents
                  
                  
                  155
                  
                  
                  
                  (7,753
                  )
                  
                  
                  (465
                  )
                  
                  
                  —
                  
                  
                  
                  (8,063
                  )Cash
      and cash equivalents at beginning of period
                  
                  
                  3,717
                  
                  
                  
                  63,990
                  
                  
                  
                  2,140
                  
                  
                  
                  —
                  
                  
                  
                  69,847Cash
      and cash equivalents at end of period
                  
                  $
                  3,872
                  
                  
                  $
                  56,237
                  
                  
                  $
                  1,675
                  
                  
                  $
                  —
                  
                  
                  $
                  61,784





78





Year Ended December 31,
      2006Parent
                  Guarantor
                
                
                HCOC
                
                
                Guarantor
                  Subsidiaries
                
                
                Eliminations
                
                
                Consolidated(In
      thousands)Cash
      provided by (used in):Operating
      activities of continuing operations
                
                $
                21
                
                
                $
                (3,668
                )
                
                $
                15,048
                
                
                $
                —
                
                
                $
                11,401Investing
      activities from continuing operations:Additions
      to pre-publication costs
                
                
                —
                
                
                
                —
                
                
                
                (17,108
                )
                
                
                —
                
                
                
                (17,108
                )Additions
      to property and equipment
                
                
                —
                
                
                
                (9
                )
                
                
                (1,497
                )
                
                
                —
                
                
                
                (1,506
                )Additions
      to intangibles
                
                
                —
                
                
                
                —
                
                
                
                (16
                )
                
                
                —
                
                
                
                (16
                )Intercompany
      activity
                
                
                114
                
                
                
                4,214
                
                
                
                (4,328
                )
                
                
                —
                
                
                
                —Proceeds
      from sale of businesses and assets
                
                
                —
                
                
                
                500
                
                
                
                —
                
                
                
                —
                
                
                
                500Net
      cash provided by (used in) investing activities
                
                
                114
                
                
                
                4,705
                
                
                
                (22,949
                )
                
                
                —
                
                
                
                (18,130
                )Financing
      activities of continuing operations:Proceeds
      from exercise of stock options
                
                
                11
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                11Repayment
      of senior secured term loan
                
                
                —
                
                
                
                (1,300
                )
                
                
                —
                
                
                
                —
                
                
                
                (1,300
                )Additions
      to deferred financing costs
                
                
                —
                
                
                
                (104
                )
                
                
                —
                
                
                
                —
                
                
                
                (104
                )Net
      cash provided by (used in) financing activities
                
                
                11
                
                
                
                (1,403
                )
                
                
                —
                
                
                
                —
                
                
                
                (1,393
                )Effect
      of exchange rates on cash
                
                
                —
                
                
                
                —
                
                
                
                245
                
                
                
                —
                
                
                
                245Net
      cash used in discontinued operations
                
                
                —
                
                
                
                (293
                )
                
                
                8,424
                
                
                
                —
                
                
                
                8,132Net
      change in cash and cash equivalents
                
                
                146
                
                
                
                (660
                )
                
                
                769
                
                
                
                —
                
                
                
                255Cash
      and cash equivalents at beginning of period
                
                
                3,571
                
                
                
                64,650
                
                
                
                1,371
                
                
                
                —
                
                
                
                69,592Cash
      and cash equivalents at end of period
                
                $
                3,717
                
                
                $
                63,990
                
                
                $
                2,140
                
                
                $
                —
                
                
                $
                69,847





22.  Related
Party Transaction





Pursuant
to Management Stock Purchase Agreements dated August 10, 2007, Messrs. Crecca
and Quandt purchased for $0.001 a share, 75,000 and 225,000 shares of restricted
stock, respectively. Mr. Quandt’s 225,000 shares of common stock were deemed to
be fully vested at the time of his resignation. Mr. Crecca’s restricted shares
are subject to a three year vesting period. Each non-employee member of the
Board of Directors received a restricted stock award of 8,117 shares of our
common stock with the Chairman receiving 12,175 shares. The restricted stock
granted pursuant to all of these awards was to vest in February 2008. During the
year ended December 31, 2007, for $0.001 per share director Eugene I. Davis
purchased 12,175 shares of restricted stock, and directors John A. McKenna, Jr.,
Curry E. Ford and T.J. Vigliotta have purchased 8,117 shares of restricted stock
each. In January 2008, prior to the vesting of his restricted stock, Mr.
Vigliotta elected to forfeit all of his restricted stock. Mr. Vigliotta resigned
from the Board of Directors on May 8, 2009. In January 2008, prior to the
vesting of his restricted stock, Mr. Ford elected to forfeit all of his
restricted stock in exchange for an issuance by the Company to Glenview Capital
Management, LLC, of an equivalent amount under the same terms and conditions.
Subsequently, we issued to Glenview Capital Management, LLC, which has
designated Mr. Ford to serve as our director, a restricted stock award of 8,117
shares. All outstanding restricted stock awards fully vested on February 10,
2008 for issuances to Mr. Davis and Glenview Capital Management, LLC and
February 21, 2008 for the issuance to Mr. McKenna. Total stock-based
compensation expense is recognized as a “general and administrative expense” in
the consolidated statements of operations on a ratable basis over the vesting
period. Total stock-based compensation expense is recognized as a “general and
administrative expense” in the consolidated statements of operations on a
ratable basis over the vesting period. The compensation expense recorded for
these restricted shares was $0.2 and $1.5 million for the years ended December
31, 2008 and December 31, 2007, respectively.





Monarch
Alternative Capital LP (“Monarch Capital”), Deephaven Distressed Opportunities
Trading Ltd. and New York Life Investment Management LLC each may be deemed to
beneficially own more than 5% of our outstanding stock. Each of these entities
or their affiliates also own positions in one or more of our Term Loans, Senior
Notes or Senior Discount Notes. Mr. Vigliotta, a former director, is a Principal
at Monarch Capital and served as a member of our Board of Directors between
August 2007 and May 2009. Monarch Capital acquired its debt positions prior to
Mr. Vigliotta’s appointment to our Board. Effective July 29, 2008, Haights Cross
entered into a commitment letter (the “Commitment Letter”) with Monarch Capital
on behalf of certain of its affiliated investment funds and Glenview Capital
Management, LLC on behalf of certain of its affiliated investment funds
(“Glenview” and together with Monarch Capital, the “Proposed Lenders”). Pursuant
to the Commitment Letter, the Proposed Lenders made commitments to provide $75
million of senior secured term loans (the “Facility”) to Haights Cross to
refinance its then existing senior secured term loan indebtedness that matured
on August 15, 2008 (the “Refinancing”).





This
commitment was obtained as a backstop to ensure the Company had the ability to
effect the Refinancing. Accordingly, Haights Cross was free to obtain financing
in lieu of the Facility (the “Alternative Term Loan Facility”) and suffer no
financial penalty. Upon Haights Cross’ election to proceed with an Alternative
Term Loan Facility described above under “New Term Loans”, the commitments of
Monarch and Glenview terminated.





79





Pursuant
to the Commitment Letter, Monarch and Glenview each made a commitment to provide
50% of the amount of the Facility. In consideration for this commitment, Haights
Cross agreed (i) to pay or reimburse Monarch and Glenview for certain reasonable
and documented out-of-pocket costs and expenses and (ii) to pay a non-refundable
commitment fee of $750,000 to each of Monarch and Glenview. These fees were
recorded in general and administrative expensed in the accompanied statement of
operations.





Certain
of Monarch’s affiliates or investment funds for which it acts as investment
advisor currently beneficially own more than 21% of the common stock of the
Company. T.J. Vigliotta, a Principal at Monarch, served as a member of our Board
of Directors between August 2007 and May 2009.





Certain
of Glenview’s affiliates or investment funds for which it acts as investment
advisor currently beneficially own more than 14% of the common stock of the
Company. Curry E. Ford, a Managing Director of Glenview, has served as a member
of our Board of Directors since August 2007.





Neither
of Messrs. Vigliotta or Ford participated in the Company’s decision to accept
the Commitment Letter.





80




HAIGHTS
CROSS COMMUNICATIONS, INC. — PARENT COMPANY





Schedule I —
Condensed Financial Information





Condensed
Balance Sheets





As of December 31,2008
                    
                    
                    2007(In
      thousands)ASSETSCurrent
      assets
                    
                    $
                    3,991
                    
                    
                    $
                    3,872Investment
      in subsidiary
                    
                    
                    (44,206
                    
                    
                    
                    (19,669
                    )Long
      term assets
                    
                    
                    1,050
                    
                    
                    
                    1,449Total
      assets
                    
                    $
                    (38,165
                    )
                    
                    $
                    (14,348
                    )LIABILITIES
      AND STOCKHOLDERS’ DEFICITCurrent
      liabilities
                    
                    $
                    133,620
                    
                    
                    $
                    —Long
      term debt
                    
                    
                    —
                    
                    
                    
                    118,362Other
      long term liabilities
                    
                    
                    13,798
                    
                    
                    
                    14,119Redeemable
      preferred stock
                    
                    
                    —
                    
                    
                    
                    —Stockholders’
      deficit:Common
      stock
                    
                    
                    3
                    
                    
                    
                    3Accumulated
      deficit
                    
                    
                    (186,586
                    )
                    
                    
                    (146,832
                    )Total
      stockholders’ deficit
                    
                    
                    (186,583
                    )
                    
                    
                    (146,829
                    )Total
      liabilities and stockholders’ deficit
                    
                    $
                    (38,165
                    )
                    
                    $
                    (14,348
                    )





Condensed
Statements of Operations





Year Ended
December 31,2008
                
                
                2007
                
                
                2006(In
      thousands)Revenues
                
                $
                —
                
                
                $
                —
                
                
                $
                —General
      and administrative expenses
                
                
                507
                
                
                
                264
                
                
                
                125Operating
      loss
                
                
                (507
                )
                
                
                (264
                )
                
                
                (125
                )Equity
      in net (loss) income of subsidiary
                
                
                (28,577
                )
                
                
                (19,363
                )
                
                
                (37,101
                )Other
      income (expense)
                
                
                (8,923
                )
                
                
                83,177
                
                
                
                (35,629
                )Net
      income (loss)
                
                $
                (38,007
                )
                
                $
                63,550
                
                
                $
                (72,855
                )





Condensed
Statements of Cash Flows





Year Ended
December 31,2008
                
                
                2007
                
                
                2006(In
      thousands)Cash
      provided by (used in):Operating
      activities
                
                $
                (503
                )
                
                $
                (110
                )
                
                $
                21Investing
      activities
                
                
                566
                
                
                
                2,303
                
                
                
                114Financing
      activities
                
                
                —
                
                
                
                (2,038
                )
                
                
                11Net
      change in cash
                
                
                63
                
                
                
                155
                
                
                
                146Cash
      at beginning of period
                
                
                3,872
                
                
                
                3,717
                
                
                
                3,571Cash
      at the end of the year
                
                $
                3,935
                
                
                $
                3,872
                
                
                $
                3,717





1.
            Basis
      of Presentation





Haights
Cross Communications, Inc. is a holding company, the principal asset of which
consists of 100% of the outstanding capital stock of Haights Cross Operating
Company (“HCOC”), our wholly-owned subsidiary. In the accompanying
parent-company-only financial statements, our investment in HCOC is stated at
cost plus equity in undistributed earnings (losses) of HCOC. Our share of net
loss of HCOC is included in the condensed statements of operations using the
equity method. These parent-company-only financial statements should be read in
conjunction with our Consolidated Financial Statements.





81








HAIGHTS
CROSS COMMUNICATIONS, INC. AND SUBSIDIARIES





Schedule II —
Valuation and Qualifying Account Summary





For the Years ended December 31,
2008, 2007 and 2006:





AdditionsBalance at
                
                
                Charged to
                
                
                
                
                
                Charged toBeginning of
                
                
                Costs and
                
                
                
                
                
                Other
                
                
                
                
                
                Balance atYear
                
                
                Expenses
                
                
                
                
                
                Accounts
                
                
                Deductions
                
                
                End of YearDescription
                
                (Credit)
                
                
                (Credit)
                
                
                Acquisitions
                
                
                Debit/(Credit)
                
                
                Debit
                
                
                (Credit)Year
      ended December 31, 2008:Allowance
      for doubtful accounts and returns(1)
                
                $
                (2,213
                )
                
                
                (2,988
                )
                
                
                —
                
                
                
                —
                
                
                
                3,326
                
                
                $
                (1,875
                )Allowance
      for senior secured promissory note(2)
                
                $
                (3,945
                )
                
                
                (337
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                (4,282
                )Allowance
      for valuation of deferred tax asset
                
                $
                (72,324
                )
                
                
                (8,755
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                (81,079
                )Allowance
      for inventory obsolescence(3)
                
                $
                (2,548
                )
                
                
                (1,753
                )
                
                
                —
                
                
                
                —
                
                
                
                940
                
                
                $
                (3,361
                )Year
      ended December 31, 2007:Allowance
      for doubtful accounts and returns(1)
                
                $
                (2,993
                )
                
                
                (2,605
                )
                
                
                —
                
                
                
                —
                
                
                
                3,385
                
                
                $
                (2,213
                )Allowance
      for senior secured promissory note(2)
                
                $
                (3,604
                )
                
                
                (341
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                (3,945
                )Allowance
      for valuation of deferred tax asset
                
                $
                (60,004
                )
                
                
                (12,320
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                (72,324
                )Allowance
      for inventory obsolescence(3)
                
                $
                (2,144
                )
                
                
                (2,487
                )
                
                
                —
                
                
                
                —
                
                
                
                2,083
                
                
                $
                (2,548
                )Year
      ended December 31, 2006:Allowance
      for doubtful accounts and returns(1)
                
                $
                (3,008
                )
                
                
                (3,958
                )
                
                
                —
                
                
                
                —
                
                
                
                3,973
                
                
                $
                (2,993
                )Allowance
      for senior secured promissory note(2)
                
                $
                (2,282
                )
                
                
                (1,322
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                (3,604
                )Allowance
      for valuation of deferred tax asset
                
                $
                (48,819
                )
                
                
                (11,185
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                (60,004
                )Allowance
      for inventory obsolescence(3)
                
                $
                (1,704
                )
                
                
                (1,735
                )
                
                
                —
                
                
                
                —
                
                
                
                1,295
                
                
                $
                (2,144
                )




(1)
                Primarily
      relates to return of
products.





(2)
            Relates
      to sale of Triumph College in 2002





(3)
            Relates
      to the destruction of obsolete
inventory.





Item 9.Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure





None





Item 9A.Controls and
Procedures





(a)
            Disclosure
      Controls and Procedures





Pursuant
to Rule 15d-15 under the Exchange Act, we carried out an evaluation under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of and
design and operation of our disclosure controls and procedures, as defined by
Exchange Act Rule 15d-15(e), as of December 31, 2007. Based on that
evaluation, our disclosure controls and procedures were ineffective, as of the
end of the period covered by this report, due to the material weakness in our
internal control over financial reporting described below. In addition the
Company was unable to file its Annual Report on Form 10K within the required
time period due to additional time needed to complete the intangible asset
valuation analysis.





In
designing and evaluating our disclosure controls and procedures, our management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
designing and evaluating the controls and procedures. We regularly review and
document our disclosure controls and procedures, and our internal controls over
financial reporting, and may from time to time make appropriate changes aimed at
enhancing their effectiveness and ensure that our systems evolve with our
business.





