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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 001-34555  (Commission File Number)
 
 Archipelago Learning, Inc.
 (Exact Name of Registrant as Specified in its Charter)
 
 Delaware
    
    27-0767387(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)3400 Carlisle Street, Suite 345, Dallas, Texas(Address of Principal Executive Offices)
    
    75204(Zip Code)
 (800) 419-3191  (Registrants telephone number, including area code)   Securities registered pursuant to Section 12(b) of the Act
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, par value $0.001 per share
    
    NASDAQ Stock Market LLC
 Securities registered pursuant to Section 12(g) of the Act
None
 o þ
 o þ
 o þ
 o o
 þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS
 PageSpecial Note Regarding Forward-Looking StatementsPART IItem 1.
    
    Business
    
    4Item 1A.
    
    Risk Factors
    
    17Item 1B.
    
    Unresolved Staff Comments
    
    32Item 2.
    
    Properties
    
    32Item 3.
    
    Legal Proceedings
    
    32PART IIItem 5.
    
    Market for the Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    33Item 6.
    
    Selected Financial Data
    
    41Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    42Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    60Item 8.
    
    Financial Statements and Supplementary Data
    
    60Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    61Item 9A.
    
    Controls and Procedures
    
    61Item 9B.
    
    Other Information
    
    61PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    61Item 11.
    
    Executive Compensation
    
    61Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    61Item 13.
    
    Certain Relationships and Related Transactions and Director Independence
    
    61Item 14.
    
    Principal Accounting Fees and Services
    
    61PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    61Signatures
    
    
    
    62EX-10.45EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1EX-99.1EX-99.2
  2




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Special Note Regarding Forward-Looking Statements
   
    
    Most of our customers are public schools, which rely on state, local and federal
funding. If any state, local or federal funding is materially reduced, our public school
customers may no longer be able to afford to purchase our products and services;
    
    If national educational standards and assessments are adopted, or if existing metrics
for applying state standards are revised, new competitors could more easily enter our
markets or the demands in the markets we currently serve may change;
    
    If Congress does not reauthorize the Elementary and Secondary Education Act, commonly
referred to as ESEA, or other legislation does not continue to mandate state educational
standards and annual assessments, demand for our products and services could be materially
adversely affected;
    
    Our recent rapid growth, the recent introduction of a number of our products and
services and our entry into new markets make it difficult for us to evaluate our current
and future business prospects, and we may be unable to effectively manage our growth and
new initiatives;
    
    The recent ongoing adoption of online learning in established education markets makes
it difficult for us to evaluate our current and future business prospects. If web-based
education fails to achieve widespread acceptance by students, parents, teachers, schools
and other institutions, our growth and profitability may materially suffer;
    
    Our revenue is primarily generated by sales of subscriptions to our Study
Island products over the term of the subscription. Our customer renewal rates are
difficult to predict and declines in our sales of Study Island products or our customer
renewal rates may materially adversely affect our business and results of operations; and
    
    Our Study Island products are predominantly purchased by individual schools, and any
decisions at the district or state level to use the products and services of one of our
competitors, or to limit or reduce the use of web-based educational products, could
materially adversely affect our ability to attract and retain customers.
    3




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##### Table of Contents



PART I
 
 Item 1.
    
    Business
 Basis of Presentation
  Overview
      4




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Our Markets
  The K-12 Education Market
  Key Dynamics in the K-12 Education Market
  Increased Accountability.
 Legislative Developments.
 5




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(1)
    
    To replace the accountability system established in No Child Left Behind with a new
system built around the goal of helping all students graduate high school college- and
career-ready. President Obama has suggested replacing the AYP benchmarks with new standards
based on college and career readiness, which have not been finalized. President Obamas proposal
eliminates the No Child Left Behind mandate that all students be proficient in reading and math by 2014.
The administration and its supporters suggest that this was an impossible target while others fear that backing away from
this absolute mandate is a mistake in a field where
nothing short of high-stakes testing grabs the attention of students, parents, teachers,
and school administrators.
 (2)
    
    To shift the method of distributing federal education dollars from formula alone to a
system that also rewards excellence based on competition and performance. The new
accountability system would divide schools into more categories, offering recognition and
additional funds for those states, districts and schools that are succeeding and providing
large new amounts of money to help either improve or close chronically failing schools.
While some consider this proposal as a positive step toward greater accountability in terms
of how federal education funds are spent, others worry that this measure will create
further inequities as the students in those schools needing the most assistance will be
penalized further due to adult mistakes.
   Increased Access to Computers and the Internet.
 6




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The Market for Supplemental Learning Materials
   Limitations of Traditional Print Products.
 Limitations of Software Products.
 Advantages of Online Learning Solutions.
 Our Competitive Strengths
  Customized, Standards-Based Content.
 7




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Real-time Student Tracking, Built-in Remediation and Enrichment.
 Engaging, Fun and Easy to Use for Students.
 Accessible, Dynamic Web-based Platform.
 High Impact, Low Cost Solution.
 Management Team with Strong Education Industry Expertise.
 Key Attributes of Business Model
  High Revenue Visibility and Strong Cash Flow Generation.
 Scalability and Flexibility.
 8




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Powerful, Demand-Driven Sales and Marketing.
 Our Growth Strategy
  Expand the Number of Schools Using Our Study Island Products.
 Increase Revenue per School.
 Develop New Products and Enhance our Online Platform.
 9




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Expand Into New Related Markets.
 
    
    Launched in 2009, Northstar Learning targets the postsecondary market utilizing our
content development, instruction, exam preparation and assessment expertise. Currently,
Northstar Learning has products in developmental studies for the approximately $2.5 billion
college remedial studies market and in vocational education and licensure exam preparation
in the healthcare occupational field. Our Northstar Learning products also include GED exam
preparation products, and PRAXIS teacher certification preparation products, which we
launched in the fourth quarter of 2009. We plan to expand our marketing efforts to increase
awareness of the Northstar Learning brand and products.
 
    
    We introduced our Study Island products in the three largest English-speaking Canadian
provinces in October 2009. We believe other English-speaking countries, including the
United Kingdom, Australia, New Zealand and South Africa, also provide potential near-term
growth opportunities, and we intend to develop products for these markets. In addition, we
are exploring the opportunities to sell Study Island products directly to parents as well
as expanding our sales efforts to public libraries, school libraries and homeschool
settings.
 Pursue Acquisitions and Strategic Relationships.
 Our Products and Services
  Core Educational Principles
  
    
    Clear expectations.Each Study Island and Northstar Learning session focuses on an
academic standard or underlying topic and sets forth a clear goal for the student to master
the targeted skill or concept.
    
    High quality, rigorous content.We have internal subject area writer and editor
expertise and deep knowledge of each set of specific standards for which we offer products.
We build content from the ground-up, customized to each set of standards for a particular
subject. We utilize a scaffolding approach to content development that begins with skill
building and then builds to higher level thinking skills. This building block learning
approach ensures that students master grade level content and are prepared for state
assessments.
    
    Fun and engaging assignments.Study Island sessions are embedded with short games
segments and reward student mastery of standards with achievement certificates. These
features provide continual positive reinforcement and reward learning to engage students
and build student confidence.
    
    Immediate feedback.Students receive immediate feedback and explanations for each
question, allowing them to learn and quickly apply new knowledge to subsequent questions
and to build skills and conceptual understanding in order to handle more complex content
that follows.
    
    Student responsibility for learning.Study Island automatically offers explanations
and prescribes remedial or building block topics when a student does not master a
standard or sub-topic, allowing the student to quickly address any learning weakness. The
student can continue with these remediation topics until he or she gradually accelerates
back to grade level proficiency, receiving built-in rewards for learning along the way.
 10




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Study Island
      11




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Northstar Learning
   
    
    GED exam preparation.We offer products for each of the five GED testing modules
covered in the GED exam, which grants a diploma to adults that do not have a high school
diploma. These modules are reading, writing, math, social studies and science.
    
    Developmental studies.We offer developmental English/language arts and math programs
for the approximately 42% of community college freshmen and 20% of four-year college
freshmen who are required to raise their proficiency levels before colleges and
universities allow them to enroll in credit-bearing courses.
    
    Allied Health programs.We recently launched ten allied health products to help
students in these certificate and Associate Degree allied health programs master the
required content and pass the applicable health career licensure exams.
    
    PRAXIS teacher certification.We recently launched products to assist educators to
prepare for and pass the PRAXIS series assessments developed by the Educational Testing
Service and used by states as part of their teacher licensure and certification processes.
    
    Online college study guides.We recently launched ten online study guides to help
college students master the fundamental skills required for success in Freshman/Sophomore
level mathematics, science and history courses.
  Market Opportunity
    12




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Our Customers
  Marketing, Sales and Customer Support
 Marketing Activities
   
    
    targeted campaigns to schools, such as search engine marketing, direct mail, e-mail
marketing and print advertisements;
    
    participation in tradeshows;
    
    building on relationships with satisfied school customers to target new sales in other
schools in the same district, in the entire district or in adjacent school districts;
    
    customer newsletters and advertising inserts sent to schools with renewal reminders,
including information about new and upgraded products;
    
    webinars for existing customers introducing them to new products, add-on features and
upgrades;
    
    incentives such as free months to attract new customers or free trials of add-on
products to attract renewals; and
    
    assistance by our grant/bid writer and contract manager to existing customers for
funding, grant requests and completion of district contracts.
   13




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Field-based and Inside Sales Channels
  Customer Support
  Our Competition
  
    
    providers of online and offline supplemental instructional materials for the core
subject areas of reading, mathematics, science and social studies for K-12 institutions;
 
    
    companies that provide K-12-oriented software and online-based educational assessment
and remediation products and services to students, educators, parents and educational
institutions;
 
    
    the assessment divisions of established education publishers, including Pearson
Education, Inc., The McGraw-Hill Companies and Houghton Mifflin Harcourt Company;
 
    
    providers of online and offline test preparation materials;
 
    
    traditional print textbook and workbook companies that publish K-12 core subject
educational materials, standardized test preparation materials or paper and pencil
assessment tools;
 
    
    summative assessment companies that have expanded their product lines to include
formative assessment and instruction products;
 
    
    non-profit and membership educational organizations and government agencies that offer
online and offline products and services, including in some cases at no cost, to assist
individuals in standards mastery and test preparation; and
 
    
    providers of website hosting for teachers and schools.
 14




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We believe the principal competitive factors in Study Islands market are:
 
    
    quality of content and deep customization to standards;
 
    
    formative assessment and reporting to inform instruction;
 
    
    ease of use, including whether a product is available online;
 
    
    program efficacy and the ability to provide improved student outcomes;
 
    
    ability to engage students;
 
    
    quality of customer support;
 
    
    vendor reputation; and
 
    
    price.
   Technology
 Engineering
     15




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Operations
   Integration with District Student Interoperability Systems
  Intellectual Property
  ®
  Employees
  Available Information
 www.archlearning.com www.sec.gov
 16




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Item 1A.
    