82





(b)
            Internal
      Control Over Financial Reporting





Our
management is responsible for establishing and maintaining an adequate system of
internal control over financial reporting, as defined by Exchange Act
Rule 15d-15(f). Pursuant to Rule 15d-15 under the Exchange Act, our
management carried out an evaluation with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our internal control over financial reporting as of the end of
the period covered by this report. Management used the framework established by
the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework
(COSO)in conducting its evaluation. Because of its inherent limitations,
internal control over financial reporting cannot provide absolute assurance of
achieving financial reporting objectives. Internal control over financial
reporting is a process that involves human diligence and compliance and is
subject to lapses in judgment and breakdowns resulting from human failures.
Internal control over financial reporting also can be circumvented by collusion
or improper management override. Because of such limitations, there is a risk
that material misstatements may not be prevented or detected on a timely basis
by internal control over financial reporting. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or that the
degree of compliance with established policies or procedures may
deteriorate.





A
material weakness is a control deficiency, or a combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. As a result of a lack of technical expertise related to multiple
aspects of our financial statement closing process, management determined that a
material weakness in internal control over financial reporting related to our
financial close process existed and continues unremediated as of
December 31, 2008. This determination prompted our management to conclude
that, as of December 31, 2008, there was a reasonable possibility that a
material misstatement of our annual or interim financial statements would not be
prevented or detected on a timely basis by our employees in the normal course of
performing their assigned functions.





Our
management concluded that due to the material weakness described above, we did
not maintain effective internal control over financial reporting as of
December 31, 2008.





This
annual report does not include an attestation report of our Independent
Registered Public Accounting Firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our Independent
Registered Public Accounting Firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this annual report.





(c)
            Changes
      in Internal Control over Financial
Reporting





There was
no change in our internal control over financial reporting that occurred during
our most recently completed fiscal quarter that materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.





Regarding
the material weakness described above, we have identified the following changes
necessary to improve our internal control over financial reporting:





•
            Hiring
      key leadership accounting personnel to focus on our technical accounting
      issues and managing the monthly close process and the SEC reporting
      process;





•
            Improving
      our documentation and training related to policies and procedures for the
      controls related to our significant accounts and
  processes;





•
            Educating
      and training our management and staff to improve technical expertise with
      respect to these technical areas;





•
            Engaging
      expert resources to assist with tax and goodwill valuation
      accounting; and





•
            Re-allocating
      and/or relocating duties of finance personnel to enhance review and
      monitoring procedures.





While we
believe that the remedial actions described above would result in the correction
of the material weakness in our internal control over financial reporting, the
exact timing of when the conditions will be corrected is dependent upon future
events, which may or may not occur.





83





Item 9B.Other
Information.





On March
11, 2009, our Board of Directors rescinded the annual incentive bonus plan for
certain of our managers and employees known as the “Annual Management / Employee
Bonus Plan” (the “Bonus Plan”), which Bonus Plan was previously approved by our
Board of Directors on February 6, 2009.  We previously reported our
Board of Director’s approval of the Bonus Plan under Item 5.02 of that certain
Form 8-K filed with the Securities and Exchange Commission on February 12,
2009.  We plan to formulate and present a new bonus plan for fiscal
year 2009 to the Compensation Committee and the Board of Directors.





Part III





Item 10.Directors, Executive
Officers and Corporate Governance.





The
following table sets forth information about our executive officers, members of
our Board of Directors and the presidents of our operating subsidiaries as of
March 20, 2009. Each of our executive officers has been elected by our
Board of Directors and serves until his or her successor is duly elected and
qualified.





Name
              
              Age
              
              PositionPaul
      J. Crecca
              
              51
              
              Director,
      Chief Executive Officer and President; President of Haights Cross
      Operating CompanyMark
      Kurtz
              
              44
              
              Senior
      Vice President and Chief Financial OfficerMelissa
      L. Linsky
              
              50
              
              Senior
      Vice President — Finance and Planning, TreasurerJohn
      A. Lawler
              
              49
              
              President
      and Chief Executive Officer, Triumph LearningScott
      Williams
              
              47
              
              President,
      Recorded BooksEugene
      I. Davis
              
              54
              
              DirectorCurry
      E. Ford
              
              37
              
              DirectorJohn
      McKenna
              
              41
              
              DirectorJulie
      A. McGee
              
              66
              
              Director





Executive
Officers





Paul J. Creccahas served as
a member of our Board of Directors since October 2004 and as our Chief Executive
Officer and President since November 2007. Mr. Crecca also has served as
President of Haights Cross Operating Company since March 2008. Mr. Crecca
served as our Interim Chief Executive Officer and Interim President from August
2007 to November 2007. Mr. Crecca also served as our Executive Vice
President and Chief Financial Officer from January 1998 to August 2007.
Additionally, Mr. Crecca served as our Chief Operating Officer from January
1998 to June 2000 and as Treasurer from 2001 to 2004. From 1995 to 1998,
Mr. Crecca served as Executive Vice President — Finance of the Marvel
Comics Group, an operating division of Marvel Entertainment Group, Inc. From
1985 to 1995, Mr. Crecca served as Chief Financial Officer of
Dun & Bradstreet International, a division of the Dun &
Bradstreet Corporation. Prior to 1985, Mr. Crecca was employed as an audit
manager for Ernst & Young LLP. Mr. Crecca, a C.P.A. since 1981,
received a B.A. from the Rutgers College of Arts and Sciences and an M.B.A. from
the Rutgers Graduate School of Business Management.





Mark Kurtzhas served as our
Senior Vice President, and Chief Financial Officer since December 2007.
Mr. Kurtz served as our Vice President, Finance and Accounting, and Chief
Accounting Officer from December 1999 to December 2007. From June 1996 to
December 1999, Mr. Kurtz served as Chief Accounting Officer of Oakstone
Publishing. Prior to joining Oakstone Publishing, Mr. Kurtz served as a
senior manager at Hardman Guess Frost and Cummings, a public accounting firm.
Mr. Kurtz, a C.P.A. since 1989, received a B.B.A. from the University of
Montevallo.





Melissa L. Linskyhas served
as our Senior Vice President — Finance & Planning since December
2007. Ms. Linsky served as our Vice President, Finance and Planning from
June 1999 to December 2007 and as our Treasurer since October 2004. From 1998 to
1999, Ms. Linsky served as Vice President of Finance and Planning at the
MacManus Group, an advertising and communications company, and from 1995 to 1997
served as Vice President of Marvel Comics Group, an operating division of Marvel
Entertainment Group, Inc. From 1988 to 1995, Ms. Linsky served as Assistant
Vice President of Dun & Bradstreet International, a division of the
Dun & Bradstreet Corporation, and from 1984 to 1988 as Assistant
Treasurer at Chase Manhattan Bank. Ms. Linsky received a B.B.A. magna cum laudefrom Temple
University and an M.B.A. from New York University’s Stern School of
Business.





84





Business
Presidents





John A. Lawler has served as
President and Chief Executive Officer of Triumph Learning since
January 2009.  Prior to joining the Company, Mr. Lawler led his own
consulting  firm, Arrow Advisory, LLC, which specialized in assisting
media companies to raise capital and develop and execute innovative growth
strategies. From 2001 to 2006, Mr. Lawler was the President and Chief Executive
Officer of Martindale-Hubbell and chief executive of the Emerging Markets
division at LexisNexis. Prior to 2001, Mr. Lawler held executive positions in
business and product development, sales and marketing, and general management
with Dun & Bradstreet. Mr. Lawler received a B.A. from Williams College and
an M.B.A. from University of Virginia.





Scott Williamshas served as
President of Recorded Bookssince October 2007. From January 2003 to October 2007, Mr. Williams
served as Chief Operating Officer of Recorded Books. Mr. Williams joined
Recorded Books in 1992 as a Public Library Sales Representative.
Mr. Williams received his B.A. from Hobart College.





Non-Executive
Directors





Eugene I. Davishas served as
a member of our Board of Directors since being elected to such position by the
holders of our Preferred B in January 2006 and has served as our Chairman since
August 24, 2007. Since 1999, Mr. Davis has served as Chairman and
Chief Executive Officer of PIRINATE Consulting Group, LLC, a privately held
consulting firm specializing in turnaround management, merger and acquisition
consulting and hostile and friendly takeovers, proxy contests and strategic
planning advisory services for domestic and international public and private
business entities. Mr. Davis was the Chairman and Chief Executive Officer
of RBX Industries, Inc., a manufacturer and distributor of foam products, from
September 2001 to November 2003 and served as the Restructuring Officer for RBX
Industries, Inc. from January 2001 to September 2001. Mr. Davis holds a
bachelor’s degree from Columbia College, a master of international affairs
degree (MIA) in international law and organization from the School of
International Affairs of Columbia University, and a Juris Doctorate from
Columbia University School of Law. He is a director of Eagle Geophysical Inc.
and American Commercial Lines Inc. He is also Chairman of the Board of Directors
of Atlas Air Worldwide Holdings, Inc.





Curry E. Fordhas served as a
member of our Board of Directors since August 2007. Since January 2008,
Mr. Ford has served as Managing Director of Glenview Capital Management,
LLC, an independent registered investment advisor offering customized global
investment management and financial planning solutions. Mr. Ford served as
a senior analyst from April 2006 to December 2007 and as an analyst from
September 2004 to April 2006. Prior to joining Glenview Capital Management, LLC,
Mr. Ford was Vice President of Loan Portfolio at Lehman Brothers Inc. from
February 2003 to August 2004. From 1994 to 2003, Mr. Ford served as a
Senior Credit Analyst in the Fixed Income division and as an Associate in the
Media & Communications M&A group at Lehman Brothers Inc.
Mr. Ford holds an M.B.A. from Columbia Business School and a B.S. from
Cornell University.




Julie
McGeehas served as a
member of our Board of Directors since May 2009.  Since 1994, Ms.
McGee has served as a director on the Board of Directors of DeVry Inc. (NYSE),
where she also serves as the Chairperson of the Compensation
Committee.  Ms. McGee is currently retired.  Prior to her
retirement in January 2008, Ms. McGee has served asa Senior Advisor to Harcourt
Inc.From 2003 to 2007, she
servedas President and CEO of Harcourt
Achieve, Professional and Trade (a publisher of educational, trade and
professional materials). Prior to her position with Harcourt Achieve,
Professional and Trade, she served as President of Basal and Test Publishing,
for McGraw Hill Education, an information service provider, and earlier as
Executive Vice President of Scholastic Inc., an education publisher. From 1991
to November 2000, Ms. McGee was President of McDougal, Littell &Co.and, upon its acquisition by Houghton
Mifflin, another publishing company, in 1994, she also became Executive Vice
President of Houghton Mifflin. Ms. McGee began her publishing career at
McDougal Littell in 1988 as an editorial director. From 1986 to 1988 she held
management positions at Ligature, Inc., prior to which she was, for three years,
Director of Marketing and Software Development for a division of Tandy
Corporation.


John McKennahas served as a
member of our Board of Directors since August 2007. Between 1999 and 2006,
Mr. McKenna was Managing Director and Co-Head of the Eastern Region
Financial Restructuring Group at Houlihan Lokey Howard & Zukin, an
international investment bank. Prior to that, Mr. McKenna served as a Vice
President of Wasserstein Perella & Company from 1998 to 1999 and as a
Financial Analyst to Senior Vice President from 1992 to 1998 at Houlihan Lokey
Howard & Zukin. Mr. McKenna currently serves on the Boards of
Directors of Gate Gourmet Holdings LLC and Restricted Stock Partners, Inc. and
previously served on the Board of Directors of US Airways Group from 2003 to
2005. Mr. McKenna graduated with honors from Claremont McKenna College with
a B.A. in Government and Economics, and holds Series 7, 24 and 63
licenses.





Audit
Committee and Audit Committee Financial Expert





The
members of the audit committee are Messrs. Davis, McKenna and
Ford.  Our Board of Directors has determined that Mr. John
McKenna qualifies as an audit committee financial expert as that term is defined
in Item 407(d)(5) of Regulation S-K under the Securities Act. Although
Mr. McKenna would satisfy the heightened independence standard for audit
committee members as defined in Rule 10A-3 under the Exchange Act, this
independence standard is not applicable to us or our directors because our
securities are not listed on any national securities exchange or in any
automated inter-dealer quotation system of any national securities
association.





85





Code
of Business Conduct and Ethics





We have
adopted a code of business conduct and ethics (the “Ethics Code”) that applies
to all of our employees, officers and directors, including those officers
responsible for financial reporting. The Ethics Code is available free of charge
on our internet site, at www.haightscross.com. We expect that any amendments to
the Ethics Code, or any waivers of its requirements, will be disclosed on our
website.





86





Item 11.Executive
Compensation.





Compensation
Discussion and Analysis





The following discussion and
analysis should be read in conjunction with the “Compensation of Named Executive
Officers” and related tables that are presented immediately
below.





Introduction





The
purpose of this compensation discussion and analysis (“CD&A”) is to provide
information about each material element of compensation that we pay or award to,
or that is earned by, our former and current principal executive officers,
principal financial officer, the three other most highly compensated executive
officers of the company (these officers are referred to herein as our “named
executive officers”). For our 2008 fiscal year, our named executive officers
were:





•
              Paul
      J. Crecca, our Chief Executive Officer and
  President;





•
              Mark
      Kurtz, our Senior Vice President and Chief Financial
    Officer;





•
              Linda
      Koons, our Executive Vice President and Publisher (through June 30,
      2008);





•
              Melissa
      L. Linsky, our Senior Vice President — Finance &
      Planning;





•
              Kevin
      M. McAliley, our Executive Vice President and the President of Triumph
      Learning (through October 22, 2008);
and





•
              Scott
      Williams, the President of Recorded
Books.





This
CD&A addresses and explains our historical compensation practices, including
those that were followed in 2008, the numerical and related information
contained in the summary compensation and related tables presented below, and
actions we have taken regarding executive compensation since the end of our 2008
fiscal year with respect to the award of bonuses related to 2008
performance.





Employment and Noncompetition
Agreements





Background.  At
different points throughout 2007, the non-employee members of the Board of
Directors (consisting of Mr. Davis, Mr. Stephen F. Gormley (through
August 10, 2007), Mr. Maslow (beginning August 10, 2007 through
August 16, 2007), Mr. Gaffney (through September 17, 2007),
Messrs. Vigliotta and Ford (beginning on August 10, 2007) and
Mr. McKenna (beginning on August 21, 2007) considered approving
employment and non-competition agreements in order to secure continued service
by certain executives to the Company and their agreement that, following the
termination of their employment, such executives would refrain from competing
against the Company for a specified period. On January 31, 2007 the Company
entered into an employment agreement with Mr. Crecca, and on December 11,
2007, the Company entered into an amendment to Mr. Crecca’s existing
employment agreement in connection with his promotion to Chief Executive Officer
and President.





Use of Compensation
Consultant.  In connection with the employment and
noncompetition agreement entered into in January 2007 for Mr. Crecca, the Board
of Directors determined that the services of a compensation consultant should be
retained. In this regard, the Company retained the services of Pearl Meyer of
the firm Steven Hall & Partners (the “Consultant”), who had advised the
Company in 2006 in a similar capacity. The Consultant was charged, among other
things, with providing management and the Board of Directors with a competitive
assessment of, and recommendations with respect to, the terms of the employment
and noncompetition agreements, preparing such agreements for review by, and
approval of, the Board of Directors, and rendering an opinion as to the
reasonableness of such agreements. Our Board of Directors took the
recommendations and opinion of the Consultant into consideration when reviewing
and ultimately approving the terms of the agreement for Mr. Crecca that was
executed in January 2007.