    Risk Factors
  Most of our customers are public schools, which rely on state, local and federal funding. If any
state, local or federal funding is materially reduced, our public school customers may no longer be
able to afford to purchase our products and services, and our business, financial condition,
results of operations and cash flow could be materially adversely affected.
   If national educational standards and assessments are adopted, or if existing metrics for applying
state standards are revised, new competitors could more easily enter our markets or the demands in
the markets we currently serve may change.
    17




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If Congress does not reauthorize the Elementary and Secondary Education Act, or ESEA, or other
legislation does not continue to mandate state educational standards and annual assessments, demand
for our products and services could be materially adversely affected.
  Our recent rapid growth, the recent introduction of a number of our products and services and our
entry into new markets make it difficult for us to evaluate our current and future business
prospects, and we may be unable to effectively manage our growth and new initiatives, which may
increase the risk of your investment and could harm our business, financial condition, results of
operations and cash flow.
   The recent ongoing adoption of online learning in established education markets makes it difficult
for us to evaluate our current and future business prospects. If web-based education fails to
achieve widespread acceptance by students, parents, teachers, schools and other institutions, our
growth and profitability may suffer.
  18




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Our revenue is primarily generated by sales of subscriptions to our Study Island products over the
term of the subscription. Our customer renewal rates are difficult to predict and declines in our
sales of Study Island products or our customer renewal rates may materially adversely affect our
business and results of operations.
  Our Study Island products are predominantly purchased by individual schools, and any decisions at
the district or state level to use the products and services of one of our competitors, or to limit
or reduce the use of web-based educational products, could materially adversely affect our ability
to attract and retain customers.
  Fluctuations in sales or renewals may not be immediately reflected in our results of operations.
  19




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Our business is subject to seasonal fluctuations, which may cause our cash flow to fluctuate from
quarter-to-quarter and materially adversely impact the market price of our common stock.
  
    
    our customers spending patterns, including shifts in the timing of when individual
schools or districts purchase our products and services;
 
    
    the timing of school districts funding sources and budgeting cycles;
 
    
    the timing of the release of federal funds to states, and the subsequent timing of
states release of such funds to districts and schools;
 
    
    the timing of expirations and renewals of subscriptions;
 
    
    the timing of special promotions and discounts, including additional free months of
subscriptions; and
 
    
    the timing of acquisitions and non-recurring charges incurred in connection with
acquisitions and extraordinary transactions.
  System disruptions, vulnerability from security risks to our networks, databases and online
applications and an inability to expand and upgrade our systems in a timely manner to meet
unexpected increases in demand could damage our reputation, impact our ability to generate revenue
and limit our ability to attract and retain customers.
  
    
    breakdowns or system failures resulting in a prolonged shutdown of our servers,
including failures attributable to power shutdowns or attempts to gain unauthorized access
to our systems, which may cause loss or corruption of data or malfunction of software or
hardware;
 
    
    disruption or failure in our colocation provider, which would make it difficult or
impossible for students and teachers to log on to our websites;
 
    
    damage from fire, flood, tornado, power loss or telecommunications failures;
 
    
    infiltration by hackers or other unauthorized persons; and
 
    
    any infection by or spread of computer viruses.
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Any significant interruption in the operations of our data centers could cause a loss of data
and disrupt our ability to manage our network hardware and software and technological
infrastructure, and any significant interruption in the operations of our call center could disrupt
our ability to respond to requests for help or service and process orders in a timely manner.
   We are subject to laws and regulations as a result of our collection and use of personal
information, particularly from our K-12 student users, and any violations of such laws or
regulations, or any breach, theft or loss of such information, could materially adversely affect
our reputation and operations and expose us to costly litigation.
  Domestic and foreign government regulation relating to the internet or our products and services
could cause us to incur significant expense, and failure to comply with applicable regulations
could make our business less efficient or even impossible to continue to operate.
  21




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We may not be able to develop new products and services or expand our existing product lines in a
timely and cost effective manner.
  If we acquire or invest in any companies, services or technologies in the future, they could prove
difficult to integrate, disrupt our business, dilute stockholder value and materially adversely
affect our results of operations.
  
    
    difficulties in integrating operations, technologies, services and personnel;
    
    diversion of financial and managerial resources from existing operations;
    
    risk of entering new markets;
    
    potential write-offs of acquired assets;
    
    significant one-time costs, including banking, legal and accounting fees and payment of
severance packages;
    
    potential loss of key employees;
    
    inability to generate sufficient revenue to offset acquisition or investment costs; and
    
    delays in customer purchases due to uncertainty.
  If we are unable to maintain and enhance our brand identity, our business and results of operations
may suffer.
  22




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Our future growth and profitability will depend in large part upon the effectiveness and efficiency
of our marketing expenditures in recruiting new customers.
  
    
    create greater awareness of our brands;
    
    select the right market, media and specific media vehicles in which to advertise;
    
    identify the most effective and efficient level of spending in each market, media and
specific media vehicle;
    
    determine the appropriate creative message and media mix for advertising, marketing and
promotional expenditures;
    
    effectively manage marketing costs, including creative and media expense, in order to
maintain acceptable customer acquisition costs;
    
    generate leads for sales, including obtaining educator lists in a cost-effective
manner;
    
    drive traffic to our website; and
    
    convert customer inquiries into actual orders.
  We operate in a highly competitive market subject to rapid technological changes, and increasing
competition could lead to pricing pressures, reduced operating margins, loss of market share and
increased capital expenditures.
  
    
    providers of online and offline supplemental instructional materials for the core
subject areas of reading, mathematics, science and social studies for K-12 institutions;
    
    companies that provide K-12-oriented software and web-based educational assessment and
remediation products and services to students, educators, parents and educational
institutions;
    
    the assessment divisions of established education publishers, including Pearson
Education, Inc., The McGraw-Hill Companies and Houghton Mifflin Harcourt Company;
    
    providers of online and offline test preparation materials;
    
    traditional print textbook and workbook companies that publish K-12 core subject
educational materials, standardized test preparation materials or paper and pencil
assessment tools;
    
    summative assessment companies, which traditionally assess student learning at the end
of a class period, that have expanded their line to include products that provide periodic
assessment in the classroom to gauge student learning and inform instruction, also known as
formative assessment; and
    
    non-profit and membership educational organizations and government agencies that offer
online and offline products and services, including in some cases at no cost, to assist
individuals in standards mastery and test preparation.
  23




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If our products or services contain errors, new product releases could be delayed or our services
could be disrupted. As a result, our customers may choose not to renew their subscriptions and our
business could be materially adversely affected.
  
    
    decreases in customer satisfaction with and loyalty toward our products and services;
    
    delays in or loss of market acceptance of our products and services;
    
    diversion of our resources;
    
    a lower rate of subscription renewals or upgrades;
    
    injury to our reputation; or
    
    increased service expense or payment of damages.
 If we are unable to adapt our products and services to technological changes, to the emergence of
new computing devices and to more sophisticated online services, we may lose market share and
revenue, and our business could suffer.
  Protection of our intellectual property is limited, and any misuse of our intellectual property by
others, including software piracy, could harm our business, reputation and competitive position.
   24




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We may be sued for infringing the intellectual property rights of others and such actions would be
costly to defend, could require us to pay damages or enter into royalty or license agreements with
third parties and could limit our ability or increase our costs to use certain content or
technologies in the future.
  Our customers can input their own content to our websites. We have limited control over this
content, which could expose us to liability from third parties.
  The confidentiality, non-disclosure and other agreements we use to protect our products, trade
secrets and proprietary information may prove unenforceable or inadequate.
   We have not registered copyrights for all of our products, which may limit our ability to enforce
them.
  25




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We must monitor and protect our internet domain names to preserve their value. We may be unable to
prevent third parties from acquiring domain names that are similar to, infringe on or otherwise
decrease the value of our trademarks.
  We do not own all of the software, content and other technologies used in our products and
services.
  Our future success depends on our ability to retain our key employees.
  We may be unable to attract and retain the skilled employees needed to sustain and grow our
business.
  We may have exposure to greater than anticipated tax liabilities.
  26




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Although we do not currently transact a material amount of business in foreign countries, we intend
to expand into international markets, which will subject us to additional economic, operational and
political risks that could increase our costs and make it difficult for us to continue to operate
profitably.
  
    
    foreign currency fluctuations, which could result in reduced revenue and increased
operating expense;
    
    potentially longer payment and sales cycles;
    
    increased difficulty in collecting accounts receivable;
    
    the effect of applicable foreign tax structures, including tax rates that may be higher
than tax rates in the United States or taxes that may be duplicative of those imposed in
the United States;
    
    tariffs and trade barriers;
    
    general economic and political conditions in each country;
    
    inadequate intellectual property protection in foreign countries;
    
    uncertainty regarding liability for information retrieved and replicated in foreign
countries;
    
    the difficulties and increased expense in complying with a variety of domestic and
foreign laws, regulations and trade standards, including the Foreign Corrupt Practices Act;
and
    
    unexpected changes in regulatory requirements.
 The current global financial crisis and adverse worldwide economic conditions may have significant
effects on our business, financial condition and results of operations.
   We may need additional capital in the future, but there is no assurance that funds will be
available on acceptable terms, or at all.
  27




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Our existing indebtedness could adversely affect our financial condition and we may not be able to
fulfill our debt obligations.
  
    
    incur or guarantee additional indebtedness;
    
    pay dividends or make other distributions to our stockholders;
    
    make restricted payments;
    
    incur liens;
    
    engage in transactions with affiliates; and
    
    enter into business combinations.
   Risks Related to Our Common Stock
 Our stock price may fluctuate significantly, and you may not be able to resell your shares at
or above the current market price.
  
    
    market conditions in the broader stock market;
    
    actual or anticipated fluctuations in our quarterly financial and results of operations;
    
    introduction of new products or services by us or our competitors;
    
    issuance of new or changed securities analysts reports or recommendations;
    
    investor perceptions of us and the educational industry;
    
    sales, or anticipated sales, of large blocks of our stock;
    
    additions or departures of key personnel;
    
    regulatory or political developments;
    
    litigation and governmental investigations; and
    
    changing economic conditions.
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If securities or industry analysts do not publish research or reports about our business, if they
adversely change their recommendations regarding our stock or if our results of operations do not
meet their expectations, our stock price and trading volume could decline.
  Sales of substantial amounts of our common stock in the public markets, or the perception that such
sales might occur, could reduce the price of our common stock and may dilute your voting power and
your ownership interest in us.
  Insiders have substantial control over us and could limit your ability to influence the outcome of
key transactions, including a change of control.
  29




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We are a controlled company within the meaning of NASDAQ rules and will qualify for, and rely on,
exemptions from certain corporate governance requirements. As a result, you will not have the same
protections afforded to stockholders of companies that are subject to such requirements.
  
    
    the requirement that a majority of the board of directors consist of independent
directors;
    
    the requirement that we have a nominating/corporate governance committee that is
composed entirely of independent directors with a written charter addressing the
committees purpose and responsibilities;
    
    the requirement that we have a compensation committee that is composed entirely of
independent directors with a written charter addressing the committees purpose and
responsibilities; and
    
    the requirement for an annual performance evaluation of the nominating and corporate
governance and compensation committees.
  As a result of becoming a public company, we are obligated to develop and maintain proper and
effective internal control over financial reporting and are subject to other requirements that will
be burdensome and costly. We may not timely complete our analysis of our internal control over
financial reporting, or these internal controls may not be determined to be effective, which could
adversely affect investor confidence in our company and, as a result, the value of our common
stock.
  
    
    prepare and distribute periodic public reports and other stockholder communications in
compliance with our obligations under the federal securities laws and NASDAQ rules;
    
    create or expand the roles and duties of our board of directors and committees of the
board;
    
    institute more comprehensive financial reporting and disclosure compliance functions;
    
    supplement our internal accounting and auditing function, including hiring additional
staff with expertise in accounting and financial reporting for a public company;
    
    enhance and formalize closing procedures at the end of our accounting periods;
    
    establish an internal audit function;
    
    enhance our investor relations function;
    
    establish new internal policies, including those relating to disclosure controls and
procedures; and
    
    involve and retain to a greater degree outside counsel and accountants in the activities
listed above.
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Our internal control over financial reporting does not currently comply with Section 404 of the
Sarbanes-Oxley Act, including the requirement for a public accounting firm attestation report, and
failure to achieve and maintain effective internal control over financial reporting, including the
requirement for a public accounting firm attestation report, in accordance with Section 404 of the
Sarbanes-Oxley Act could have a material adverse effect on us.
   Provisions in our certificate of incorporation and bylaws and Delaware law may discourage, delay or
prevent a change of control of our company or changes in our management and, therefore, may depress
the trading price of our stock.
  
    
    restrictions on the ability of our stockholders to fill a vacancy on the board of
directors;
    
    our ability to issue preferred stock with terms that the board of directors may
determine, without stockholder approval, which could be used to significantly dilute the
ownership of a hostile acquirer;
    
    the absence of cumulative voting in the election of directors which may limit the
ability of minority stockholders to elect directors; and
    
    advance notice requirements for stockholder proposals and nominations, which may
discourage or deter a potential acquirer from soliciting proxies to elect a particular
state of directors or otherwise attempting to obtain control of us.
  We do not expect to pay dividends, and any return on an investment in our common stock will likely
be limited to the appreciation of our common stock.
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Our certificate of incorporation contains a provision renouncing our interest and expectancy in
certain corporate opportunities.
  
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
    
 Item 3. Legal Proceedings
  32




---



##### Table of Contents



PART II
 
 Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
 Market for Our Common Stock
  High
    
    LowNovember 20, 2009 through December 31, 2009
    
    $
    20.79
    
    
    $
    16.51
 Holders
  Dividends
    
    
    restrictions in our credit facility;
    
    general economic and business conditions;
    
    the financial condition and results of operations of us and our subsidiaries;
    
    our capital requirements and the capital requirements of our subsidiaries;
    
    the ability of our operating subsidiaries to pay dividends and make distributions to
us; and
    
    such other factors as our board of directors may deem relevant.
 33




---



##### Table of Contents



Equity Compensation Plans
 2009 Omnibus Incentive Plan
  Administration
  Shares Available
  Eligibility for Participation
  Types of Awards
  Award Agreement
  34




---



##### Table of Contents



Options
   Stock Appreciation Rights
  Restricted Stock
  Other Stock-Based Awards
  35




---



##### Table of Contents



Performance-Based Compensation
  Transferability
  Stockholder Rights
  Adjustment of Awards
   36




---



##### Table of Contents



Amendment and Termination
  Compliance with Code Section 409A
  Employee Stock Purchase Plan
   Administration
  Shares Subject to the Plan
   Eligibility
  37




---



##### Table of Contents



Participation
   Offerings
  Purchase of Shares
  Resale Restrictions
  Stockholder Rights
  Amendment and Termination
  Use of Proceeds
  Sales of Unregistered Securities
  38




---



##### Table of Contents



Archipelago Learning Purchases of its Equity Securities
  39




---



##### Table of Contents



Stock Performance Graph
     Comparision of the Cumulative total Return of Archipelago Learning, Inc.
 
 Measurement Date
    
    Archipelago Learning, Inc.
    
    NASDAQ Composite
    
    Peer GroupNovember 20, 2009
    
    $
    100.00
    
    
    $
    100.00
    
    
    $
    100.00November 30, 2009
    
    
    98.56
    
    
    
    104.99
    
    
    
    100.11December 31, 2009
    
    
    110.28
    
    
    
    110.86
    
    
    
    111.53
 40




---



##### Table of Contents



Item 6. Selected Financial Data
     Successor
    
    
    Predecessor2009
    
    
    2008
    
    
    2007
    
    
    2006(In thousands, except per share data)Consolidated Statements of Income:Revenue
    
    $
    42,768
    
    
    $
    31,415
    
    
    $
    18,250
    
    
    $
    10,065Gross profit
    
    
    39,694
    
    
    
    29,524
    
    
    
    17,500
    
    
    
    9,722Income from continuing operations
    
    
    12,630
    
    
    
    8,230
    
    
    
    3,615
    
    
    
    3,636Net income from continuing operations
    
    $
    6,374
    
    
    $
    1,114
    
    
    $
    2,924
    
    
    $
    3,663Earnings per share from continuing operations:Basic and Diluted
    
    $
    0.31
    
    
    $
    0.06
    
    
    $
    0.15
    
    
    $
    0.18Consolidated Balance Sheet Data:Deferred revenue
    
    $
    36,443
    
    
    $
    26,922
    
    
    $
    16,931
    
    
    $
    9,318Cash and cash equivalents
    
    
    58,248
    
    
    
    13,144
    
    
    
    11,060
    
    
    
    1,387Total assets
    
    
    192,535
    
    
    
    142,025
    
    
    
    127,591
    
    
    
    4,227Long-term debt
    
    
    60,876
    
    
    
    68,600
    
    
    
    69,300
    
    
    
    Total liabilities
    
    
    109,525
    
    
    
    101,551
    
    
    
    89,244
    
    
    
    9,762Total equity (deficit)
    
    
    83,010
    
    
    
    40,474
    
    
    
    38,347
    
    
    
    (5,535
    )
 41




---



##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
       42




---



##### Table of Contents



(1)
    
    To replace the accountability system established in No Child Left Behind with a new
system built around the goal of helping all students graduate high school college- and
career-ready. President Obama has suggested replacing the AYP benchmarks with new
standards based on college and career readiness, which have not been finalized. President Obamas
proposal eliminates the No Child Left Behind mandate that all
students be proficient in reading and math by 2014.
The administration and its supporters suggest that this was an impossible target while others fear that backing away from
this absolute mandate is a mistake in a
field where nothing short of high-stakes testing grabs the attention of students, parents,
teachers, and school administrators.(2)
    
    To shift the method of distributing federal education dollars from formula alone to a
system that also rewards excellence based on competition and performance. That is, the new
accountability system would divide schools into more categories, offering recognition and
additional funds for those states, districts and schools that are succeeding and providing
large new amounts of money to help either improve or close chronically failing schools.
     43




---



##### Table of Contents



2009 Events
        44




---



##### Table of Contents



Results of Operations
 Comparison of 2009 and 2008
  Change2009
    
    
    2008
    
    
    Dollars
    
    
    PercentageRevenue
    
    $
    42,768
    
    
    $
    31,415
    
    
    $
    11,353
    
    
    
    36.1
    %Cost of revenue
    
    
    3,074
    
    
    
    1,891
    
    
    
    1,183
    
    
    
    62.6
    %Gross profit
    
    
    39,694
    
    
    