In
determining to approve this agreement, at the time the Board of Directors
considered the following factors:





•
              The
      Company’s highly leveraged capital structure had impeded the growth of
      stockholder value in recent periods, and a resolution to these capital
      structure issues was a high priority for the
  Company;





87





•
              A
      successful resolution of the Company’s capital structure issues would
      require a dedicated effort from the Company’s management team, and the
      Board of Directors believed that a successful resolution would be much
      more likely to occur if Mr. Crecca remained with the Company throughout
      this critical period;





•
              The
      Board of Directors believed that its other senior management, and the
      senior managers of the Company’s businesses, were more likely to remain
      with the Company if Mr. Crecca also remained with the
    Company;





•
              The
      Board of Directors believed that the Company’s highly leveraged capital
      structure had caused the equity component of the Company’s compensation
      program to become increasingly less effective in motivating and retaining
      its officers and employees and, accordingly, that the Company’s best
      interests were served by ensuring that its key executives had cash
      compensation that adequately motivated them to remain with the Company
      through the next several
years;





•
              The
      Board of Directors, after reviewing the opinion and analysis of the
      Consultant, believed the severance amounts payable to Mr. Crecca (while
      greater than the amounts to which he was entitled prior to execution of
      the agreement), as well as the events triggering payment of such amount,
      were within industry standards, acknowledged his long and dedicated
      service to the Company and his importance to the Company going forward,
      served to motivate him to remain with the Company during the challenging
      period of the Company’s capital structure issues and beyond, and was fair
      and reasonable in absolute terms relative to privately held companies
      similar in size to the Company (as measured by revenue and enterprise
      value); and





•
              The
      Company would receive a material benefit by having Mr. Crecca restricted
      from competing with the Company (previously, they were not subject to
      noncompetition covenants).





The
Consultant engaged to develop the employment agreements employed industry
standards for companies of similar size in making their recommendation to the
Board of Directors.





The new
employment and non-competition agreements were approved by a majority of the
non-employee members of the Board of Directors, with Mr. Davis dissenting.
Mr. Crecca did not participate in the decision to approve his new
employment and noncompetition agreements.





Amended
Agreement.  We promoted Mr. Crecca to interim-Chief
Executive Officer and Interim-President following the departure of Peter Quandt
as the Company’s Chief Executive Officer and President on August 24, 2007, and
then subsequently, on November 5, 2007, we promoted Mr. Crecca to
Chief Executive Officer and President. On December 11, 2007, we amended
Mr. Crecca’s employment agreement to reflect his new titles and to adjust
his salary and minimum annual cash bonus payment. These payments are shown in
the chart below in “Employment and Noncompetition Agreement.” Our Compensation
Committee recommended, and our Board of Directors approved, the amendment to
Mr. Crecca’s employment agreement.





Certain other Components of
Executive Compensation





Enhanced Severance
Plan.  On June 26, 2007, we adopted an Enhanced Severance
Plan for an identified group of key employees.  On December 19, 2008,
our Board extended the term of the Enhanced Severance Plan. Under this plan, we
will provide additional severance coverage to participating employees if such
employee’s employment with us or the employee’s business unit is terminated
involuntarily without cause or voluntarily for “good reason” (as defined in the
plan) during the one year period following the sale of the Company or the
applicable business unit. We adopted the Enhanced Severance Plan to increase the
likelihood of the retention of employees during the uncertainty created by our
capital structure, which resulted in our recapitalization in August 2007 and our
anticipated exploration of strategic alternatives. We extended the Enhanced
Severance Plan in December 2008 to provide retention incentives to key
employees.




Transaction Bonus
Plan.  Upon recommendation of the Compensation Committee, on
October 10, 2007, our Board adopted a Transaction Bonus Plan pursuant to
which selected employees were eligible to receive a transaction incentive bonus
if certain conditions were satisfied. In this regard, the Company retained the
services of Deloitte & Touche LLP to assist us with the development of
this plan. The objective of the plan was to increase the likelihood of the
retention of certain key employees during our exploration of strategic
alternatives. We designed the Transaction Bonus Plan to maximize sales values by
aligning the interests of the participating employees with those of the Company
by increasing the size of bonuses if higher milestones were achieved in a sales
process. Deloitte & Touche prepared and delivered a written report that
concluded that, on an overall basis, the key plan provisions and bonus
opportunities available under the Transaction Bonus Plan as adopted by our Board
were reasonable and consistent with competitive practices. The Transaction Bonus
Plan is more fully described in “Transaction Bonus Plan.”  This plan
expired on December 31, 2008.





88





Oversight
Over Compensation Decisions





Role of the Board of Directors and
our Compensation Committee in Establishing Compensation.   The
Compensation Committee (the “Committee”) oversees all of our compensation and
benefit programs. Committee membership is determined by our Board. Since the
formation of the Committee on August 21, 2007, Messrs. McKenna, Ford and
Vigliotta served on the Committee with Mr. McKenna serving as Chairman. Mr.
Vigliotta resigned from the Board of Directors on May 8, 2009.





The
Committee’s responsibilities are specified in the Board’s authorizing votes.
During 2008, the Committee met six times. The Chairman regularly reports on
Committee actions and recommendations at full meetings of our Board. At
Committee meetings, non-Committee members of the Board and others such as the
Chief Executive Officer and President, Mr. Crecca, legal officers or
external consultants or counsel, may be invited to provide information, respond
to inquiries of the Committee and generally provide support to the
Committee.





Role of Executives in Establishing
Compensation.  During 2008, Mr. Crecca participated in and
will continue to participate in the assessment, design and recommendation of
compensation programs, plans and awards for our named executive officers. In
this regard, Mr. Crecca made and will continue to make recommendations as to
base salary levels and appropriate annual adjustments, performance targets and
award levels for purposes of our annual management and employee bonus plan, and
the creation and design of other incentive programs. Mr. Crecca, who was a
director at the time of consideration of his compensation and continues in such
role, did not participate in decisions concerning his own compensation,
including the decisions to approve his employment and noncompetition agreements
or any amendments thereto.





Role of Compensation
Consultants.  As discussed above, we used the services of
Steven Hall & Partners to assist with the design of employment packages
for Mr. Crecca and we retained the services of Deloitte & Touche
LLP to assist us with the development of our Transaction Bonus
Plan.





Objectives
of Compensation Programs





Our
executive compensation strategy is based on business performance and individual
performance accountability and competitiveness, and is designed to enable us to
attract, retain, and reward key leaders critical to our success. The
Compensation Committee and the Board has not established a revised bonus plan
for 2009. See Item 9B, “Other Information.”





Compensation
Philosophy.  Under our compensation philosophy, a named
executive officer’s total direct compensation will vary based on the Company’s
achievement of established financial objectives. In prior years non-financial
goals were also utilized in establishing targets for the managers, however
considering the sales process during 2008 the bonus plans were modified to be
100% financial target based. This philosophy applied to all of our employees,
with a more significant level of variability and compensation at risk as an
employee’s level of responsibility increases. The Company’s overall goals in
implementing this philosophy are to attract, motivate and retain highly
qualified individuals responsible for guiding the Company to achieve its
financial objectives and creating value for our investors.





Compensation
Objectives.  The Company believes that the compensation program
it follows helps it achieve the following objectives:





•
              Compensation will be related
      to performance.  The proportion of an individual’s total
      compensation that varies with achievement of Company and individual
      performance measures increases as the individual’s business
      responsibilities increase. Thus, a material portion of executive
      compensation should be directly linked to achieving specific financial
      objectives, which also serves to align the named executive officers’
      interests with those of the Company’s
investors.





•
              Compensation will be
      competitive and cost effective.  The
      Company desires to attract, motivate and retain key employees. The Company
      will pay total cash compensation (base salary plus performance-based cash
      incentives) in amounts necessary to achieve these goals and which will be
      of fair value relative to other positions in the
  Company.





•
              Retention during an
      exploration of strategic alternatives.  Our adoption of
      our Enhanced Severance Plan and Transaction Bonus Plan provided retention
      incentives to employees during our exploration of strategic alternatives
      for the Company, and subsequently, during our sales
    process.





89





For 2009,
a revised bonus plan has not been established due to the economic uncertainty
and a companywide focus on eliminating costs. See Item 9B, “Other
Information.”





Company Compensation
Policies.  A named executive officer’s total in-service
compensation consists of base salary, a cash bonus, the potential for a
transaction bonus, limited perquisites and, in certain cases, restricted stock.
With regard to these components, the Board of Directors in the past developed,
and has continued to adhere to, the following compensation
policies:





•
              Cash should be a principal
      component of compensation.  The
      Company’s equity securities are not publicly traded, and the true
      compensatory value to be accorded to the Company’s restricted stock is
      difficult for both the Company and a restricted stock recipient to
      determine. Accordingly, the Company’s compensation policy is to focus most
      heavily on providing the opportunity for its named executive officers to
      earn total cash compensation at levels that enable the Company to achieve
      the motivation and retention goals described
  above.





•
              Base salary should be the
      largest component of cash compensation.For
      each named executive officer, base salary is typically the largest
      component of cash compensation, with cash bonuses being significantly less
      than an officer’s base salary. In this regard, the Company generally views
      base salary as compensation for the named executive officer to perform the
      essential elements of his or her job, and cash bonuses as a reward for
      superior Company and individual
performance.





•
              Annual cash incentives should
      be linked to performance.Other
      than in connection with the minimum bonus amount payable under the
      employment agreement with Mr. Crecca, corporate-level executive
      officers are judged against overall Company performance, while business
      unit officers are judged against the performance of their specific unit.
      The Company believes that this policy properly reflects the fact that
      corporate-level executive officers, who have operational control over all
      business units, should be compensated based on overall performance, while
      unit officers, who have operational control only over their individual
      units, are properly compensated based on individual unit
      performance.





•
              Equity Incentives and
      Transaction Bonuses should be structured to advance both
      executive retention and motivation.The
      grant of restricted stock that the Company issued to Mr. Crecca in
      2007 vests over a three year period or upon certain other events, such as
      a sale event of the Company. Similarly, a participant’s ability to receive
      a transaction bonus requires that the employee remain continuously
      employed by the Company from the date he or she becomes a participant in
      the plan through the relevant payment
dates.





90





Compensation
Programs Design and Elements of Compensation





The
Company designs its compensation programs to reward both business and individual
performance. We choose to pay each element of compensation to further the
objectives of our compensation program, which, as noted, includes the need to
attract, retain and reward key leaders critical to our success by providing
competitive total compensation.





Elements of In-Service
Compensation.  The elements of in-service compensation consist
of base salary, annual cash performance incentives, the potential for a
transaction bonus and a limited number of perquisites. The Company generally
determines the nature and amount of each element of compensation as
follows:





•
              Base
      salaries.  The Company typically agrees upon a base
      salary with a named executive officer at the time of initial employment,
      which may or may not be reflected in an employment agreement. The amount
      agreed upon reflects the Company’s views as to the individual executive’s
      experience and future potential, scope of anticipated responsibilities,
      skills, expertise, potential to add value through performance and
      competitive salary practices. When appropriate, the Company also considers
      changes to base salary pay during the year. The Company also considers the
      named executive officer’s projected future total compensation, emphasizing
      performance-based compensation in lieu of base salary
      adjustments.





•
              Cash performance
      incentives.  The Company typically adopts an Annual
      Management/Employee Bonus Plan. For 2008, the plan was designed to pay
      100% of the award opportunity based on the achievement of pre-defined
      financial goals (described below). These goals had been recommended by our
      senior management and approved by the Board of Directors. The operation of
      this plan as it related to our named executive officers is described in
      more detail below. For 2008, the cash performance incentives had been
      modified to reduce the focus on non-financial Company and individual
      goals. This modification was enacted in light of the Company’s pursuit of
      the sales of its businesses.





For 2009,
a revised bonus plan has not been established due to the economic uncertainty
and a companywide focus on eliminating costs. See Item 9B, “Other
Information.”





•
              Stock
      options.  The Company had 2,400,000 shares of common
      stock authorized for grants under its Restated 2000 Stock Option and Grant
      Plan. In connection with the recapitalization on August 10, 2007,
      this plan and all outstanding awards thereunder were terminated. The
      Company no longer uses stock options as incentive
      compensation.





•
              Restricted
      Stock.  In connection with the closing of the
      recapitalization, we issued Mr. Crecca restricted stock in the amount of
      75,000 shares of common stock. As noted above, the recapitalization
      eliminated substantially all of the prior equity (options and shares)
      owned by the executive officers of the Company. The issuance of restricted
      stock was made to Mr. Crecca to realign his interests with the
      stockholders of the Company.





•
              Transaction Bonus
      Plan.  In October 2007, we adopted a Transaction Bonus
      Plan pursuant to which selected employees are eligible to receive a
      transaction incentive bonus if certain conditions are satisfied. We
      evaluated and selected each participating employee’s range of transaction
      bonuses at the time of the adoption of the plan and notified each employee
      of their bonus range. Each employee’s bonus range was selected based on
      that particular employee’s value to the business unit and the sales
      process. Under the Transaction Bonus Plan Mr. Crecca has received $23,830,
      Ms. Koons has received $11,208 and each of Ms. Linsky and Mr. Kurtz
      received $4,878 during the year. The Transaction Bonus Plan expired on
      December 31, 2008.





•
              Perquisites.  The
      Company’s general policy is to compensate its named executive officers at
      a level that eliminates the need for Company-provided perquisites and
      enables each individual officer to provide for his or her own needs.
      Accordingly, in 2008, the Company provided only the following perquisites
      to its named executive officers, the amounts of which are detailed in the
      tables below:





•
              All
      named executive officers received automobile allowances ranging in value
      from $7,500 to $15,000 for the year;
and





•
              Ms. Koons
      received a monthly housing allowance as part of the relocation arrangement
      agreed to by the Company upon her hiring. During 2008 Ms. Koons received
      $6,000 in housing allowance.





91





Elements of Post-Termination
Compensation and Benefits.  The Company’s historical
post-termination compensation policy has been designed to enable a terminated
officer to continue to receive his or her salary and benefits for a reasonable
period of time while the officer searches for new employment. The Company
believes that the amounts of these payments and benefits and the periods of time
during which they are provided are fair and reasonable and the Company has not
historically taken into account any amounts that may be received by a named
executive officer following termination when establishing current compensation
levels. Historically, the elements of post-termination compensation that the
Company has provided to its named executive officers have consisted of the
following:





•
              Salary
      continuation.  Each of Ms. Linsky, Mr. Williams and
      Mr. Kurtz has a written agreement under which he or she will receive
      continuing salary payments for a stated period of time following
      termination of employment, unless such termination constitutes termination
      for cause. Under these agreements, Ms. Linsky and Mr. Kurtz
      would receive such salary continuation for a period of six months and Mr.
      Williams would receive such salary continuation for a period of 7.4 months
      following termination of employment. The enhanced severance plan that we
      adopted in June 2007 and extended in December 2008 provides additional
      severance coverage to participating employees if such employee’s
      employment with us or the employee’s business unit is terminated
      involuntarily without cause or voluntarily for “good reason” (as defined
      in the plan) during the one year period following the sale of the Company
      or the applicable business unit. Taking into effect the application of
      this enhanced severance plan in addition to the severance benefits
      described above, Ms. Linsky, Mr. Williams and Mr. Kurtz would
      receive salary continuation for an aggregate of
      12 months.