    29,524
    
    
    
    10,170
    
    
    
    34.4
    %Operating expense:Sales and marketing
    
    
    14,048
    
    
    
    12,726
    
    
    
    1,322
    
    
    
    10.4
    %Content development
    
    
    3,773
    
    
    
    2,162
    
    
    
    1,611
    
    
    
    74.5
    %General and administrative
    
    
    9,243
    
    
    
    6,406
    
    
    
    2,837
    
    
    
    44.3
    %Total
    
    
    27,064
    
    
    
    21,294
    
    
    
    5,770
    
    
    
    27.1
    %Income from continuing operations
    
    
    12,630
    
    
    
    8,230
    
    
    
    4,400
    
    
    
    53.5
    %Other income (expense):Interest expense
    
    
    (2,803
    )
    
    
    (5,161
    )
    
    
    2,358
    
    
    
    45.7
    %Interest income
    
    
    159
    
    
    
    247
    
    
    
    (88
    )
    
    
    (35.6
    %)Derivative loss
    
    
    (518
    )
    
    
    (2,119
    )
    
    
    1,601
    
    
    
    75.6
    %Total
    
    
    (3,162
    )
    
    
    (7,033
    )
    
    
    3,871
    
    
    
    55.0
    %Net income from continuing operations before tax
    
    
    9,468
    
    
    
    1,197
    
    
    
    8,271
    
    
    
    691.0
    %Provision for income tax
    
    
    3,094
    
    
    
    83
    
    
    
    3,011
    
    
    
    3,627.7
    %Net income from continuing operations
    
    
    6,374
    
    
    
    1,114
    
    
    
    5,260
    
    
    
    472.2
    %Income (loss) from discontinued operation before tax
    
    
    261
    
    
    
    (339
    )
    
    
    600
    
    
    
    177.0
    %Benefit from income tax on discontinued operation
    
    
    (101
    )
    
    
    (247
    )
    
    
    146
    
    
    
    59.1
    %Net income (loss) from discontinued operation
    
    
    362
    
    
    
    (92
    )
    
    
    454
    
    
    
    493.5
    %Net income
    
    $
    6,736
    
    
    $
    1,022
    
    
    $
    5,714
    
    
    
    559.1
    %
 Revenue.
     45




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##### Table of Contents



2009
    
    
    2008Invoiced sales:New customers
    
    $
    15,567
    
    
    $
    14,099Existing customers
    
    
    37,219
    
    
    
    24,709Other sales
    
    
    1,088
    
    
    
    1,013Total
    
    
    53,874
    
    
    
    39,821Change in deferred revenue
    
    
    (11,106
    )
    
    
    (8,405
    )Revenue
    
    $
    42,768
    
    
    $
    31,416Other metrics:Schools using Study Island products
    
    
    21,705
    
    
    
    17,307Products available
    
    
    1,249
    
    
    
    950States
    
    
    50
    
    
    
    50
  46




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##### Table of Contents



Cost of Revenue.
   Sales and Marketing Expense.
   Content Development Expense.
   47




---



##### Table of Contents



General and Administrative Expense.
   Other Income (Expense).
   Provision for Income Tax.
  48




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##### Table of Contents



Comparison of 2008 and 2007
  Change2008
    
    
    2007
    
    
    Dollars
    
    
    PercentageRevenue
    
    $
    31,415
    
    
    $
    18,250
    
    
    $
    13,165
    
    
    
    72.1
    %Cost of revenue
    
    
    1,891
    
    
    
    750
    
    
    
    1,141
    
    
    
    152.1
    %Gross profit
    
    
    29,524
    
    
    
    17,500
    
    
    
    12,024
    
    
    
    68.7
    %Operating expense:Sales and marketing
    
    
    12,726
    
    
    
    7,669
    
    
    
    5,057
    
    
    
    65.9
    %Content development
    
    
    2,162
    
    
    
    1,206
    
    
    
    956
    
    
    
    79.3
    %General and administrative
    
    
    6,406
    
    
    
    5,010
    
    
    
    1,396
    
    
    
    27.9
    %Total
    
    
    21,294
    
    
    
    13,885
    
    
    
    7,409
    
    
    
    53.4
    %Income from continuing operations
    
    
    8,230
    
    
    
    3,615
    
    
    
    4,615
    
    
    
    127.7
    %Other income (expense):Interest expense
    
    
    (5,161
    )
    
    
    (838
    )
    
    
    (4,323
    )
    
    
    (515.9
    %)Interest income
    
    
    247
    
    
    
    343
    
    
    
    (96
    )
    
    
    (28.0
    %)Derivative loss
    
    
    (2,119
    )
    
    
    (173
    )
    
    
    (1,946
    )
    
    
    (1,124.9
    %)Total
    
    
    (7,033
    )
    
    
    (668
    )
    
    
    (6,365
    )
    
    
    (952.8
    %)Net income from continuing operations before tax
    
    
    1,197
    
    
    
    2,947
    
    
    
    (1,750
    )
    
    
    (59.4
    %)Provision for income tax
    
    
    83
    
    
    
    23
    
    
    
    60
    
    
    
    260.9
    %Net income from continuing operations
    
    
    1,114
    
    
    
    2,924
    
    
    
    (1,810
    )
    
    
    (61.9
    %)Income (loss) from discontinued operation before tax
    
    
    (339
    )
    
    
    
    
    
    
    (339
    )
    
    
    Benefit from income tax on discontinued operation
    
    
    (247
    )
    
    
    
    
    
    
    (247
    )
    
    
    Net income (loss) from discontinued operation
    
    
    (92
    )
    
    
    
    
    
    
    (92
    )
    
    
    Net income
    
    $
    1,022
    
    
    $
    2,924
    
    
    $
    (1,902
    )
    
    
    (65.0
    %)
 Revenue.
    49




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##### Table of Contents



2008
    
    
    2007Invoiced sales:New customers
    
    $
    14,099
    
    
    $
    11,224Existing customers
    
    
    24,709
    
    
    
    13,841Other sales
    
    
    1,013
    
    
    
    798Total
    
    
    39,821
    
    
    
    25,863Change in deferred revenue
    
    
    (8,405
    )
    
    
    (7,613
    )Revenue
    
    $
    31,416
    
    
    $
    18,250Other metrics:Schools using Study Island products
    
    
    17,307
    
    
    
    11,563Products available
    
    
    950
    
    
    
    650States
    
    
    50
    
    
    
    35
   Cost of Revenue.
  Sales and Marketing Expense.
  50




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##### Table of Contents



Content Development Expense.
  General and Administrative Expense.
  Other Income (Expense).
  Liquidity and Capital Resources
  51




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##### Table of Contents



Cash Flow
  Provided by (used in):
    
    2009
    
    2008
    
    2007Operating activities
    
    $
    21,627
    
    
    $
    13,551
    
    
    $
    12,718Investing activities
    
    
    (3,125
    )
    
    
    (10,982
    )
    
    
    (85,285
    )Financing activities
    
    
    26,602
    
    
    
    (485
    )
    
    
    82,240
 Cash Flow from Operating Activities
   Cash Flow from Investing Activities
    52




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##### Table of Contents



Cash Flow from Financing Activities
    Credit Facility
     53




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##### Table of Contents



Contractual Obligations
  Payments due by periodTotal
    
    Less than 1 year
    
    2-3 years
    
    4-5 years
    
    More than 5 yearsLong-term debt obligations(1)
    
    $
    61,576
    
    
    $
    700
    
    
    $
    1,400
    
    
    $
    59,476
    
    
    
    Operating lease obligations
    
    $
    1,144
    
    
    $
    507
    
    
    $
    636
    
    
    
    1
    
    
    
    Colocation contracts
    
    $
    418
    
    
    $
    192
    
    
    $
    226
    
    
    
    
    
    
    
    
 
 (1)
    
    Interest payments based on variable interest rates on our long-term
debt obligations are excluded from our contractual obligations.  Off-Balance Sheet Arrangements
  54




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##### Table of Contents



Critical Accounting Policies and Estimates
   Revenue Recognition
     Goodwill, Intangible Assets and Long-Lived Assets
   55




---



##### Table of Contents




    
    Data from actual open marketplace transactions.We may utilize such information, if
available, where those transactions may involve assets or equity, to assist management in
evaluating goodwill impairment.
 
    
    Anticipated future cash flows and terminal value for each reporting unit.The income
approach to determining the fair value relies on the timing and estimates of future cash
flows, including an estimate of terminal value. The projections use managements estimates
of economic and market conditions over the projected period including growth rates in
revenue, customer attrition and estimates of any expected changes in operating margins. We
have utilized an income growth rate for our estimates, which we believe to be reasonable
based on historical growth and market and industry conditions. Our projections of future
cash flows are subject to change as actual results are achieved that differ from those
anticipated. Because management frequently updates its projections, we would expect to
identify on a timely basis any significant differences between actual results and recent
estimates. We are not expecting actual results to vary significantly from estimates.
 
    
    Selection of an appropriate discount rate.The income approach requires the selection
of an appropriate discount rate, which is based on a weighted-average cost of capital
analysis. The discount rate is affected by changes in short-term interest rates and
long-term yield as well as variances in the typical capital structure of marketplace
participants. For our impairment testing in the fourth quarter of 2008, we utilized a
weighted-average cost of capital which was developed using a combination of a risk free
rate, an equity premium, and a risk factor. For the risk free rate, we utilized the 20-year
U.S. government bond rate. The equity premium was developed based on a study of historical
security market returns, adjusted for the size of our reporting entities. The risk factor
was based on our product lines, potential changes in market demand, current market
conditions and other potentially relevant factors. Given the current volatile general
economic conditions, it is possible that the discount rate will fluctuate in the near term.
    56




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Stock-Based Compensation Expense
      57




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##### Table of Contents



2009
    
    2008
    
    2007Pre-Reorganization:Class B Shares granted
    
    
    673,287
    
    
    
    456,336
    
    
    
    5,720,692Class C Shares granted
    
    
    673,287
    
    
    
    456,336
    
    
    
    5,720,692Class B Shares cancelled or forfeited
    
    
    
    
    
    
    (821,588
    )
    
    
    Class C Shares cancelled or forfeited
    
    
    
    
    
    
    (273,864
    )
    
    
    Reorganization:Exchange of Class B and Class C Shares for Common stock
    
    
    530,474
    
    
    
    
    
    
    
    Exchange of Class B and Class C Shares for Restricted Common stock
    
    
    1,394,260
    
    
    
    
    
    
    
    Post-Reorganization:Common stock granted
    
    
    1,768
    
    
    
    
    
    
    
    Restricted Common stock granted
    
    
    1,768
    
    
    
    
    
    
    
    Stock-options granted
    
    
    552,594
    
    
    
    
    
    
    
    
  
    
    our strong operating performance in the last half of 2008;
 
    
    the prevailing adverse market conditions;
 
    
    the financial crisis and reduced initial public offering and merger activity;
 
    
    the ongoing recession;
 
    
    the lack of a liquid market for the Class B and Class C shares, and the assumption that
a liquidity event, such as an initial public offering or strategic sale, would not occur
prior to 2010 but more likely in 2011, when the market and overall economy were expected to
recover;
 
    
    the decline in state tax receipts and the uncertainty in state education funding;
 
    
    the decision by Congress in October 2008 to delay the reauthorization of the Elementary
and Secondary Education Act (commonly referred to during the Bush administration as No
Child Left Behind) and the further uncertainty in federal education funding;
 
    
    the impact of the priority of the Class A shares as well as the Class A-2 shares that
were issued in June 2008; and
 
    
    the nearly doubled distribution thresholds applicable to the January 2009 grants as
compared to the May 2008 grant.
  58




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##### Table of Contents




    
    our significantly stronger operating performance;
 
    
    improved stock market performance;
 
    
    improved prospects for a liquidity event as a result of an improved initial public
offering market;
 
    
    improved economic conditions and the possible end of the recession;
 
    
    the enactment of the American Recovery and Reinvestment Act of 2009, the largest
economic stimulus bill in history, which provided for approximately $100 billion in
education funding at the federal and state level; and
 
    
    the launch of our Northstar Learning postsecondary product line in April 2009.
 Accounts Receivable
  Recently Issued Accounting Standards
 Generally Accepted Accounting Principles The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles  a Replacement of FASB Statement No. 162
 Business Combinations Business Combinations
 Subsequent Events Subsequent Events
 59




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##### Table of Contents



Item 7A.
    
    Qualitative and Quantitative Disclosures about Market Risk
 Interest Rate Risk
   Effects of Inflation
  
 Item 8.
    
    Financial Statements and Supplementary Data
   March 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,
    
    
    March 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2009
    
    
    2009
    
    
    2009
    
    
    2009(1)
    
    
    2008
    
    
    2008
    
    
    2008
    
    
    2008Revenue
    
    $
    9,947
    
    
    $
    10,253
    
    
    $
    10,601
    
    
    $
    11,967
    
    
    $
    6,844
    
    
    $
    7,156
    
    
    $
    8,141
    
    
    $
    9,274Gross profit
    
    
    9,197
    
    
    
    9,569
    
    
    
    9,849
    
    
    
    11,079
    
    
    
    6,532
    
    
    
    6,765
    
    
    
    7,737
    
    
    
    8,490Income from
continuing
operations
    
    
    3,386
    
    
    
    3,200
    
    
    
    2,870
    
    
    
    3,174
    
    
    
    1,855
    
    
    
    2,011
    
    
    
    1,755
    
    
    
    2,609Net (loss) income
from continuing
operations
    
    $
    2,479
    
    
    $
    2,371
    
    
    $
    1,695
    
    
    $
    (171
    )
    
    $
    (937
    )
    
    $
    1,867
    
    
    $
    (8
    )
    
    $
    192Earnings (loss) per
share from
continuing
operations:Basic and Diluted
    
    $
    0.12
    
    
    $
    0.12
    
    
    $
    0.09
    
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    0.09
    
    
    $
    (0.00
    )
    
    $
    0.01Increase (decrease)
in deferred revenue
    
    $
    (1,790
    )
    
    $
    1,584
    
    
    $
    8,987
    
    
    $
    2,325
    
    
    $
    13
    
    
    $
    1,714
    
    
    $
    5,771
    
    
    $
    907
 
 (1)
    
    In November 2009 we completed our Corporate Reorganization, resulting in a change in our
equity structure and the conversion to a taxpaying entity, resulting in an immediate tax
expense of $2.0 million to record initial deferred tax items and additional tax expense for the
remainder of the year of $0.5 million. In October 2009, we completed our sale of TeacherWeb,
resulting in its classification as a discontinued operation. 60




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##### Table of Contents



Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A.
    
    Controls and Procedures
 Internal Control over Financial Reporting
   Changes in Internal Control over Financial Reporting
  
 Item 9B.
    
    Other Information
  
 PART III
  
 PART IV
 
 Item 15.
    
    Exhibits and Financial Statement Schedules
 Consolidated Financial Statements
  Index to Consolidated Financial Statements
    
    
    F-1Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2009 and 2008
    
    
    F-3Consolidated Statements of Income for the three years ended December 31, 2009
    
    
    F-4Consolidated Statements of Changes in  Equity for the three years ended December 31, 2009
    
    
    F-5Consolidated Statements of Cash Flows for the three years ended December 31, 2009
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
 Financial Statement Schedules
  Exhibit List
  61




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SIGNATURES
 th
 ARCHIPELAGO LEARNING, INC.By:
    /s/  Tim McEwenTim McEwenPresident and Chief Executive Officer POWER OF ATTORNEY
  rd
 Signature
    
    Title/s/ Tim McEwen
Tim McEwen
    
    President, Chief Executive Officer and Director (Principal 
Executive Officer)/s/ James Walburg
James Walburg
    
    Executive Vice President, Chief Financial Officer 
and Secretary
(Principal Financial and Accounting Officer)/s/ Brian H. Hall
Brian H. Hall
    
    Director/s/ Thomas F. Hedrick
Thomas F. Hedrick
    
    Director/s/ David Phillips
David Phillips
    
    Director/s/ Michael Powell
Michael Powell
    
    Director/s/ Peter Wilde
Peter Wilde
    
    Chairman
 62




---



##### 



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2009 and 2008
    
    
    F-3Consolidated Statements of Income for the three years ended December 31, 2009
    
    
    F-4Consolidated Statements of Changes in  Equity for the three years ended December 31, 2009
    
    
    F-5Consolidated Statements of Cash Flows for the three years ended December 31, 2009
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
  F -1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
       F -2




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##### Table of Contents



ARCHIPELAGO LEARNING, INC.
 
 CONSOLIDATED BALANCE SHEETS
 As of December 31,2009
    
    
    2008(In thousands, except share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    58,248
    
    
    $
    13,144Accounts receivable, net
    
    
    7,535
    
    
    
    6,093Short-term deferred tax assets
    
    
    2,528
    
    
    
    33Prepaid expenses and other current assets
    
    
    1,809
    
    
    
    324Total
    
    
    70,120
    
    
    
    19,594Property and equipment, net
    
    
    2,620
    
    
    
    1,782Goodwill
    
    
    94,373
    
    
    
    103,267Intangible assets, net
    
    
    12,327
    
    
    
    16,106Investment
    
    
    6,446
    
    
    
    Notes receivable
    
    
    4,931
    
    
    
    Other long-term assets
    
    
    1,718
    
    
    
    1,276Total assets
    
    $
    192,535
    
    
    $
    142,025Liabilities and EquityCurrent liabilities:Accounts payable  trade
    
    $
    1,254
    
    
    $
    382Accrued employee-related expenses
    
    
    2,033
    
    
    
    1,918Other accrued expenses
    
    
    803
    
    
    
    128Deferred revenue
    
    
    31,181
    
    
    
    24,632Taxes payable
    
    
    625
    
    
    
    64Current portion of long-term debt
    
    
    700
    
    
    
    700Interest payable
    
    
    124
    
    
    
    210Interest rate swap
    
    
    1,149
    
    
    
    1,988Total
    
    
    37,869
    
    
    
    30,022Long-term debt, net of current
    
    
    60,876
    
    
    
    68,600Long-term deferred revenue
    
    
    5,262
    
    
    
    2,290Long-term deferred tax liability
    
    
    5,093
    
    
    
    639Other long-term liability
    
    
    425
    
    
    
    Total liabilities
    
    
    109,525
    
    
    
    101,551Commitments and contingencies (Note 11)Members Equity:Class A shares (no shares authorized,
issued or outstanding at December 31,
2009; 109,545,064 shares authorized,
issued and outstanding at December 31,
2008)
    
    
    
    
    
    
    34,792Class A-2 shares (no shares authorized,
issued or outstanding at December 31,
2009; 286,882 shares authorized, issued
and outstanding at December 31, 2008)
    
    
    
    
    
    
    750Class B shares (no shares authorized,
issued or outstanding at December 31,
2009; 6,578,727 shares authorized,
5,355,440 shares issued and outstanding
at December 31, 2008)
    
    
    
    
    
    
    684Class C shares (no shares authorized,
issued or outstanding at December 31,
2009; 7,126,451 shares authorized,
5,903,164 shares issued and outstanding
at December 31, 2008)
    
    
    
    
    
    
    302Retained earnings
    
    
    
    
    
    
    3,946Total members equity
    
    
    
    
    
    
    40,474Stockholders Equity:Preferred stock ($0.001 par value,
10,000,000 shares authorized, none
issued and outstanding at December 31,
2009 and 2008)
    
    
    
    
    
    
    Common stock ($0.001 par value,
200,000,000 shares authorized,
25,110,255 shares issued and outstanding
at December 31, 2009 and no shares
authorized, issued or outstanding at
December 31, 2008)
    
    
    25
    
    
    
    Additional paid-in capital
    
    
    76,072
    
    
    
    Retained earnings
    
    
    6,913
    
    
    
    Total stockholders equity
    
    
    83,010
    
    
    
    Total liabilities and equity
    
    $
    192,535
    
    
    $
    142,025
  F -3




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##### Table of Contents



ARCHIPELAGO LEARNING, INC.
 