Kevin
McAliley ceased to be our Executive Vice President and President and Chief
Executive Officer of Triumph
Learning on October 22, 2008.  Linda Koons ceased to be
Executive Vice President and Publisher on June 30, 2008. Under their written
agreements both Mr. McAliley and Ms. Koons received salary continuation for a
period of 12 months. However, taking into effect the application of the enhanced
severance plan in addition to the severance benefits, Ms. Koons and Mr. Mc
Aliley received severance for aggregate of 18 months. Severance payments for Mr.
McAliley and Ms. Koons were  $606,300 and $518,000,
respectively.





•
              Benefits
      continuation.  While the Company is not obligated
      pursuant to the salary continuation agreements to provide any continuation
      of benefits, the Company has followed a policy over the years of
      reimbursing terminated employees who receive salary continuation for the
      cost of COBRA payments made by them during the applicable salary
      continuation period. The Company expects that it would follow this policy
      with its named executive
officers.





Mr. Crecca’s
employment agreement provides for different arrangements regarding salary
continuation. This agreement is described below.





Employment and Noncompetition
Agreement.  As discussed above, on January 31, 2007, our
Board of Directors approved, and we entered into, an employment and
non-competition agreement with Mr. Crecca and then amended such employment
agreement on December 11, 2007.





92





The
agreement as amended provides as follows:





Terms
of Employment Agreement (as amended)





Provision
                
                Paul
      J. CreccaTerm:
                
                Through
      December 31, 2008, with automatic extensions for periods of one year (the
      first possible extension date was January 1, 2009) unless either we or the
      executive has given written notice to the other not later than six months
      prior to the expiration of the term.Base
      salary:
                
                $435,000
      commencing on December 5, 2007 and for the year 2008, increasing by 4% in
      each subsequent year of the term. The 2009 raise has been waived by Mr.
      Crecca.Annual
      bonus:
                
                Minimum
      annual cash bonus equal to 50% of the base salary in effect for the
      applicable year.Other
      benefits:
                
                Mr.
      Crecca is eligible to participate in all the compensation and benefit
      plans in which senior executives of the company are generally eligible to
      participate.Termination:
                  By
      the company for Cause or by executive without Good Reason (as defined in
      the agreement):
                
                Mr.
      Crecca will receive his salary through the date of termination and any
      accrued but unpaid vacation, and will retain all of his rights to benefits
      earned prior to termination under benefit plans in which he participates
      (including any earned but unpaid bonus).By
      executive for any reason, including death or permanent
      disability:
                
                In
      addition to the foregoing, Mr. Crecca will be entitled to a cash lump sum
      payment of a pro-rated annual cash bonus for the year in which the
      termination occurs.By
      the Company without Cause or by executive for Good Reason (as defined in
      the agreement), subject to entering into a release of
    claims:
                
                In
      addition to the amounts owed above for termination for Cause or by
      executive without Good Reason, Mr. Crecca will be entitled to (a) a
      cash lump sum payment of a pro-rated annual cash bonus for the year in
      which the termination occurs, such bonus (before pro-ration) equal to the
      greater of (i) the current year target amount or (ii) the actual bonus
      paid or payable for the prior year; plus (b) a cash lump sum payment equal
      to two (2) times the sum of (i) his base salary (calculated at the salary
      level in effect at the time of termination, including the 2009 waived
      salary increase), plus (ii) an amount equal to the higher of the current
      year bonus that would be payable at the target level, or the actual bonus
      paid or payable for performance in the year prior to the year of
      termination, plus (iii) an amount equal to the annual cost of medical plan
      benefits under COBRA or similar plan.Mr.
      Crecca will also be entitled to amounts payable under the noncompetition
      agreement described below.Definition
      of “Cause”
                
                Cause
      means:•    
      any action by executive involving theft, fraud, embezzlement or other act
      of similarly grave misconduct that results in significant damage to the
      business or reputation of the company;•    
      any material breach of the provisions of the employment agreement relating
      to treatment of confidential information, any material breach of the
      noncompetition agreement, or any material breach of any other material
      provision of the employment agreement by executive;•    
      any action by executive involving material malfeasance or material
      misconduct in connection with his employment, continuing failure to
      perform any material duties hereunder, or failure to follow any lawful,
      reasonable and material direction of the Board of Directors of the
      company; or•    
      executive’s conviction of any felony that involves dishonesty, fraud, or
      moral turpitude.





93





Definition
      of “Good Reason”
                
                Good
      Reason means, for each executive:•    
      the failure of the company to pay any amount due under the employment
      agreement;•    
      a material breach of the employment agreement by the
    company;•    
      a meaningful diminution by the company in the title, status, duties,
      powers, responsibilities or authority of the executive;•    
      the failure of any successor to the company (through merger or acquisition
      of assets or any other transaction that constitutes a sale event in which
      liabilities of the company of this nature are to be assumed) to assume and
      fully perform all of the remaining obligations of the company under the
      employment agreement; or•    
      the requirement by the company that the executive be based at any office
      more than ten miles from White Plains, New York;provided,
      however, that none of the foregoing events or matters will be deemed to
      constitute Good Reason if the company has, prior to the date of
      termination, fully cured and corrected the event or matter that would have
      constituted Good
                  Reason.
                  
                  In
      addition, each executive may elect to terminate for “Good Reason” during
      the period of three months that begins six months after a transaction or
      series of transactions in which the persons who on the date of the
      employment agreement beneficially owned the common stock of the company,
      including the former holders of the Series A and Series B preferred stock
      that converted into common stock in the recapitalization, have in the
      aggregate but regardless of whether acting as a group, no longer
      beneficially own securities of the company that enable them to effectively
      control the company through the power to elect at least 50% of the members
      of the Board of Directors (for this purpose, “beneficially own” and
      related terms have the meaning ascribed to them under Section 13(d) of the
      Exchange Act).





Terms
of Noncompetition Agreement





Provision
              
              Paul
      J. CreccaTerm
              
              While
      employed by the company and for a period of 12 months following
      termination of employmentAdditional
      amounts payable upon termination by company without Cause or executive for
      Good Reason or as a result of death or permanent
disability
              
              Will
      receive monthly payments equal to $25,000 during the 12 month period
      following the terminationRestrictive
      covenants
              
              Mr.
      Crecca may not:•    
      engage, participate, assist or invest in any competitive business (as
      defined in the agreement);•    
      directly or indirectly employ, attempt to employ, recruit, other otherwise
      solicit, induce or influence any person to leave employment with the
      company; or•    
      solicit or encourage any customer or supplier to terminate or otherwise
      modify adversely its business relationship with the
  companyDefinition
      of “Competitive Business”
              
              “Competitive
      Business” means a business conducted in all or any portion of the United
      States which is competitive with any business which the company or any of
      its direct or indirect subsidiaries conducts as of and subsequent to the
      date of the noncompetition agreement. Notwithstanding the foregoing, each
      executive may own up to one percent (1%) of the outstanding stock of a
      publicly held corporation which constitutes or is affiliated with a
      Competing Business.





94





Impact
of Performance on Compensation





Performance goals for
2008.  For 2008, the Board of Directors established financial
performance goals for the named executive officers that related to the
achievement of EBITDA For purposes of these goals “EBITDA” means earnings before
interest, taxes, depreciation and amortization, all as determined in accordance
with United States generally accepted accounting principles, excluding
restructuring and restructuring related costs, and certain non-cash and one-time
charges.





We
utilize EBITDA in the calculation of annual cash bonuses because we believe this
measure provides useful information regarding our operating results and,
consequently, executive performance. In our business, we rely on this measure to
review and assess the operational performance of our company and to compare our
current operating results with corresponding historical periods and with the
operating performance of other publishing companies. We believe it is fair and
reasonable to our executives to determine their performance bonuses on the same
basis as the company’s performance is judged by the Board of Directors, as well
as the company’s investors and creditors.





To
demonstrate how our bonus plan works, the following tables show each named
executive officer’s target bonus percentage, the allocation of that bonus
percentage by performance measure, the company’s financial performance and bonus
achievement levels, and the actual financial targets applicable to the named
executive officers.





Target Bonus
Percentages.  The following table shows the target bonus
percentage of each named executive officer for fiscal 2008. As noted above, the
bonus percentage reflects the percentage of the named executive officer’s base
salary that would be payable in the form of a cash bonus, and the target bonus
percentage for each officer reflects the Board of Directors’ assessment of the
value and contribution of each officer to the overall success of the
company:





Name
                
                Target
      Bonus
                  PercentagePaul
      J. Crecca
                
                
                50.0
                %Linda
      Koons
                
                
                44.0
                %Kevin
      M. McAliley
                
                
                40.0
                %Mark
      Kurtz
                
                
                35.0
                %Melissa
      Linsky
                
                
                35.0
                %Scott
      Williams
                
                
                35.0
                %





With
respect to each named executive officer, the measure of performance for each
named executive officer’s potential bonus was based 100% on EBITDA.





Financial Performance and Bonus
Achievement Levels.  The following table shows the rate of
payout for each named executive officer, for each measure of performance at the
Threshold, Target and Maximum achievement levels.





Financial
Performance and Bonus Achievement Levels





% of Performance Goal
    Achieved
                    
                    % of Bonus Percentage Allocation
      Achieved75%
                    
                    50%100%
                    
                    110%115%
      or higher
                    
                    150%





Accordingly,
if the actual performance with respect to a specified goal is (i) less than
75% of the target, then no bonus will be paid with respect to that goal,
(ii) 115% of the target or greater, then a maximum bonus with respect to
that goal will be paid equal to 150% of the target bonus amount, or
(iii) between 75% and 115% of the target, then a bonus with respect to that
goal of between 50% and 150% of the target bonus amount will be paid (as
determined on a straight-line basis). As previously noted and as discussed
further below, under the terms of the employment agreement of Mr. Crecca,
he is required to be paid a minimum bonus equal to 50% of his base
salary.





2008 Financial
Goals.  The following table shows the financial goals
established for the named executive officers, other than Mr. McAliley, for
2008 with respect to the overall company. These financial goals were selected
based upon the Company’s overall results for 2007, its budget and related
projections for 2008, and the Board of Director’s assessment of the appropriate
levels at which to set goals that would maximize the incentives for superior
performance.





95





Overall
Haights Cross Communications Goals





EBITDAThreshold
                          (75%)
                        
                        Target
                          (100%)
                        
                        Maximum
                          (115% or higher)(In
      thousands)$51,680
                        
                        $68,907
                        
                        $79,243





Financial
goals were also established for Mr. McAliley for 2008 with respect to Triumph Learning. The goal
for Mr. McAliley was selected based upon such unit’s overall results for
2007, its budget and related projections for 2008, and the Board of Director’s
and management’s assessment of the appropriate levels at which to set goals that
would maximize the incentives for superior performance at the unit level. We
believe that the maximum financial performance goals we have historically
established at the unit level have been difficult to achieve and represent
excellent performance that should be rewarded with a bonus that is at or near
the maximum amount achievable amount. In this regard, for the years 2006 and
2007, Mr. McAliley achieved bonuses equal to 144% and 60% of his target
bonus, indicating that Triumph
Learningperformed significantly in excess of the targeted goal and
approached the maximum goal in 2006.





Actual
performance vs. compensation paid for 2008





For 2008
the company achieved EBITDA equal to 86% of target, respectively, while Triumph Learningachieved
EBITDA under the floor amount for bonus payout, Recorded Books achieved EBITDA
of 94% of target, Oakstone achieved EBITDA of 92% of target and Sundance/Newbridgeachieved
EBITDA 120% of target. The named executive officers achieved incentive bonuses
equal to the following percentages of their base salaries:





Name
                    
                    Percentage of Base SalaryMr.
      Crecca
                    
                    
                    50.00
                    %Ms.
      Koons
                    
                    
                    37.82
                    %Mr.
      McAliley
                    
                    
                    0.00
                    %Mr.
      Kurtz
                    
                    
                    30.09
                    %Ms.
      Linsky
                    
                    
                    30.09
                    %Mr.
      Williams
                    
                    
                    35.47
                    %





Compensation
Committee Report





The
Compensation Committee of the Board of Directors has reviewed and discussed the
Compensation Discussion and Analysis required by Item 402(b) of
Regulation S-K with management and, based on such review and discussions,
the Committee has recommended to the Board of Directors that the Compensation
Discussion and Analysis be included in this report.





John
McKenna, Chairman


Curry
Ford





96





Compensation
of Named Executive Officers





The
following table includes information concerning compensation for the years ended
December 31, 2008, 2007 and 2006 for our named executive
officers.





Summary
Compensation Table





Name
      and Principal Position
                
                Year
                
                Salary
                  ($)
                
                
                Bonus
                  ($)
                  (4)
                
                
                Stock
                  Awards
                  ($)
                  (5)
                
                
                Option
                  Awards
                  ($)
                  (6)
                
                
                Non-
                  Equity
                  Incentive
                  Plan
                  Compen-
                  sation
                  ($)
                  (7)
                
                
                Change
      in
                  Pension
      Value
                  and
                  Nonqualified
                  Deferred
                  Compensation
                  Earnings
                  ($)
                
                
                All
      Other
                  Compensation
      ($)
                  (8)
                
                
                Total
                  ($)Paul
      J. Crecca
                
                2008
                
                
                435,000
                
                
                
                217,500
                
                
                
                154,394
                
                
                
                —
                
                
                
                23,830
                
                
                
                —
                
                
                
                21,900
                
                
                
                852,624Chief
      Executive Officer and
                
                2007
                
                
                379,631
                
                
                
                273,838
                
                
                
                60,327
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                21,750
                
                
                
                735,546President
                
                2006
                
                
                344,698
                
                
                
                181,667
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                22,943
                
                
                
                549,308Kevin
      M. McAliley
                
                2008
                
                
                369,627
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                625,120
                
                
                
                994,747Executive
      Vice President
                
                2007
                
                
                346,942
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                208,165
                
                
                
                —
                
                
                
                20,850
                
                
                
                575,957and
      President of TriumphLearning
      (1)
                
                2006
                
                
                326,874
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                188,319
                
                
                
                —
                
                
                
                19,510
                
                
                
                534,703Linda
      Koons
                
                2008
                
                
                171,035
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                75,898
                
                
                
                —
                
                
                
                538,408
                
                
                
                785,341Executive
      Vice President
                  and
      Publisher(2)
                
                2007
                
                
                307,230
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                195,019
                
                
                
                —
                
                
                
                38,250
                
                
                
                540,4992006
                
                
                295,231
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                119,570
                
                
                
                —
                
                
                
                37,205
                
                
                
                452,006Mark
      Kurtz
                
                2008
                
                
                250,000
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                123,211
                
                
                
                —
                
                
                
                10,829
                
                
                
                384,040Senior
      Vice President, and
                
                2007
                
                
                219,850
                
                
                
                —
                
                
                
                
                
                
                
                —
                
                
                
                154,726
                
                
                
                —
                
                
                
                14,250
                
                
                
                388,826Chief
      Financial Officer
                
                2006
                
                
                209,115
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                74,493
                
                
                
                —
                
                
                
                13,000
                
                
                
                296,608Melissa
      Linsky
                
                2008
                
                
                250,000
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                116,686
                
                
                
                —
                
                
                
                14,400
                
                
                
                381,086Senior
      Vice President
                  Finance &
      Planning
                
                2007
                
                
                216,810
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                147,098
                
                
                
                —
                
                
                
                14,250
                
                
                
                378,158Scott
      Williams
                
                2008
                
                
                251,385
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                89,155
                
                
                
                —
                
                
                
                6,900
                
                
                
                347,440President,
      Recorded Books(3)


(1)
                Kevin
      McAliley ceased to be our Executive Vice President and President and Chief
      Executive Officer of Triumph Learning on October 22,
  2008.





(2)
            Linda
      Koons ceased to be Executive Vice President and Publisher on June 30,
      2008.





(3)
            Scott
      Williams became a named executive officer in fiscal
  2008.





(4)
            Represents
      the minimum required bonus paid to Mr. Crecca pursuant to his
      employment agreement. See “Terms of Employment
  Agreement.”





(5)
            The
      fair value of each share of restricted stock awarded during the year ended
      December 31, 2007 was $6.16 per share of common stock based upon an
      August 10, 2007 valuation prepared by a third party and after due
      consideration of all other relevant factors and reasonably available
      information. Mr. Crecca paid $0.001 for each share of restricted stock.
      This award was subject to forfeiture and vested in one-third increments on
      August 9th
      of each of 2008, 2009 and 2010.





97








(6)
            In
      connection with the Recapitalization Agreement on August 10, 2007,
      all equity incentive plans and any outstanding awards thereunder were
      terminated.





(7)
            Represents
      non-equity incentive payments earned pursuant to our Annual
      Management/Employee Bonus Plan. For Ms. Linsky and Mr. Kurtz,
      also includes $1,593 and $8,118, respectively, earned under our 2008
      Expense Savings Incentive Plan and a board approved discretionary bonus of
      $35,000 for each. Amount also includes the payments earned pursuant to our
      Transaction Bonus Plan. Under the Transaction Bonus Plan, Mr. Paul Crecca
      received $23,830, Ms. Koons received $11,208 and each of Ms Linsky and Mr.
      Kurtz received $4,878 during the
year.





(8)
            For
      each named executive officer, the amounts in this column also consist of:
      (i) contributions made by the Company under our 401(k) plan; and
      (ii) car allowances. For Ms. Koons, amounts in this column also
      include a housing allowance of $6,000 that the Company paid as part of a
      relocation arrangement agreed to upon her hiring. For Mr. McAliley and Ms.
      Koons, this column also included severance payments of $606,300 and
      $518,000, respectively. These severance payments are discussed above under
      “Compensation Discussion and
Analysis”





Incentive
Plans





Restated 2000 Stock Option and Grant
Plan.  In connection with the recapitalization on
August 10, 2007, our Restated 2000 Stock Option and Grant Plan and all
outstanding awards thereunder were terminated. There are no other equity
incentive plans outstanding.





Annual Management/Employee Bonus
Plan.  We provide our managers and employees an opportunity to
earn cash bonuses pursuant to an incentive bonus plan in effect for each fiscal
year known as the “Annual Management/Employee Bonus Plan” (the “Bonus Plan”).
Compensation payouts to participants under the Bonus Plan are based on a
participant’s achievement of defined objectives and such participant’s
applicable Bonus Percentage (as defined below). Qualification to receive a
payout under the Bonus Plan for each employee considered an executive or
manager, will generally be based 60% on the achievement of certain pre-defined
business profit and cash flow goals, and 40% on the completion of pre-defined,
non-quantitative business improvement projects and initiatives. The pre-defined
business profit and cash flow goals, and the pre-defined projects and
initiatives, are recommended by our senior management and approved by the Board
of Directors.  For 2008, qualification to receive a payout under the
Bonus Plan was based 100% on the achievement of certain pre-defined profit
goals.





The
amount of a participant’s payout under the Bonus Plan is determined as a
percentage of the participant’s annual base compensation (“Bonus Percentage”).
Bonus Percentages for executives and managers range from approximately 15% to
approximately 50%, based on achieving the stated objectives of the Bonus Plan.
The amount of a participant’s payout under the Bonus Plan is subject to
proportional adjustment in the event actual results are at least 75% of the
stated objectives, and in the event actual results exceed the stated objectives
(with a maximum payout of 1.5 times an employee’s Bonus Percentage). A
participant will not receive a payout if such participant does not achieve at
least 75% of the stated objectives.





The
operation of the Bonus Plan with respect to our named executive officers is
described above in “Compensation Discussion and Analysis — Impact of
Performance on Compensation.”





The
following table sets forth certain information with respect to incentive plan
awards granted during or for the fiscal year ended December 31, 2008 to
each of our named executive officers.





98





Grants
of Plan-Based Awards


AllOther
                              
                              
                              All OtherStock
                              
                              
                              OptionAwards:
                              
                              
                              Awards:
                              
                              
                              Exercise
                              
                              
                              GrantNumber of
                              
                              
                              Number of
                              
                              
                              or Base
                              
                              
                              DateEstimated Future Payouts Under
                              
                              
                              Estimated Future Payouts Under
                              
                              
                              Shares
                              
                              
                              Securities
                              
                              
                              Price of
                              
                              
                              FairNon-Equity Incentive Plan Awards(1)
                              
                              
                              Equity Incentive Plan Awards(2)
                              
                              
                              of Stock
                              
                              
                              Underlying
                              
                              
                              Option
                              
                              
                              Value ofGrant
                              
                              Threshold
                              
                              
                              Target
                              
                              
                              Maximum
                              
                              
                              Threshold
                              
                              
                              Target
                              
                              
                              Maximum
                              
                              
                              or Units
                              
                              
                              Options
                              
                              
                              Awards
                              
                              
                              OptionName
                              
                              Date
                              
                              ($)
                              
                              
                              ($)
                              
                              
                              ($)
                              
                              
                              (#)
                              
                              
                              (#)
                              
                              
                              (#)
                              
                              
                              (#)
                              
                              
                              (#)
                              
                              
                              ($/Sh)
                              
                              
                              PricePaul
      J. Crecca
                              
                              
                              
                              $
                              217,500
                              
                              
                              $
                              217,500
                              
                              
                              $
                              326,250
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Linda
      Koons
                              
                              
                              
                              $
                              71,500
                              
                              
                              $
                              143,000
                              
                              
                              $
                              214,500
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Kevin
      M. McAliley
                              
                              
                              
                              $
                              76,000
                              
                              
                              $
                              152,000
                              
                              
                              $
                              228,000
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Mark
      Kurtz
                              
                              
                              
                              $
                              43,750
                              
                              
                              $
                              87,500
                              
                              
                              $
                              131,250
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Melissa
      Linsky
                              
                              
                              
                              $
                              43,750
                              
                              
                              $
                              87,500
                              
                              
                              $
                              131,250
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Scott
      Williams
                              
                              
                              
                              $
                              43,750
                              
                              
                              $
                              87,500
                              
                              
                              $
                              131,250
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —







(1)
            These
      amounts reflect the Threshold, Target and Maximum bonuses payable to our
      named executive officers under awards granted pursuant to our 2008 Annual
      Management/Employee Bonus Plan. All such awards have been paid, and the
      actual amounts paid are set forth in the Summary Compensation Table above.
      As discussed above, Mr. Crecca received the minimum bonus payments under
      his new employment agreements and was not paid pursuant to his non-equity
      incentive plan awards.





The
following table includes certain information with respect to outstanding equity
awards held by the named executive officers as of December 31,
2008.





Outstanding
Equity Awards at Fiscal Year-End


Option Awards
                                    
                                    Stock AwardsEquityIncentiveEquity
                                    
                                    PlanIncentive
                                    
                                    Awards:Plan
                                    
                                    MarketAwards:
                                    
                                    orEquity
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    Number of
                                    
                                    PayoutIncentive
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    Market
                                    
                                    Unearned
                                    
                                    Value ofPlan
                                    
                                    
                                    
                                    
                                    
                                    Number of
                                    
                                    Value of
                                    
                                    Shares,
                                    
                                    UnearnedAwards:
                                    
                                    
                                    
                                    
                                    
                                    Shares or
                                    
                                    Shares or
                                    
                                    Units or
                                    
                                    Shares,Number of
                                    
                                    Number of
                                    
                                    Number of
                                    
                                    
                                    
                                    
                                    
                                    Units of
                                    
                                    Units of
                                    
                                    Other
                                    
                                    Units orSecurities
                                    
                                    Securities
                                    
                                    Securities
                                    
                                    
                                    
                                    
                                    
                                    Stock
                                    
                                    Stock
                                    
                                    Rights
                                    
                                    OtherUnderlying
                                    
                                    Underlying
                                    
                                    Underlying
                                    
                                    Option
                                    
                                    
                                    
                                    That
                                    
                                    That
                                    
                                    That
                                    
                                    RightsUnexercised
                                    
                                    Unexercised
                                    
                                    Unexercised
                                    
                                    Exercise
                                    
                                    Option
                                    
                                    Have
                                    
                                    Have Not
                                    
                                    Have
                                    
                                    ThatOptions (#)
                                    
                                    Options (#)
                                    
                                    Unearned
                                    
                                    Price
                                    
                                    Expiration
                                    
                                    Not
                                    
                                    Vested
                                    
                                    Not
                                    
                                    HaveName
                                    
                                    Exercisable
                                    
                                    Unexercisable
                                    
                                    Options (#)
                                    
                                    ($)
                                    
                                    Date
                                    
                                    Vested (#)
                                    
                                    ($)
                                    
                                    Vested (#)
                                    
                                    Not Vested(a)
                                    
                                    (b)
                                    
                                    (c)
                                    
                                    (d)
                                    
                                    (e)
                                    
                                    (f)
                                    
                                    (g)
                                    
                                    (h)
                                    
                                    (i)
                                    
                                    (j)Paul
      J. Crecca (1)
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    40,137
                                    
                                    $
                                    62,443




99





Option
Exercises and Stock Vested





Option Awards
                          
                          Stock AwardsName
                            (a)
                          
                          Number of Shares
                            Acquired on
                            Exercise (#)
                            (b)
                          
                          Value Realized on
                            Exercise ($)
                            (c)
                          
                          Number of Shares
                            Acquired on
                            Vesting (#)
                            (d)
                          
                          
                          Value Realized on
                            Vesting ($)
                            (e)Paul
      J. Crecca (1)
                          
                          
                          
                          
                          
                          
                          34,863
                          
                          
                          $
                          214,756





(1)
            In
      connection with the recapitalization on August 10, 2007, Mr. Crecca
      received a restricted stock award for 75,000 shares of common stock. The
      award was subject to forfeiture and vests in one-third increments on
      August 9th of each of 2008, 2009 and 2010. The fair value of each
      share of restricted stock awarded during the year ended December 31,
      2007 was $6.16 per share of common stock based upon the August 10, 2007
      valuation received by a third party and after due consideration of all
      other relevant factors and reasonably available information. Mr. Crecca
      paid $0.001 for each share of restricted
stock.





Option
Exercises and Option Grants





During
the year ended December 31, 2008, no named executive officer exercised any
outstanding stock options or became vested with respect to any stock option
grant. The Restated 2000 Stock Option and Grant Plan and all outstanding awards
thereunder were terminated as of August 10, 2007.





Post-Employment
Compensation





Pension Benefits/401(k)
Plan.  We do not provide pension arrangements or
post-retirement health coverage for our executives or employees. Our executive
officers are eligible to participate in our 401(k) contributory defined
contribution plan. In any plan year, we will contribute to each participant a
matching contribution equal to 50% of the first 6% of the participant’s
compensation that has been contributed to the plan, up to a maximum matching
contribution of $6,900. All our executive officers participated in our 401(k)
plan during fiscal 2008 and received matching contributions.





Nonqualified Deferred
Compensation.  We do not provide any nonqualified defined
contribution or other deferred compensation plans.





Other Post-Employment
Payments.  Other than Mr. Crecca, all of our employees,
including our executive officers, are employees-at-will and as such do not have
employment contracts with us. Each of Mr. Kurtz, Mr. Williams and
Ms. Linsky have a written agreement under which he or she will receive
continuing salary payments for a stated period of time following termination of
employment, unless such termination constitutes termination for cause. Under
these agreements, Mr. Kurtz and Ms. Linsky would each receive such salary
continuation for a period of six months and  Mr. Williams for a period
of  7.4months following termination of employment. We adopted an
enhanced severance plan in June 2007 that provides additional severance coverage
to participating employees if such employee’s employment with us or the
employee’s business unit is terminated involuntarily without cause or
voluntarily for “good reason” (as defined in the plan) during the one year
period following the sale of the Company or the applicable business unit. We
extended the enhanced severance plan in December 2008. Taking into effect the
application of this enhanced severance plan in addition to the severance
benefits described above, Ms. Linsky, Mr. Williams and Mr. Kurtz would
receive salary continuation for an aggregate of 12 months. Although the
Company is not obligated pursuant to these agreements to provide any
continuation of benefits, the Company has followed a policy over the years of
reimbursing terminated employees who receive salary continuation for the cost of
COBRA payments made by them during the applicable salary continuation period.
The Company expects that this policy would be applied in the event of the
termination of any of Mr. Kurtz, Mr. Williams or Ms. Linsky.
Mr. Crecca, under the terms of his employment agreement, would receive,
among other things, cash payments equal to the annual cost of medical plan
benefits under COBRA or similar plan.





The
tables below reflect the amount of compensation to be paid to each of the named
executive officers of the Company in the event of termination of such
executive’s employment. The amount of compensation payable to each named
executive officer upon voluntary termination, involuntary not-for-cause
termination, termination for good reason and in the event of disability or death
of the executive is shown below. The amounts shown assume that such termination
was effective as of December 31, 2008, and thus includes amounts earned
through such time and are estimates of the amounts which would be paid out to
the executives upon their termination. With respect to Mr. Crecca, the
amounts shown below also assume that his employment and noncompetition
agreements, which were entered into on January 31, 2007, and whose
employment agreement was amended on December 11, 2007, were in effect at
December 31, 2007. The actual amounts to be paid out can only be determined
at the time of such executive’s separation from the Company.





100


Potential
Payments Upon Termination or Change of Control





Paul J.
Crecca.  The following table shows the amounts payable upon
termination of employment to Mr. Paul J. Crecca, our Chief Executive
Officer and President:





Executive Benefit
              
              Voluntary
                Termination
              
              
              Permanent
                Disability
              
              
              Death
              
              
              Termination for
                Cause
              
              
              Involuntary Not for
                Cause
                Termination(1)
              
              
              Involuntary for
                Good Reason
                Termination(1)Accrued vacation
              
              $
              36,250
              
              
              $
              36,250
              
              
              $
              36,250
              
              
              $
              36,250
              
              
              $
              36,250
              
              
              $
              36,250Cash
      bonus through date of termination
              
              $
              217,500
              
              
              $
              217,500
              
              
              $
              217,500
              
              
              $
              217,500
              
              
              $
              217,500
              
              
              $
              217,500Cash
      severance
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              $
              870,000
              
              
              $
              870,000Noncompetition
      payments
              
              
              —
              
              
              $
              300,000
              
              
              $
              300,000
              
              
              
              —
              
              
              $
              300,000
              
              
              $
              300,000Total
              
              $
              253,750
              
              
              $
              553,750
              
              
              $
              553,750
              
              
              $
              253,750
              
              
              $
              1,423,750
              
              
              $
              1,423,750


__________





(1)
            Under
      the terms of his employment agreement, upon an involuntary not for cause
      termination or an involuntary for good reason termination,
      Mr. Crecca, in addition to the other stated amounts, is entitled to
      receive cash severance equal to two (2) times the sum of (i) his
      base salary (calculated at the salary level in effect at the time of
      termination), plus (ii) an amount equal to the higher of the current
      year bonus that would be payable at the target level, or the actual bonus
      paid or payable for performance in the year prior to the year of
      termination, plus (iii) an amount equal to the annual cost of medical
      plan benefits under COBRA or similar plan. For purposes of this
      calculation, it is assumed that Mr. Crecca’s bonus for purposes of
      calculating the cash severance is equal to the minimum bonus required
      under his employment agreement of 50.0% of his base
  salary.