 CONSOLIDATED STATEMENTS OF INCOME
 Years Ended December 31,2009
    
    
    2008
    
    
    2007(In thousands, except share and per share data)Revenue
    
    $
    42,768
    
    
    $
    31,415
    
    
    $
    18,250Cost of revenue
    
    
    3,074
    
    
    
    1,891
    
    
    
    750Gross profit
    
    
    39,694
    
    
    
    29,524
    
    
    
    17,500Operating Expense:Sales and marketing
    
    
    14,048
    
    
    
    12,726
    
    
    
    7,669Content development
    
    
    3,773
    
    
    
    2,162
    
    
    
    1,206General and administrative
    
    
    9,243
    
    
    
    6,406
    
    
    
    5,010Total
    
    
    27,064
    
    
    
    21,294
    
    
    
    13,885Income from continuing operations
    
    
    12,630
    
    
    
    8,230
    
    
    
    3,615Other income (expense):Interest expense
    
    
    (2,803
    )
    
    
    (5,161
    )
    
    
    (838
    )Interest income
    
    
    159
    
    
    
    247
    
    
    
    343Derivative loss
    
    
    (518
    )
    
    
    (2,119
    )
    
    
    (173
    )Total
    
    
    (3,162
    )
    
    
    (7,033
    )
    
    
    (668
    )Net income from continuing operations before tax
    
    
    9,468
    
    
    
    1,197
    
    
    
    2,947Provision for income tax
    
    
    3,094
    
    
    
    83
    
    
    
    23Net income from continuing operations
    
    
    6,374
    
    
    
    1,114
    
    
    
    2,924Income (loss) from discontinued operation before tax
    
    
    261
    
    
    
    (339
    )
    
    
    Benefit from income tax on discontinued operation
    
    
    (101
    )
    
    
    (247
    )
    
    
    Net income (loss) from discontinued operation
    
    
    362
    
    
    
    (92
    )
    
    
    Net income
    
    $
    6,736
    
    
    $
    1,022
    
    
    $
    2,924Earnings (loss) per share:Basic:Continuing operations
    
    $
    0.31
    
    
    $
    0.06
    
    
    $
    0.15Discontinued operation
    
    
    0.02
    
    
    
    (0.01
    )
    
    
    Total
    
    $
    0.33
    
    
    $
    0.05
    
    
    $
    0.15Diluted:Continuing operations
    
    $
    0.31
    
    
    $
    0.06
    
    
    $
    0.15Discontinued operation
    
    
    0.02
    
    
    
    (0.01
    )
    
    
    Total
    
    $
    0.33
    
    
    $
    0.05
    
    
    $
    0.15Weighted-average shares outstanding:Basic
    
    
    20,407,685
    
    
    
    19,965,866
    
    
    
    19,965,866Diluted
    
    
    20,434,486
    
    
    
    19,965,866
    
    
    
    19,965,866
  F -4




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##### Table of Contents



ARCHIPELAGO LEARNING, INC.
 
 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 Study Island
    
    
    Class A
    
    
    Class A-2
    
    
    Class B
    
    
    Class C
    
    
    Preferred
    
    
    Common
    
    
    AdditionalLP Partner
    
    
    Shares
    
    
    Shares
    
    
    Shares
    
    
    Shares
    
    
    Stock
    
    
    Stock
    
    
    Paid-in
    
    
    Retained
    
    
    TotalDeficit
    
    
    Units
    
    
    Value
    
    
    Units
    
    
    Value
    
    
    Units
    
    
    Value
    
    
    Units
    
    
    Value
    
    
    Shares
    
    
    Par Value
    
    
    Shares
    
    
    Par Value
    
    
    Capital
    
    
    Earnings
    
    
    Equity(In thousands)PredecessorBalance at December
31, 2006
    
    $
    (5,535
    )Distribution
    
    
    (1,178
    )Reorganization
due to change in
ownership
    
    
    6,713Ending balance,
predecessor
    
    $
    SuccessorShares issued
    
    
    
    
    
    
    109,545
    
    
    $
    109,545
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    109,545Distributions
    
    
    
    
    
    
    
    
    
    
    (74,753
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (74,753
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,721
    
    
    
    345
    
    
    
    5,721
    
    
    
    286
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    631Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,924
    
    
    
    2,924Balance at December
31, 2007
    
    
    
    
    
    
    109,545
    
    
    
    34,792
    
    
    
    
    
    
    
    
    
    
    
    5,721
    
    
    
    345
    
    
    
    5,721
    
    
    
    286
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,924
    
    
    
    38,347Shares issued in
acquisition of
discontinued
operation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    287
    
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    750Stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    456
    
    
    
    372
    
    
    
    456
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    402Forfeitures of
stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (822
    )
    
    
    (33
    )
    
    
    (274
    )
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,022
    
    
    
    1,022Balance at December
31, 2008
    
    
    
    
    
    
    109,545
    
    
    
    34,792
    
    
    
    287
    
    
    
    750
    
    
    
    5,355
    
    
    
    684
    
    
    
    5,903
    
    
    
    302
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,946
    
    
    
    40,474Distributions
    
    
    
    
    
    
    
    
    
    
    (8,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,769
    )
    
    
    (11,769
    )Sale of
discontinued
operation to
shareholder
    
    
    
    
    
    
    
    
    
    
    2,912
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,912Reorganization
    
    
    
    
    
    
    (109,545
    )
    
    
    (29,704
    )
    
    
    (287
    )
    
    
    (750
    )
    
    
    (5,355
    )
    
    
    (684
    )
    
    
    ( 5,903
    )
    
    
    (302
    )
    
    
    
    
    
    
    
    
    
    
    21,798
    
    
    
    22
    
    
    
    31,571
    
    
    
    (1,957
    )
    
    
    (1,804
    )Stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187
    
    
    
    
    
    
    
    562
    
    
    
    
    
    
    
    562Stock offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,125
    
    
    
    3
    
    
    
    43,939
    
    
    
    
    
    
    
    43,942Net
income, excluding tax charge upon Reorganization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,693
    
    
    
    8,693Balance at December
31, 2009
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    25,110
    
    
    $
    25
    
    
    $
    76,072
    
    
    $
    6,913
    
    
    $
    83,010
  F-5




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##### Table of Contents



ARCHIPELAGO LEARNING, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years Ended December 31,2009
    
    
    2008
    
    
    2007(In thousands)Cash flows from operating activitiesNet income
    
    $
    6,736
    
    
    $
    1,022
    
    
    $
    2,924Adjustments to reconcile net income to net cash provided by
operating activities:Amortization of debt financing costs
    
    
    208
    
    
    
    179
    
    
    
    36Depreciation and amortization
    
    
    2,720
    
    
    
    1,970
    
    
    
    1,670Stock-based compensation
    
    
    562
    
    
    
    355
    
    
    
    631Allowance for doubtful accounts
    
    
    25
    
    
    
    11
    
    
    
    38Unrealized (gain) loss on interest rate swap
    
    
    (839
    )
    
    
    1,783
    
    
    
    205Deferred income taxes
    
    
    2,565
    
    
    
    
    
    
    
    Deduction of net (income) loss from discontinued operation
    
    
    (362
    )
    
    
    92
    
    
    
    Operating cash provided by discontinued operation
    
    
    904
    
    
    
    1,353
    
    
    
    Changes in operating assets and liabilities, net of
disposition and discontinued operation:Accounts receivable
    
    
    (1,713
    )
    
    
    (2,174
    )
    
    
    (1,542
    )Prepaid expenses and other
    
    
    (854
    )
    
    
    489
    
    
    
    (469
    )Accounts payable
    
    
    (101
    )
    
    
    221
    
    
    
    55Accrued expenses
    
    
    245
    
    
    
    (155
    )
    
    
    1,557Deferred revenue
    
    
    11,106
    
    
    
    8,405
    
    
    
    7,613Other long-term liability
    
    
    425
    
    
    
    
    
    
    
    Net cash provided by operating activities
    
    
    21,627
    
    
    
    13,551
    
    
    
    12,718Cash flows from investing activitiesPurchase of property and equipment
    
    
    (1,855
    )
    
    
    (1,324
    )
    
    
    (498
    )Purchase of property and equipment  discontinued operation
    
    
    (93
    )
    
    
    
    
    
    
    Investment in Edline
    
    
    (2,734
    )
    
    
    
    
    
    
    Funding of note receivable from Edline
    
    
    (2,144
    )
    
    
    
    
    
    
    Sale of discontinued operation to Edline
    
    
    3,701
    
    
    
    
    
    
    
    Acquisition of the Company
    
    
    
    
    
    
    
    
    
    
    (84,787
    )Acquisition of discontinued operation
    
    
    
    
    
    
    (9,658
    )
    
    
    Net cash used in investing activities
    
    
    (3,125
    )
    
    
    (10,982
    )
    
    
    (85,285
    )Cash flows from financing activitiesDistributions to predecessor
    
    
    
    
    
    
    
    
    
    
    (846
    )Proceeds from issuance of shares
    
    
    
    
    
    
    
    
    
    
    89,545Return of Capital distributions to members
    
    
    (8,000
    )
    
    
    
    
    
    
    (74,753
    )Contribution from member in Reorganization
    
    
    693
    
    
    
    
    
    
    
    Tax distributions to members
    
    
    (3,769
    )
    
    
    
    
    
    
    Cost of debt financing
    
    
    
    
    
    
    215
    
    
    
    (1,706
    )Stock offering
    
    
    45,402
    
    
    
    
    
    
    
    Proceeds from revolver
    
    
    
    
    
    
    10,000
    
    
    
    Payments on revolver
    
    
    
    
    
    
    (10,000
    )
    
    
    Proceeds from term note
    
    
    
    
    
    
    
    
    
    
    70,000Payments on term note
    
    
    (7,724
    )
    
    
    (700
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    26,602
    
    
    
    (485
    )
    
    
    82,240Net change in cash and cash equivalents
    
    
    45,104
    
    
    
    2,084
    
    
    
    9,673Beginning of period
    
    
    13,144
    
    
    
    11,060
    
    
    
    1,387End of period
    
    $
    58,248
    
    
    $
    13,144
    
    
    $
    11,060Supplemental informationCash paid for interest
    
    $
    2,691
    
    
    $
    4,992
    
    
    $
    612Cash paid for income taxes
    
    $
    67
    
    
    $
    44
    
    
    $
    Non-cash investing and financing activitiesAccrued purchases of property and equipment
    
    $
    95
    
    
    $
    19
    
    
    $
    49Accrued offering costs
    
    $
    1,460
    
    
    $
    
    
    
    $
    Receipt of Edline stock and note receivable and amounts held
in escrow on sale of TeacherWeb (Note 6)
    
    $
    7,800
    
    
    $
    
    
    
    $
    Contribution of tax payable from member in Reorganization
(Note 12)
    
    $
    540
    
    
    $
    
    
    
    $
    Non-cash distribution to Predecessor (Note 12)
    
    $
    
    
    
    $
    
    
    
    $
    332Issuance of shares in business acquisitions (Note 1)
    
    $
    
    
    
    $
    750
    
    
    $
    20,000
  F-6




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##### Table of Contents



ARCHIPELAGO LEARNING, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. ORGANIZATION
      Purchase Transaction
   F-7




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##### Table of Contents



The purchase price was comprised of the following (in thousands):Net cash paid to sellers
    
    $
    80,226Transaction costs
    
    
    4,560Total cash paid
    
    
    84,786Issuance of Class A shares
    
    
    20,000Total
    
    
    104,786Assets (liabilities) acquired:Accounts receivable
    
    
    2,319Related party receivables
    
    
    4,545Accounts payable
    
    
    (4,565
    )Deferred revenue
    
    
    (9,352
    )Property and equipment
    
    
    346Intangible assets
    
    
    17,120Total
    
    
    10,413Remaining value, recorded to goodwill
    
    $
    94,373
  2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Consolidation 
 Estimates
 Revenue Recognition
     F-8




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##### Table of Contents



Cost of Revenue
 Operating Expense
 Software Development Costs
 Content Development Costs
 Cash and Cash Equivalents
 Accounts Receivable
 Property and Equipment
 Estimated useful lifeFurniture and fixtures
    
    7 yearsOffice equipment
    
    5 yearsComputer equipment
    

    3 to 5 yearsComputer software
    
    3 yearsLeasehold improvements
    
    Lesser of the lease term or useful life
  F-9




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##### Table of Contents



Goodwill, Intangible Assets and Long-Lived Assets
   
    
    Data from actual open marketplace transactions. The Company may utilize such
information if available, where those transactions may involve assets or equity, to assist
management in evaluating goodwill impairment.
    
    Anticipated future cash flows and terminal value for each reporting unit.The
determination of discontinued cash flows relies on the timing and estimates of future cash
flows, including an estimate of terminal value. The projections use managements estimates
of economic and market conditions over the projected period including growth rates in
revenue, customer attrition and estimates of any expected changes in operating margins.
    
    Selection of an appropriate discount rate.The determination of discontinued cash
flows requires the selection of an appropriate discount rate, which is based on a
weighted-average cost of capital analysis. The discount rate is affected by changes in
short-term interest rates and long-term yield as well as variances in the typical capital
structure of marketplace participants.
   Deferred Financing Costs
 F-10




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##### Table of Contents



Income Taxes
  Concentrations of Credit Risk
 Stock-Based Compensation Expense
 Derivatives and Hedging Activities
  Earnings per Share
 Reclassifications
 F-11




---



##### Table of Contents



3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 Generally Accepted Accounting Principles The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles  a replacement of FASB Statement No. 162
 Business Combinations Business Combinations
 Subsequent Events Subsequent Events
 4. FAIR VALUE MEASUREMENTS
   
    
    Level 1  Unadjusted quoted market prices for identical assets or liabilities in
active markets that the Company has the ability to access.
    
    Level 2  Quoted prices for similar assets or liabilities in active markets; quoted
prices for identical or similar assets or liabilities in inactive markets; or valuations
based on models where the significant inputs are observable (interest rates, yield curves,
prepayment speeds, default rates, loss severities, etc.) or can be corroborated by
observable market data.
    
    Level 3  Valuations based on models where significant inputs are not observable. The
unobservable inputs reflect the Companys own assumptions about the assumptions that market
participants would use.
  F-12




---



##### Table of Contents



Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAs of December 31, 2009Assets  cash equivalents
    
    $
    55,792
    
    
    
    
    
    
    
    
    
    
    $
    55,792Liabilities  interest rate swap
    
    
    
    
    
    $
    1,149
    
    
    
    
    
    
    $
    1,149As of December 31, 2008Assets  cash equivalents
    
    $
    12,206
    
    
    
    
    
    
    
    
    
    
    $
    12,206Liabilities  interest rate swap
    
    
    
    
    
    $
    1,988
    
    
    
    
    
    
    $
    1,988
   2009
    
    2008Carrying
    
    
    
    
    
    CarryingAmount
    
    Fair Value
    
    Amount
    
    Fair ValueCost investment
    
    $
    6,446
    
    
    
    n/a
    
    
    
    
    
    
    
    Notes receivable
    
    $
    4,931
    
    
    $
    4,931
    
    
    
    
    
    
    
    Term loan
    
    $
    61,576
    
    
    $
    61,229
    
    
    $
    69,300
    
    
    $
    70,047
  5. PROPERTY AND EQUIPMENT
  2009
    
    
    2008Computer equipment
    
    $
    2,754
    
    
    $
    1,534Furniture and fixtures
    
    
    311
    
    
    
    284Office equipment
    
    
    177
    
    
    
    13Computer software
    
    
    837
    
    
    
    363Leasehold improvements
    
    
    60
    
    
    
    474,139
    
    
    
    2,241Accumulated depreciation
    
    
    (1,519
    )
    
    
    (459
    )Total
    
    $
    2,620
    
    
    $
    1,782
  6. DISCONTINUED OPERATION
  F-13




---



##### Table of Contents



Net cash paid to sellers
    
    $
    9,408Transaction costs
    
    
    250Total cash paid
    
    
    9,658Issuance of Company shares
    
    
    750Total
    
    
    10,408Assets (liabilities) acquired:Accounts receivable
    
    
    199Other assets
    
    
    32Accounts payable
    
    
    (49
    )Deferred revenue
    
    
    (199
    )Net long-term deferred tax liability
    
    
    (853
    )Property and equipment
    
    
    4Intangible assets
    
    
    2,380Total
    
    
    1,514Remaining value, recorded to goodwill
    
    $
    8,894
   F-14




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##### Table of Contents



Assets:Current assets:Cash and cash equivalents
    
    $
    1,353Account receivable, net
    
    
    255Short-term deferred tax assets
    
    
    33Prepaid expenses and other current assets
    
    
    19Total
    
    
    1,660Property and equipment, net
    
    
    4Goodwill
    
    
    8,894Intangible assets, net
    
    
    2,167Total assets
    
    $
    12,725Liabilities:Current liabilities:Accounts payable  trade
    
    $
    84Accrued expenses
    
    
    407Deferred revenue
    
    
    1,585Total current liabilities
    
    
    2,076Long-term deferred tax liabilities
    
    
    639Total liabilities
    
    $
    2,715
  7. INVESTMENT
   8. GOODWILL AND INTANGIBLE ASSETS
   2009
    
    
    2008
    
    
    2007Cost of revenue
    
    $
    84
    
    
    $
    84
    
    
    $
    82Sales and marketing
    
    
    1,362
    
    
    
    1,362
    
    
    
    1,325Content development
    
    
    166
    
    
    
    166
    
    
    
    162Income (loss) from discontinued operation
    
    
    355
    
    
    
    213
    
    
    
    Total
    
    $
    1,967
    
    
    $
    1,825
    
    
    $
    1,569
 F-15




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##### Table of Contents



2009
    
    
    2008Amortization
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    GrossPeriod
    
    
    Carrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    Accumulated(Years)
    
    
    Amount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    NetGoodwill from acquisition of Company
    
    
    n/a
    
    
    $
    94,373
    
    
    $
    
    
    
    $
    94,373
    
    
    $
    94,373
    
    
    $
    
    
    
    $
    94,373Goodwill from discontinued operation
    
    
    n/a
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,894
    
    
    
    
    
    
    
    8,894Total goodwill
    
    
    
    
    
    $
    94,373
    
    
    $
    
    
    
    $
    94,373
    
    
    $
    103,267
    
    
    $
    
    
    
    $
    103,267Finite-lived intangible assets:Study Island customer relationships
    
    
    10
    
    
    $
    13,620
    
    
    $
    (4,050
    )
    
    $
    9,570
    
    
    $
    13,620
    
    
    $
    (2,687
    )
    
    $
    10,933Study Island technical development/program content
    
    
    10
    
    
    
    2,500
    
    
    
    (743
    )
    
    
    1,757
    
    
    
    2,500
    
    
    
    (494
    )
    
    
    2,006Discontinued operation customer relationships
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,130
    
    
    
    (213
    )
    
    
    1,917Indefinite-lived intangible assets:Study Island trade name
    
    
    n/a
    
    
    
    1,000
    
    
    
    
    
    
    
    1,000
    
    
    
    1,000
    
    
    
    
    
    
    
    1,000Discontinued operation trade name
    
    
    n/a
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    
    
    
    