Other Named Executive
Officers.  The following table shows the amounts payable upon
involuntary, not for cause termination of employment to Mr. Mark Kurtz, our
Senior Vice President and Chief Financial Officer, and Melissa Linsky, our
Senior Vice President — Finance & Planning, and Mr. Scott
Williams, the President of Recorded Books:





Name
                
                Salary Continuation
                
                Cost of COBRA Reimbursement
                  During Salary Continuation Period
                
                TotalMark Kurtz
                
                $20,833 per
      month for 12 months
                
                $1,052
      per month for 12 months
                
                $
                262,620Melissa
      Linsky
                
                $20,833
      per month for 12 months
                
                $376
      per month for 12 months
                
                $
                254,508Scott
      Williams
                
                $20,949
      per month for 12 months
                
                $1,052
      per month for 12 months
                
                $
                264,012





Transaction
Bonus Plan





On
October 10, 2007, upon recommendation of the Compensation Committee, our
Board adopted the Haights Cross Communications, Inc. Transaction Bonus Plan (the
“Plan”) effective as of October 1, 2007. Under the Plan, selected employees
of the Company (each, a “Participant”), including all of our named executive
officers, were eligible to receive a transaction incentive bonus (the “Bonus”)
if (i) we announced that we were selling the Participant’s respective
business unit; (ii) a certain minimum sales proceeds from the closing of
the sale of the Participant’s business unit was achieved or exceeded; and
(iii) the Participant remained continuously employed by the Company from
the date he or she becomes a Participant in the Plan through the relevant
payment dates. Once the minimum sales proceeds were achieved, the Participant’s
Bonus could increase up to the maximum Bonus if the maximum sales proceeds for
such business unit was achieved. One-half of the Participant’s Bonus was paid on
the 30th day following the closing of the sale transaction of the
Participant’s business unit and the remainder will be paid on the one
(1) year anniversary of the closing date. The Transaction Bonus Plan
expired December 31, 2008.





For each
named executive officer who received a Bonus under the Plan, their payouts were
as follows:





Name
                  
                  BonusPaul
      J. Crecca, President and Chief Executive Officer
                  
                  $
                  23,830Kevin
      M. McAliley, Executive Vice President and President of Triumph Learning
      Group
                  
                  
                  —Linda
      Koons, Executive Vice President and Publisher
                  
                  
                  11,208Mark
      Kurtz, Senior Vice President and Chief Financial Officer
                  
                  
                  4,878Melissa
      L. Linsky, Treasurer, and Senior Vice President — Finance &
      Planning
                  
                  
                  4,878Scott
      Williams, President of Recorded Books
                  
                  
                  —





DIRECTOR
COMPENSATION





The
following table sets forth the compensation for fiscal year ended
December 31, 2008 for our directors (or on behalf of their services) who
were serving as such as of December 31, 2008.





101





Name(1)
              
              Fees Earned
                or Paid
                in Cash
              
              
              Stock
                Awards ($)
              
              
              Option
                Awards ($)
              
              
              Non- Equity
                Incentive Plan
                Compensation ($)
              
              
              All Other
                Compensation
                ($)
              
              
              TotalEugene Davis,
      Chairman(1)
              
              $
              192,362
              
              
              $
              45,885
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              $
              238,247T.J.
      Vigliotta(1)(2)
              
              
              97,500
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              97,500Curry
      Ford(1)(3)
              
              
              94,000
              
              
              
              30,592
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              124,592John
      McKenna(1)
              
              
              124,181
              
              
              
              33,327
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              157,508Paul
      J. Crecca(4)
              
              
              —
              
              
              
              154,394
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              154,394


__________





(1)
            In
      2007, each non-employee member of the Board of Directors received a
      restricted stock award of 8,117 shares of our common stock, with the
      Chairman receiving 12,175 shares. The restricted stock granted
      pursuant to all of these awards vested on February 10, 2008, except
      for Mr. McKenna’s grant which vested on February 21, 2008. In
      January 2008, prior to the vesting of his restricted stock,
      Mr. Vigliotta elected to forfeit all of his restricted stock. Mr.
      Vigliotta resigned from the Board of Directors on May 8, 2009. In January
      2008, prior to the vesting of his restricted stock, Mr. Curry elected
      to forfeit all of his restricted stock in exchange for an issuance by the
      Company to Glenview Capital Management, LLC, of an equivalent amount under
      the same terms and conditions. Subsequently, we issued to Glenview Capital
      Management, LLC, which has designated Mr. Ford to serve as our
      director, a restricted stock award of 8,117 shares. All outstanding
      restricted stock awards fully vested on February 10, 2008 for
      issuances to Mr. Davis and Glenview Capital Management, LLC and
      February 21, 2008 for the issuance to
    Mr. McKenna.





(2)
            Fees
      shown on the table as payable to Mr. Vigliotta were made to Monarch
      Alternative Capital LP, for which Mr. Vigliotta serves as a Managing
      Principal. Mr. Vigliotta resigned from the Board of Directors on May 8,
      2009.





(3)
            Fees
      shown on the table as payable to Mr. Ford were made to Glenview
      Capital Management, LLC, for which Mr. Ford serves as Managing
      Director.





(4)
            Mr. Crecca
      received no compensation for serving as a director. Mr. Crecca’s 2008
      compensation is reflected in the Summary Compensation table
      above.





Cash
Compensation.  Each non-employee director is entitled to
receive the following cash compensation:





•
            Annual
      Payments.





•
            An
      annual retainer for members of the Board of $30,000, payable $7,500 per
      quarter.





•
            An
      annual retainer for the Chairman of the Board of
  $105,000.





•
            $5,000
      annual retainer for each committee on which such non-employee director
      served ($10,000 if such non-employee director served as the Chairman of
      such committee).





•
            Board and Committee Meeting
      Fees.





•
            $3,000
      for each meeting of the Board or Committee at which the non-employee
      director was physically present.





•
            $1,500
      for each meeting of the Board or Committee at which the non-employee
      director participated by telephone.





Equity
Compensation.  In addition to cash compensation, non-employee
directors are eligible to receive equity compensation in the form of restricted
stock. We issued restricted stock as indicated under “Stock Awards” in the
preceding table.





Compensation Committee Interlocks
and Insider Participation.  The current members of the
Compensation Committee are Messrs. McKenna and Ford. No current member of
the Compensation Committee is or has ever been an executive officer or employee
of our company (or any of its subsidiaries).





Item 12.Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.





The
following table sets forth information known to us regarding the beneficial
ownership of our capital stock as of February 27, 2009, by:





102





•
            each
      person known by us to be the beneficial owner of more than 5.0% of such
      stock;





•
            each
      of our directors;





•
            each
      named executive officer; and





•
            all
      of our directors and named executive officers as a
  group.





Unless
otherwise noted, to our knowledge, each person has sole voting and investment
power over the shares of stock shown as beneficially owned, except to the extent
authority is shared by spouses under applicable law and except as set forth in
the footnotes to the table. The address of Media/Communications
Partners III Limited Partnership and its affiliates is One Liberty Square,
Boston, Massachusetts 02109. The address of New York Life Investment Management
LLC is 51 Madison Avenue, 2nd Floor, New York, New York 10010. The address
of Glenview Capital Management, LLC is 767 Fifth Avenue, 44th Floor,
New York, New York 10153. The address of Deephaven Distressed Opportunities
Trading Ltd. is 130 Cheshire Lane, Suite 102, Minnetonka, MN 55305. The
address of Monarch Alternative Capital LP is 535 Madison Avenue, New York, New
York 10022. The address of MacKay Shields LLC is 9 West 57th Street,
33rd Floor, New York, New York 10019.





The
number and percentage of shares beneficially owned by each stockholder is
determined under rules issued by the SEC. Under these rules, beneficial
ownership includes any shares as to which the individual or entity has sole or
shared voting power or investment power and includes any shares as to which the
individual or entity has the right to acquire beneficial ownership within
60 days of February 27, 2009 through the exercise of any warrant, stock
option or other right.





As of
February 27, 2009, a total of 9,958,112 shares of common stock were
outstanding and 70,301 shares of common stock were subject to warrants
exercisable within 60 days thereafter. The number of shares of voting
capital stock outstanding used in calculating the voting percentage for each
listed person includes the shares of common stock and common stock underlying
the warrants beneficially owned by such person that are exercisable within
60 days as of February 27, 2009, but excludes shares of common stock
underlying warrants beneficially owned by any other person.





Shares Beneficially OwnedName of Beneficial Owner
                    
                    Common Stock
                    
                    
                    Total
                      Voting
                      PercentMacKay
      Shields LLC
                    
                    
                    2,376,447
                    (1)(2)
                    
                    
                    23.9
                    %Monarch
      Alternative Capital LP
                    
                    
                    2,130,316
                    (1)(3)
                    
                    
                    21.4
                    %Glenview
      Capital Management, LLC
                    
                    
                    1,418,033
                    (1)(4)
                    
                    
                    14.2
                    %Media/Communications
      Partners III Limited Partnership and affiliates
                    
                    
                    1,179,135
                    (1)(5)
                    
                    
                    11.8
                    %Deephaven
      Distressed Opportunities Trading Ltd.
                    
                    
                    606,170
                    (1)(6)
                    
                    
                    6.1
                    %New
      York Life Investment Management LLC
                    
                    
                    865,938
                    (7)
                    
                    
                    8.7
                    %Paul
      J. Crecca
                    
                    
                    75,000
                    
                    
                    
                    *Eugene
      I. Davis
                    
                    
                    12,175
                    
                    
                    
                    *John
      A. McKenna. Jr.
                    
                    
                    8,117
                    
                    
                    
                    *Curry
      Ford
                    
                    
                    0
                    
                    
                    
                    0Julie
      A. McGee
                    
                    
                    0
                    
                    
                    
                    0Linda
      Koons
                    
                    
                    0
                    
                    
                    
                    0Kevin
      M. McAliley
                    
                    
                    0
                    
                    
                    
                    0Mark
      W. Kurtz
                    
                    
                    0
                    
                    
                    
                    0Melissa
      Linsky
                    
                    
                    0
                    
                    
                    
                    0John
      A. Lawler
                    
                    
                    0
                    
                    
                    
                    0Scott
      Williams
                    
                    
                    0
                    
                    
                    
                    0All
      directors and named executive officers as a group
      (11 persons)
                    
                    
                    95,292
                    
                    
                    
                    1
                    %


__________





(1)
            These
      beneficial holders are parties to a Shareholders Agreement (“Shareholders
      Agreement”) whereby the only voting provisions contained in such agreement
      require the parties thereto to vote for the director nominees of certain
      of the parties. Under the rules promulgated by the SEC, each party to the
      Shareholders Agreement may be deemed to beneficially own the shares
      beneficially owned by all parties to the Shareholders Agreement. As of
      February 27, 2009, the parties to the Shareholders Agreement collectively
      owned an aggregate of 7,710,101 shares (or 77.4%) of our outstanding
      Common Stock.





103





(2)
            MacKay
      Shields LLC (“MacKay Shields”), an investment adviser registered under
      Section 203 of the Investment Advisers Act of 1940, is deemed to be
      the beneficial owner of shares of its clients as a result of acting as
      investment adviser to these clients with sole power to vote or dispose of
      the stock. The total represents 2,357,482 shares of common stock and
      warrants to purchase 18,965 shares of common stock held by clients
      for whom MacKay Shields serves as investment
  advisor.





MacKay
      Shields disclaims beneficial ownership for any shares which may be deemed
      beneficially owned by it, including without limitation the stock and
      warrants held by other parties to the Shareholders Agreement, for purposes
      of this disclosure except to the extent of its pecuniary interest therein,
      if any, and the reporting herein of such securities shall not be construed
      as an admission of beneficial ownership thereof for any other
      purpose.





(3)
            Monarch
      Alternative Capital LP is the investment advisor to the other three
      Monarch entities named herein and may be deemed to be the beneficial owner
      of the stock and warrants held by those funds. Michael Weinstock, Andrew
      Herenstein, Christopher Santana, Josiah Rotenberg and T.J. Vigliotta, a
      former director, are Managing Principals of Monarch Alternative
      Capital LP and may be deemed to be the beneficial owner of the stock and
      warrants held by the Monarch entities named herein. The total includes
      1,559,746 shares of common stock and warrants to purchase
      7,878 shares of common stock held by Monarch Debt Recovery Master
      Fund Ltd; 214,470 shares of common stock and warrants to
      purchase 890 shares of common stock held by Monarch Income Master
      Fund Ltd; and 346,442 shares of common stock and warrants to
      purchase 890 shares of common stock held by Monarch Opportunities
      Master Fund Ltd.





The
      entities and individuals listed above disclaim beneficial ownership for
      any shares which may be deemed beneficially owned by them, including
      without limitation the stock and warrants held by other parties to the
      Shareholders Agreement, for purposes of this disclosure except to the
      extent of their pecuniary interest therein, if any, and the reporting
      herein of such securities shall not be construed as an admission of
      beneficial ownership thereof for any other
  purpose.





(4)
            Larry
      Robbins is the Chief Executive Officer and Senior Managing Member of
      Glenview Capital Management, LLC, the Investment Manager of each of
      Glenview Capital Partners, L.P., Glenview Institutional Partners, L.P. and
      Glenview Capital Master Fund, Ltd. As such, he and Glenview Capital
      Management, LLC may be deemed to exercise shared voting and investment
      control over the stock and warrants held by the entities listed above. The
      total includes 431,721 shares of common stock and warrants to
      purchase 3,431 shares of common stock held by Glenview Institutional
      Partners, L.P; 175,606 shares of common stock and warrants to
      purchase 1,398 shares of common stock held by Glenview Capital
      Partners, L.P; 791,311 shares of common stock and warrants to
      purchase 6,449 shares of common stock held by Glenview Capital Master
      Fund, Ltd.; and 8,117 shares of common stock held by Glenview Capital
      Management, LLC.





The
      entities and individual listed above disclaim beneficial ownership for any
      shares which may be deemed beneficially owned by them, including without
      limitation the stock and warrants held by other parties to the
      Shareholders Agreement, for purposes of this disclosure except to the
      extent of their pecuniary interest therein, if any, and the reporting
      herein of such securities shall not be construed as an admission of
      beneficial ownership thereof for any other
  purpose.





(5)
            The
      total includes 1,120,170 shares of common stock beneficially owned by
      Media/Communications Partners III Limited Partnership and
      58,965 shares of common stock beneficially owned by M/C Investors
      L.L.C. Christopher S. Gaffney is a Manager and holds an ownership interest
      in these entities and may be deemed to be the beneficial owner of the
      stock and warrants held by the entities named herein. The two entities
      listed herein are affiliated investment entities whose sole general
      partners or managing members share individual general partners and thus
      each entity may be deemed to beneficially own the stock held by the other
      entity.





The
      entities listed above and Mr. Gaffney disclaim beneficial ownership
      for any shares which may be deemed beneficially owned by them, including
      without limitation the stock and warrants held by other parties to the
      Shareholders Agreement, for purposes of this disclosure except to the
      extent of their pecuniary interest therein, if any, and the reporting
      herein of such securities shall not be construed as an admission of
      beneficial ownership thereof for any other
  purpose.





(6)
            The
      total includes 601,310 shares of common stock and warrants to
      purchase 4,860 shares of common stock beneficially owned by Deephaven
      Distressed Opportunities Trading
Ltd.





The
      entity listed above disclaims beneficial ownership for any shares which
      may be deemed beneficially owned by it, including without limitation the
      stock and warrants held by other parties to the Shareholders Agreement,
      for purposes of this disclosure except to the extent of its pecuniary
      interest therein, if any, and the reporting herein of such securities
      shall not be construed as an admission of beneficial ownership thereof for
      any other purpose.





104





(7)
            This
      total includes 777,405 shares of common stock and warrants to
      purchase 6,258 shares of common stock beneficially owned by New York
      Life Investment Management LLC (“New York Life”) and 81,608 shares of
      common stock and warrants to purchase 667 shares of common stock held
      by third party clients of New York Life. New York Life serves as
      investment manager for those third party clients and has voting and
      investment power related to such stock and warrants. New York Life may be
      deemed to beneficially own the stock and warrants held by those third
      parties.





New
      York Life disclaims beneficial ownership for any shares which it may be
      deemed to beneficially own for purposes of this disclosure except to the
      extent of its pecuniary interest therein, if any, and the reporting herein
      of such securities shall not be construed as an admission of beneficial
      ownership thereof for any other
purpose.





Item 13.Certain
Relationships and Related Transactions, and Director Independence





Those
individuals who served on our Board of Directors during 2008 are as follows:
Mr. Crecca, Mr. Davis, Mr. Curry, Mr. Vigliotta and
Mr. McKenna. Mr. Vigliotta resigned from the Board of Directors on May 8,
2009.





Because
we do not have listed securities, we are not subject to exchange listing
requirements requiring us to have a majority independent board or to exchange
and/or SEC rules relating to the formation and functioning of board committees,
including audit, nominating and compensation committees.





If we
were listed on an exchange, such as the Nasdaq Global Market, prior to the
recapitalization on August 10, 2008, Media/Communications Partners III
Limited Partnership and its affiliates owned more than 70% of the voting power
of our voting capital stock. Therefore, we would qualify for the exemption from
Nasdaq’s board and compensation and nominating committee independence
requirements available to controlled companies (which, for Nasdaq’s purposes,
means companies of which more than 50% of the voting power is held by an
individual, a group or another company) and would not be required to have a
majority independent board or independent compensation or nominating committees.
Similarly, the existence of the Shareholders Agreement after the
recapitalization results in a common ownership for voting purposes of more than
50% of the voting power. Therefore, we would continue to qualify for the
exemption from Nasdaq’s board and compensation and nominating committee
independence requirements available to controlled companies. See “Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters” for a description of the Shareholders Agreement.





105





Even as a
controlled company, however, we would remain subject to Nasdaq’s audit committee
independence requirements. Under this requirement, if we were listed on the
Nasdaq Global Market, we would be required to have an audit committee of at
least three members, each of whom meets the requirements set forth in Nasdaq
Marketplace Rule 4350(d)(2). Mr. Eugene I. Davis was the only member
of our Board of Directors who would have satisfied the Nasdaq audit committee
independence requirements prior to the recapitalization. Since the formation of
the respective committees on August 21, 2008, Messrs. Davis, McKenna
and Ford have served on the audit committee and Messrs. McKenna, Ford and
Vigliotta have served on the compensation committee. Mr. Vigliotta resigned from
the Board of Directors on May 8, 2009. Messrs. Davis and McKenna would
satisfy the Nasdaq audit committee independence requirements.





As
discussed above, we have adopted an Ethics Code. The Board of Directors is
responsible for administering the Ethics Code. The Board of Directors has
delegated day-to-day responsibility for administering and interpreting the
Ethics Code to Paul J. Crecca, our President and Chief Executive Officer. Under
the Ethics Code, activities engaged in by directors, officers, and employees
that present actual or potential conflicts of interest must be reported to the
compliance officer. Such conflicts of interest can arise, for example, when a
director, officer or employee takes an action or has an outside interest,
responsibility or obligation that may make it difficult for him or her to
perform the responsibilities of his or her position objectively and/or
effectively in the Company’s best interests. Conflicts of interest may also
occur when a director, officer or employee or his or her immediate family member
receives some personal benefit (whether improper or not) as a result of the
director’s, officer’s or employee’s position with the Company. Our management,
under the supervision of the compliance officer, is responsible for taking
reasonable steps from time to time to (i) monitor and audit compliance with
the Ethics Code, including the establishment of monitoring and auditing systems
that are reasonably designed to investigate and detect conduct in violation of
the Ethics Code, and (ii) when appropriate, impose and enforce appropriate
disciplinary measures for violations of the Ethics Code. Disciplinary measures
for violations of the Ethics Code may include, but are not limited to,
counseling, oral or written reprimands, warnings, probation or suspension with
or without pay, demotions, reductions in salary, termination of employment or
service and restitution. The compliance officer periodically reports to the
Board of Directors on these compliance efforts including, without limitation,
periodic reporting of alleged violations of the Ethics Code and the actions
taken with respect to any such violation. No waiver of any provisions of the
Ethics Code for the benefit of a director or an executive officer (including,
without limitation, our principal executive, financial and accounting officers)
will be effective unless (i) such waiver is approved by the Board of
Directors, and (ii) if applicable, such waiver is promptly disclosed to our
investors in accordance with applicable United States securities laws and/or the
rules and regulations of the exchange or system on which the Company’s shares
are traded or quoted, as the case may be.





Certain
of our shareholders have entered into a shareholders agreement with the Company.
See “Directors, Executive Officers and Corporate Governance — Nomination
and Election of Directors.”





Monarch
Alternative Capital LP (“Monarch Capital”), Deephaven Distressed Opportunities
Trading Ltd. and New York Life Investment Management LLC each may be deemed to
beneficially own more than 5% of our outstanding stock. See “Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder Matters.”
Each of these entities or their affiliates also own positions in one or more of
our Term Loans, Senior Notes or Senior Discount Notes. In 2008, these entities
received their pro rata portion of any interest or consent fees we paid related
to our debt. Mr. Vigliotta, a former director, is a Principal at Monarch Capital
and served as a member of our Board of Directors between August 2007 and May
2009. Monarch Capital acquired its debt positions prior to Mr. Vigliotta’s
appointment to our Board.





Effective
July 29, 2008, the Company entered into a commitment letter (the
“Commitment Letter”) with Monarch Capital on behalf of certain of its affiliated
investment funds and Glenview Capital Management, LLC on behalf of certain of
its affiliated investment funds (“Glenview” and together with Monarch Capital,
the “Proposed Lenders”). Pursuant to the Commitment Letter, the Proposed Lenders
made commitments to provide $75 million of senior secured term loans (the
“Facility”) to the Company to refinance its then existing senior secured term
loan indebtedness that matured on August 15, 2008 (the
“Refinancing”).  This commitment was obtained as a backstop to ensure
the Company had the ability to effect the Refinancing. Accordingly, the Company
was free to obtain financing in lieu of the Facility (the “Alternative Term Loan
Facility”) and suffer no financial penalty. Upon the Company’s election to
proceed with an Alternative Term Loan Facility described in Note 15 to our
consolidated financial statements, the commitments of Monarch Capital and
Glenview terminated.  Pursuant to the Commitment Letter, Monarch
Capital and Glenview each made a commitment to provide 50% of the amount of the
Facility. In consideration for this commitment, the Company agreed (i) to
pay or reimburse Monarch Capital and Glenview for certain reasonable and
documented out-of-pocket costs and expenses and (ii) to pay a
non-refundable commitment fee of $750,000 to each of Monarch Capital and
Glenview.  Certain of Monarch’s affiliates or investment funds for
which it acts as investment advisor currently beneficially own more than 21% of
the common stock of the Company. Mr. Vigliotta, a former director, is a
Principal at Monarch and served as a member of our Board of Directors between
August 2007 and May 2009. Certain of Glenview’s affiliates or investment funds
for which it acts as investment advisor currently beneficially own more than 14%
of the common stock of the Company. Mr. Ford, a director, is a Managing Director
of Glenview and has served as a member of our Board of Directors since
August 2007. Neither of Messrs. Vigliotta or Ford participated in the
Company’s decision to accept the Commitment Letter.





106





Our audit
committee is responsible under its authorizing resolutions for reviewing and
approving related-party transactions for potential conflict of interest
situations unless such duty has been delegated to another committee of the board
of directors. Prior to the formation of our audit committee on August 21,
2007, our full board of directors performed this function. The transactions
described in the paragraphs above did not require such review or
approval.





Item 14.Principal Accountant
Fees and Services.





The Board
of Directors has appointed Ernst & Young LLP as the independent
registered public accountants to audit our consolidated financial statements for
the fiscal year ending December 31, 2008.





Audit Fees.  Fees
for audit services totaled $1.2 million in 2008 and $1.3 million in
2007, including fees associated with the annual audit, the review of our
quarterly reports on Form 10-Q, comfort letters, consents, assistance with
and review of documents to be filed with the SEC.





Audit-Related
Fees.  Fees for audit-related services totaled
$0.1 million in 2008 and $0.0 million in 2007. Audit related services
principally include due diligence, consents and assistance with review of
documents pertaining to acquisitions and dispositions.





Tax Fees.  Fees for
tax services, including tax compliance, tax advice and tax planning totaled $0
in 2008 and 2007.





All Other
Fees.  Fees for all other services not included above totaled
approximately $0 in 2008 and 2007.





Our Board
of Directors must pre-approve all audit and permitted non-audit services to be
provided by our principal independent registered public accounting firm unless
an exception to such pre-approval exists under the Exchange Act, or the rules of
the SEC promulgated thereunder. Each year, the Board of Directors approves the
retention of the independent registered public accounting firm to audit our
financial statements, including the associated fees. All of the services
described in the four preceding paragraphs were approved by the Board of
Directors. The Board of Directors has considered whether the provisions of such
services, including non-audit services, by Ernst & Young LLP is
compatible with maintaining Ernst & Young LLP’s independence and has
concluded that it is.





107




PART IV





Item 15.Exhibits





(a) Documents
filed as a part of this report.





1. Financial Statements.The
following financial statements are filed as a part of this report.





Report
      of Ernst & Young LLP, Independent Registered Public Accounting
      Firm
              48Consolidated
      Balance Sheets
              49Consolidated
      Statements of Operations
              50Consolidated
      Statements of Changes in Stockholders’ Deficit
              51Consolidated
      Statements of Cash Flows
              52Notes
      to Consolidated Financial Statements
              532. Financial Statement
      SchedulesSchedule I —
      Condensed Financial Information
              81Schedule II —
      Valuation and Qualifying Account Summary
              82





All other
financial statement schedules are not required under related instructions or are
inapplicable and therefore have been omitted.





3. Exhibits.Haights
Cross Communications, Inc. has filed the following Exhibits as part of this
Report.





108




EXHIBIT INDEX





Exhibit
                                                            No.
                                                          
                                                          Exhibit Description2.1
                                                          
                                                          Asset
      Purchase Agreement, dated as of March 6, 2004, by and among Haights
      Cross Communications, Inc., Buckle Down Publishing Company and the other
      parties named therein, incorporated by reference to Exhibit 2.1 of
      Haights Cross Communications, Inc.’s Current Report on Form 8-K filed
      April 20, 20042.2
                                                          
                                                          Asset
      Purchase Agreement, dated as of November 11, 2004, by and among
      Haights Cross Communications, Inc., Haights Cross Operating Company,
      Options Publishing, LLC, Options Publishing, Inc., and certain
      stockholders of Options Publishing, Inc. named therein, incorporated by
      reference to Exhibit 2.1 of Haights Cross Communications, Inc.’s
      Current Report on Form 8-K filed December 6,
  20042.3
                                                          
                                                          Purchase
      and Sale Agreement, dated as of November 11, 2004, by and between
      Options Publishing, LLC and Merrimack M&R Realty LLC, incorporated by
      reference to Exhibit 2.2 of Haights Cross Communications, Inc.’s
      Current Report on Form 8-K filed December 6,
  20042.4
                                                          
                                                          Membership
      Interest Purchase Agreement dated June 30, 2008, by and among Haights
      Cross Operating Company, Oakstone Publishing, LLC, and Oakstone Holding
      Company, LLC, incorporated by reference to Exhibit 2.1 of Haights
      Cross Communications, Inc.’s Current Report on Form 8-K filed July 7,
      20082.5
                                                          
                                                          Asset
      Purchase Agreement by and among The Rowman & Littlefield Publishing
      Group, Inc., Sundance/Newbridge, LLC, Haights Cross Operating Company and
      Sundance/Newbridge Educational Publishing, LLC, dated August 27,
      2008, incorporated by reference to Exhibit 2.1 of Haights Cross
      Communications, Inc.’s Current Report on Form 8-K filed September 4,
      20083.1
                                                          
                                                          Third
      Amended and Restated Certificate of Incorporation of Haights Cross
      Communications, Inc., dated October 8, 2008, incorporated by reference to
      Exhibit 3.1 of Haights Cross Communications, Inc.’s Current Report on
      Form 8-K filed October 10, 20083.2
                                                          
                                                          Bylaws
      of Haights Cross Communications, Inc., incorporated by reference to
      Exhibit 3.2 of Haights Cross Communications, Inc.’s Registration
      Statement on Form S-4 (Reg. No. 333-109381) filed
      October 2, 20033.2(a)
                                                          
                                                          Amendment
      to the Bylaws of Haights Cross Communications, Inc. dated August 10,
      2007, incorporated by reference to Exhibit 3.2 of Haights Cross
      Communications, Inc.’s Current Report on Form 8-K filed
      August 16, 20073.2(b)
                                                          
                                                          Amendment
      to the Bylaws of Haights Cross Communications, Inc. dated
      September 21, 2007, incorporated by reference to Exhibit 3.1 of
      Haights Cross Communications, Inc.’s Current Report on Form 8-K filed
      September 27, 20073.3
                                                          
                                                          Certificate
      of Incorporation of Haights Cross Operating Company, incorporated by
      reference to Exhibit 3.3 of Haights Cross Communications, Inc.’s
      Registration Statement on Form S-4 (Reg. No. 333-109381) filed
      October 2, 20033.4
                                                          
                                                          Bylaws
      of Haights Cross Operating Company, incorporated by reference to
      Exhibit 3.4 of Haights Cross Communications, Inc.’s Registration
      Statement on Form S-4 (Reg. No. 333-109381) filed
      October 2, 20033.5
                                                          
                                                          Certificate
      of Formation of Triumph Learning, LLC, incorporated by reference to
      Exhibit 3.7 of Haights Cross Communications, Inc.’s Registration
      Statement on Form S-4 (Reg. No. 333-109381) filed
      October 2, 20033.6
                                                          
                                                          Amended
      and Restated Limited Liability Company Agreement of Triumph Learning, LLC,
      incorporated by reference to Exhibit 3.8 of Haights Cross
      Communications, Inc.’s Registration Statement on Form S-4 (Reg.
      No. 333-109381) filed October 2, 20033.7
                                                          
                                                          Certificate
      of Formation of Recorded Books, LLC, incorporated by reference to
      Exhibit 3.11 of Haights Cross Communications, Inc.’s Registration
      Statement on Form S-4 (Reg. No. 333-109381) filed
      October 2, 20033.8
                                                          
                                                          Amended
      and Restated Limited Liability Company Agreement of Recorded Books, LLC,
      incorporated by reference to Exhibit 3.12 of Haights Cross
      Communications, Inc.’s Registration Statement on Form S-4 (Reg.
      No. 333-109381) filed October 2, 20033.9
                                                          
                                                          Articles
      of Association of W F Howes Limited, incorporated by reference to
      Exhibit 3.17 of Haights Cross Communications, Inc.’s Registration
      Statement on Form S-4 (Reg. No. 333-109381) filed
      October 2, 20033.10
                                                          
                                                          Memorandum
      of Association of W F Howes Limited, incorporated by reference to
      Exhibit 3.18 of Haights Cross Communications, Inc.’s Registration
      Statement on Form S-4 (Reg. No. 333-109381) filed
      October 2, 20033.11*
                                                          
                                                          Certificate
      of Registration of Wavesound Pty
Ltd





109





3.12*
                                                  
                                                  Constitution
      of Wavesound Pty Ltd4.1
                                                  
                                                  Indenture,
      dated as of August 20, 2003, by and between Haights Cross Operating
      Company and Wells Fargo Bank Minnesota, N.A., as Trustee, incorporated by
      reference to Exhibit 4.1 of Haights Cross Communications, Inc.’s
      Registration Statement on Form S-4 (Reg. No. 333-109381) filed
      October 2, 20034.2
                                                  
                                                  Form
      of Haights Cross Operating Company 113⁄4% Senior Note due 2011,
      incorporated by reference to Exhibit 4.2 of Haights Cross
      Communications, Inc.’s Registration Statement on Form S-4 (Reg.
      No. 333-109381) filed October 2, 20034.3
                                                  
                                                  Indenture,
      dated as of February 2, 2004, by and between Haights Cross
      Communications, Inc. and Wells Fargo Bank Minnesota, N.A., as Trustee,
      incorporated by reference to Exhibit 4.4 of Haights Cross
      Communications, Inc.’s Special Report on Form 10-K filed
      April 19, 20044.4
                                                  
                                                  Form
      of Haights Cross Communications, Inc. 121⁄2% Senior Discount Note due
      2011, incorporated by reference to Exhibit 4.5 of Haights Cross
      Communications, Inc.’s Special Report on Form 10-K filed
      April 19, 20044.5
                                                  
                                                  Supplemental
      Indenture, dated as of December 10, 2004, by and among Options
      Publishing, LLC, Haights Cross Operating Company, the guarantors signatory
      thereto, and Wells Fargo Bank, N.A., as trustee, supplementing the
      Indenture, dated as of August 20, 2003, among Haights Cross Operating
      Company, the guarantors named therein and Wells Fargo Bank, N.A., as
      trustee, incorporated by reference to Exhibit 4.2 of Haights Cross
      Communications, Inc.’s Current Report on Form 8-K filed
      December 15, 20044.6
                                                  
                                                  Form
      of Warrant for the Purchase of Shares of Common Stock of Haights Cross
      Communications, Inc., incorporated by reference to Exhibit 4.6 of
      Haights Cross Communications, Inc.’s Annual Report on Form 10-K filed
      March 31, 200810.1
                                                  
                                                  Lease
      Agreement, dated as of January 15, 2003, by and between Sundance
      Publishing, LLC and LIT Industrial Limited Partnership, incorporated by
      reference to Exhibit 10.1 of Haights Cross Communications, Inc.’s
      Registration Statement on Form S-4 (Reg. No. 333-109381) filed
      October 2, 200310.2
                                                  
                                                  Investors
      Registration Rights Agreement, dated as of December 10, 1999, by and
      among Haights Cross Communications, Inc., Haights Cross Operating Company
      and the Holders (as defined therein), incorporated by reference to
      Exhibit 10.6 of Haights Cross Communications, Inc.’s Registration
      Statement on Form S-4 (Reg. No. 333-109381) filed
      October 2, 200310.3+
                                                  
                                                  Haights
      Cross Communications, Inc. 401(k) Savings Plan, incorporated by reference
      to Exhibit 10.9 of Haights Cross Communications, Inc.’s Registration
      Statement on Form S-4 (Reg. No. 333-109381) filed
      October 2, 200310.4+
                                                  
                                                  Description
      of the Haights Cross Communications, Inc. Annual Management/ Employee
      Bonus Plan for fiscal year 2008, incorporated by reference to
      Exhibit 10.1 of Haights Cross Communications, Inc.’s Current Report
      on Form 8-K filed February 11, 200810.5+
                                                  
                                                  Description
      of the Haights Cross Communications, Inc. Annual Management/ Employee
      Bonus Plan for fiscal year 2009, incorporated by reference to
      Exhibit 10.1 of Haights Cross Communications, Inc.’s Current Report
      on Form 8-K filed February 12, 200910.6+
                                                  
                                                  Description
      of the Haights Cross Communications, Inc. 2006 Expense Savings Incentive
      Plan, incorporated by reference to Exhibit 99.1 of Haights Cross
      Communications, Inc.’s Current Report on Form 8-K filed April 6,
      200710.7+
                                                  
                                                  Employment
      Agreement, dated January 31, 2007, by and between Haights Cross
      Communications, Inc. and Paul J. Crecca, incorporated by reference to
      Exhibit 10.3 of Haights Cross Communications, Inc.’s Current Report
      on Form 8-K filed February 2, 200710.8+
                                                  
                                                  Amendment
      dated December 11, 2007 to the Employment Agreement between Haights
      Cross Communications, Inc. and Paul J. Crecca, incorporated by reference
      to Exhibit 10.1 of Haights Cross Communications, Inc.’s Current
      Report on Form 8-K filed December 11, 200710.9+
                                                  
                                                  Noncompetition
      Agreement, dated January 31, 2007, by and between Haights Cross
      Communications, Inc. and Paul J. Crecca, incorporated by reference to
      Exhibit 10.4 of Haights Cross Communications, Inc.’s Current Report
      on Form 8-K filed February 2, 200710.10
                                                  
                                                  Recapitalization
      Agreement, dated June 29, 2007 by and among Haights Cross
      Communications, Inc. and the Investors named therein, incorporated by
      reference to Exhibit 10.1 of Haights Cross Communications, Inc.’s
      Current Report on Form 8-K filed July 6, 200710.11
                                                  
                                                  Shareholders’
      Agreement by and among Haights Cross Communications, Inc. and the
      Investors named therein dated August 10, 2007, incorporated by
      reference to Exhibit 10.1 of Haights Cross Communications, Inc.’s
      Current Report on Form 8-K filed August 16,
  200710.12
                                                  
                                                  Amendment
      dated January 29, 2008 to Shareholders Agreement dated
      August 10, 2007, incorporated by reference to Exhibit 10.1 of
      Haights Cross Communications, Inc.’s Current Report on Form 8-K filed
      January 31,
2008




110





10.13
                                                    
                                                    Amendment
      No. 2 dated October 8, 2008 to Shareholders Agreement dated
      August 10, 2007, as previously amended on January 29, 2008,
      incorporated by reference to Exhibit 3.1 of Haights Cross
      Communications, Inc.’s Current Report on Form 8-K filed October 10,
      200810.14
                                                    
                                                    Indemnification
      Agreement by and between Haights Cross Communications, Inc. and Eugene
      Davis dated August 10, 2007, incorporated by reference to
      Exhibit 10.2 of Haights Cross Communications, Inc.’s Current Report
      on Form 8-K filed August 16, 200710.15
                                                    
                                                    Indemnification
      Agreement by and between Haights Cross Communications, Inc. and T.J.
      Vigliotta dated August 10, 2007, incorporated by reference to
      Exhibit 10.3 of Haights Cross Communications, Inc.’s Current Report
      on Form 8-K filed August 16, 200710.16
                                                    
                                                    Indemnification
      Agreement by and between Haights Cross Communications, Inc. and Curry Ford
      dated August 10, 2007, incorporated by reference to Exhibit 10.4
      of Haights Cross Communications, Inc.’s Current Report on Form 8-K
      filed August 16, 200710.17
                                                    
                                                    Indemnification
      Agreement by and between Haights Cross Communications, Inc. and John A.
      McKenna, Jr., dated August 21, 2007, incorporated by reference to
      Exhibit 10.1 of Haights Cross Communications, Inc.’s Current Report
      on Form 8-K filed August 22, 200710.18
                                                    
                                                    Release
      and Settlement Agreement by and among Haights Cross Communications, Inc.
      and the other parties named therein dated August 10, 2007,
      incorporated by reference to Exhibit 10.6 of Haights Cross
      Communications, Inc.’s Current Report on Form 8-K filed
      August 16, 200710.19+
                                                    
                                                    Separation
      and Release Agreement dated August 24, 2007 by and between Peter J.
      Quandt and Haights Cross Communications, Inc., incorporated by reference
      to Exhibit 10.1 of Haights Cross Communications, Inc.’s Current
      Report on Form 8-K filed August 27, 200710.20+
                                                    
                                                    Noncompetition
      Agreement, dated January 31, 2007, by and between the Company and
      Peter J. Quandt, incorporated by reference to Exhibit 10.1
      of Haights Cross Communications, Inc.’s Current Report on Form 8-K
      filed February 2, 200710.21
                                                    
                                                    Indemnification
      Agreement by and between Haights Cross Communications, Inc. and Paul J.
      Crecca dated September 21, 2007, incorporated by reference to
      Exhibit 10.1 of Haights Cross Communications, Inc.’s Current Report
      on Form 8-K filed September 27, 200710.22+
                                                    
                                                    Haights
      Cross Communications, Inc. Transaction Bonus Plan, incorporated by
      reference to Exhibit 10.1 of Haights Cross Communications, Inc.’s
      Current Report on Form 8-K filed October 15,
  200710.23
                                                    
                                                    Credit
      Agreement dated as of August 15, 2008 among Haights Cross Operating
      Company, the guarantors party thereto, DDJ Capital Management, LLC, as
      Administrative Agent and Collateral Agent, and the lenders party thereto,
      incorporated by reference to Exhibit 10.24 of Haights Cross
      Communications, Inc.’s Quarterly Report on Form 10-Q filed August 19,
      200810.24
                                                    
                                                    Back-stop
      Commitment Letter dated July 28, 2008 among Monarch Alternative
      Capital LP, Glenview Capital Management LLC and Haights Cross Operating
      Company, incorporated by reference to Exhibit 10.25 of Haights Cross
      Communications, Inc.’s Quarterly Report on Form 10-Q filed August 19,
      200810.25
                                                    
                                                    Separation
      and Release Agreement by and between Kevin McAliley and Haights Cross
      Communications, Inc., dated November 10, 2008, incorporated by
      reference to Exhibit 10.27 of Haights Cross Communications, Inc.’s
      Quarterly Report on Form 10-Q filed November 14,
  200810.26
                                                    
                                                    Cash
      Escrow Agreement dated June 30, 2008, by and among Oakstone Holding
      Company, LLC, Haights Cross Operating Company and U.S. Bank National
      Association, incorporated by reference to Exhibit 10.1 of Haights Cross
      Communications, Inc.’s Current Report on Form 8-K filed March 13,
      2009.10.27
                                                    
                                                    Indemnification
      Agreement by and between Haights Cross Communications, Inc. and Julie
      McGee dated May 8, 2009, incorporated by reference to Exhibit 10.1 of
      Haights Cross Communications, Inc.’s Current Report on Form 8-K filed May
      12, 2009.10.28
                                                    
                                                    Fourth
      Forbearance Agreement and Amendment No. 1 to Credit Agreement dated May 7,
      2009, incorporated by reference to Exhibit 10.2 of Haights Cross
      Communications, Inc.’s Current Report on Form 8-K filed May 12,
      2009.
 
 12.1*
                                            
                                            Statement
      Regarding Computation of Ratio of Earnings to Fixed
  Charges





14.1
                          
                          Code
      of Business Conduct and Ethics, incorporated by reference to
      Exhibit 14 of Haights Cross Communications, Inc.’s Current Report on
      Form 8-K filed September 28, 200421.1*
                          
                          Subsidiaries
      of Haights Cross Communications, Inc. and Subsidiaries of Haights Cross
      Operating Company24.1*
                          
                          Power
      of Attorney (Included in signature page)31.1*
                          
                          Rule 13a-14(a)/15d-14(a)
      Certification of Paul J. Crecca31.2*
                          
                          Rule 13a-14(a)/15d-14(a)
      Certification of Mark Kurtz32.1*
                          
                          Certification
      of Paul J. Crecca pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
    200232.2*
                          
                          Certification
      of Mark Kurtz pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of
  2002


__________





+
Indicates a management contract or any compensatory plan, contract or
arrangement


* Filed
herewith





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SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.





HAIGHTS
      CROSS COMMUNICATIONS, INC.By:
                  /s/
      Paul
      J. CreccaPaul
      J. CreccaDirector,
      Chief Executive Officer and President(Principal
      Executive
Officer)





Date:
May 29, 2009





POWER
OF ATTORNEY





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.





Each
person whose signature appears below in so signing also makes, constitutes and
appoints Paul J. Crecca and Mark Kurtz, and each of them, his true and lawful
attorney-in-fact, with full power of substitution, for him in any and all
capacities, to execute and cause to be filed with the Securities and Exchange
Commission any and all amendments to this Form 10-K, with exhibits thereto
and other documents in connection therewith, and hereby ratifies and confirms
all that said attorney-in-fact or his substitute or substitutes may do or cause
to be done by virtue hereof.





Signature
                      
                      Title
                      
                      Date/s/
      Paul J. Crecca
                      
                      Chief
      Executive Officer and President
                      
                      May
      29, 2009Paul
      J. Crecca/s/
      Mark Kurtz
                      
                      Senior
      Vice President and Chief Financial Officer
                      
                      May
      29, 2009Mark
      Kurtz/s/
      Eugene I. Davis
                      
                      Chairman,
      Director
                      
                      May
      29, 2009Eugene
      I. Davis/s/
      Curry E. Ford
                      
                      Director
                      
                      May
      29, 2009Curry
      E. Ford/s/
      Julie
      A. McGee
                      
                      Director
                      
                      May
      29, 2009Julie
      A. McGee/s/
      John
      A. McKenna, Jr.
                      
                      Director
                      
                      May
      29, 2009John
      A. McKenna, Jr.





SUPPLEMENTAL
INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF
THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.





No annual
report with respect to the registrant’s last fiscal year, nor any proxy
statement, form of proxy or other proxy soliciting material with respect to any
annual or other meeting of security holders, has been sent or will be sent to
security holders of the registrant.





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