    250Total intangible assets
    
    
    
    
    
    $
    17,120
    
    
    $
    (4,793
    )
    
    $
    12,327
    
    
    $
    19,500
    
    
    $
    (3,394
    )
    
    $
    16,106
  2010
    
    $
    1,6122011
    
    
    1,6122012
    
    
    1,6122013
    
    
    1,6122014
    
    
    1,612Thereafter
    
    
    3,267$
    11,327
  9. CREDIT FACILITY
   F-16




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##### Table of Contents



2010
    
    $
    7002011
    
    
    7002012
    
    
    7002013
    
    
    59,476Total debt
    
    
    61,576Less: current maturities
    
    
    (700
    )Total long-term debt
    
    $
    60,876
 F-17




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##### Table of Contents



10. TAXES
    2009
    
    
    2008
    
    
    2007Continuing operations:Current provision:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    529
    
    
    
    83
    
    
    
    23Total
    
    
    529
    
    
    
    83
    
    
    
    23Deferred provision:Federal
    
    
    2,407
    
    
    
    
    
    
    
    State
    
    
    158
    
    
    
    
    
    
    
    Total
    
    
    2,565
    
    
    
    
    
    
    
    Tax provision from continuing operations
    
    $
    3,094
    
    
    $
    83
    
    
    $
    23Discontinued operation:Current provision:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    Deferred benefit:Federal
    
    
    (101
    )
    
    
    (247
    )
    
    
    State
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    (101
    )
    
    
    (247
    )
    
    
    Tax benefit from discontinued operation
    
    $
    (101
    )
    
    $
    (247
    )
    
    $
    
  2009
    
    
    2008
    
    
    2007Federal statutory income tax rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %Impact of taxation as a partnership
    
    
    (28.4
    )
    
    
    (34.0
    )
    
    
    (34.0
    )State taxes, net
    
    
    6.5
    
    
    
    6.9
    
    
    
    0.8Net federal deferred tax liability recorded upon Reorganization
    
    
    20.7
    
    
    
    
    
    
    
    Other, net
    
    
    (0.1
    )
    
    
    
    
    
    
    Effective tax rate from continuing operations
    
    
    32.7
    
    
    
    6.9
    
    
    
    0.8
 F-18




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##### Table of Contents



2009
    
    
    2008Deferred tax assets:Current:Deferred revenue
    
    $
    1,735
    
    
    $
    15Allowance for doubtful accounts
    
    
    27
    
    
    
    18Unrealized loss on interest rate swap
    
    
    428
    
    
    
    Net operating loss carryforwards
    
    
    338
    
    
    
    Total
    
    
    2,528
    
    
    
    33Noncurrent:Stock-based compensation
    
    
    52
    
    
    
    Deferred revenue
    
    
    1,520
    
    
    
    Net operating loss carryforwards
    
    
    
    
    
    
    135Total
    
    
    1,572
    
    
    
    135Total deferred tax assets
    
    $
    4,100
    
    
    $
    168Deferred tax liabilities:Noncurrent:Depreciation
    
    $
    341
    
    
    $
    Amortization
    
    
    6,324
    
    
    
    774Total deferred tax liabilities
    
    $
    6,665
    
    
    $
    774
  Accounting for Uncertainty in Income Taxes 
an Interpretation of FASB Statement No. 109
  Balance as of January 1, 2009
    
    $
    Additions for tax positions related to prior years
    
    
    223Additions for tax positions related to the current year
    
    
    202Reductions of tax positions
    
    
    Balance as of December 31, 2009
    
    $
    425
 F-19




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##### Table of Contents



11. COMMITMENTS AND CONTINGENCIES
  2010
    
    
    5072011
    
    
    4472012
    
    
    1892013
    
    
    1$
    1,144
  12. STOCKHOLDERS EQUITY
   Contributions and Distributions
    F-20




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##### Table of Contents



13. EARNINGS PER SHARE
   2009
    
    
    2008
    
    
    2007Net Income
    
    
    Shares
    
    
    Net Income
    
    
    Shares
    
    
    Net Income
    
    
    SharesContinuing operations:Net income
    
    $
    6,374
    
    
    
    20,572
    
    
    $
    1,114
    
    
    
    19,966
    
    
    $
    2,924
    
    
    
    19,966Less: Income attributable to restricted shares
    
    
    (47
    )
    
    
    (164
    )Net income available to common shareholders
    
    
    6,327
    
    
    
    20,408Basic and diluted earnings per share
    
    $
    0.31
    
    
    
    
    
    
    $
    0.06
    
    
    
    
    
    
    $
    0.15Discontinued operation:Net income (loss)
    
    $
    362
    
    
    
    20,572
    
    
    $
    (92
    )
    
    
    19,966
    
    
    $
    
    
    
    
    Less: Income attributable to restricted shares
    
    
    
    
    
    
    (164
    )Net income (loss) available to common shareholders
    
    
    362
    
    
    
    20,408Basic and diluted earnings (loss) per share
    
    $
    0.02
    
    
    
    
    
    
    $
    (0.01
    )
    
    
    
    
    
    $
    Total:Net income
    
    $
    6,736
    
    
    
    20,572
    
    
    $
    1,022
    
    
    
    19,966
    
    
    $
    2,924
    
    
    
    19,966Less: Income attributable to restricted shares
    
    
    
    
    
    
    (164
    )Net income available to common shareholders
    
    
    6,649
    
    
    
    20,408Basic and diluted earnings per share
    
    $
    0.33
    
    
    
    
    
    
    $
    0.05
    
    
    
    
    
    
    $
    0.15
  14. STOCK-BASED COMPENSATION
 2007 Equity Compensation Plan
   F-21




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##### Table of Contents



2009 Omnibus Incentive Plan
  Employee Stock Purchase Plan
  Activity
   Per Share Weighted-Average
    
    
    Aggregate FairGrant-Date
    
    
    Value of VestedUnvested Participation Shares
    
    Shares
    
    
    Fair Value
    
    
    SharesDecember 31, 2006
    
    
    
    
    
    $
    Granted
    
    
    5,721
    
    
    
    0.31Vested
    
    
    
    
    
    
    
    
    
    $
    Forfeited
    
    
    
    
    
    
    December 31, 2007
    
    
    5,721
    
    
    
    0.31Granted
    
    
    456
    
    
    
    0.29Vested
    
    
    (1,089
    )
    
    
    0.31
    
    
    
    316Forfeited
    
    
    (822
    )
    
    
    0.31December 31, 2008
    
    
    4,266
    
    
    
    0.31Granted
    
    
    673
    
    
    
    0.26Vested
    
    
    (1,180
    )
    
    
    0.31
    
    
    
    307Forfeited
    
    
    
    
    
    
    November 19, 2009
    
    
    3,759
    
    
    
    0.30Exchange of unvested participation shares to restricted common stock
    
    
    1,394
    
    
    
    1.23Granted
    
    
    2
    
    
    
    16.50Vested
    
    
    (3
    )
    
    
    2.15
    
    
    
    412Forfeited
    
    
    
    
    
    
    December 31, 2009
    
    
    1,393
    
    
    $
    1.27
  F-22




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##### Table of Contents



2009Expected life
    
    6.25 yearsVolatility
    
    
    49.3
    %Dividend yield
    
    
    0
    %Risk-free rate
    
    
    2.4
    %
  2009
    
    
    2008
    
    
    2007Cost of revenue
    
    $
    96
    
    
    $
    7
    
    
    $
    17Sales and marketing
    
    
    74
    
    
    
    32
    
    
    
    81General and administrative
    
    
    369
    
    
    
    298
    
    
    
    513Content development
    
    
    23
    
    
    
    18
    
    
    
    20Total
    
    
    562
    
    
    
    355
    
    
    
    631Tax impact
    
    
    (64
    )
    
    
    
    
    
    
    Net expense
    
    $
    498
    
    
    $
    355
    
    
    $
    631
  15. EMPLOYEE BENEFIT PLANS
   16. SEGMENT INFORMATION
  F-23




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##### Table of Contents



17. RELATED-PARTY TRANSACTIONS
  2009
    
    
    2008
    
    
    2007Management or advisory services
    
    $
    14
    
    
    $
    342
    
    
    
    Purchases of property and equipment
    
    
    748
    
    
    
    344
    
    
    
    
  18. SUBSEQUENT EVENTS
   F-24




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Exhibits3.1
    
    Form of Certificate of Incorporation of Archipelago Learning, Inc. (filed as Exhibit 3.1 to
Amendment No. 4 to Registration Statement on Form S-1 (File No. 333-161717) filed on November 17,
2009)3.2
    
    Form of Bylaws of Archipelago Learning, Inc. (filed as Exhibit 3.2 to Amendment No. 4 to
Registration Statement on Form S-1 (File No. 333-161717) filed on November 17, 2009)3.3
    
    Second Amended and Restated Limited Liability Company Agreement of Study Island Holdings, LLC.
(filed as Exhibit 3.3 to Registration Statement on Form S-1 (File No. 333-161717) filed on
September 3, 2009)4.1
    
    Form of Common Stock Certificate. (filed as Exhibit 4.1 to Amendment No. 4 to Registration
Statement on Form S-1 (File No. 333-161717) filed on November 17, 2009)4.2
    
    Form of Stockholders Agreement. (filed as Exhibit 4.2 to Amendment No. 4 to Registration
Statement on Form S-1 (File No. 333-161717) filed on November 17, 2009)4.3
    
    Reserved.4.4
    
    Form of Time Vesting Restricted Stock Award Agreement. (filed as Exhibit 4.4 to Amendment No. 1
to Registration Statement on Form S-1 (File No. 333-161717) filed on October 13, 2009)4.5
    
    Form of Cash Return Vesting Restricted Stock Award Agreement. (filed as Exhibit 4.5 to Amendment
No. 1 to Registration Statement on Form S-1 (File No. 333-161717) filed on October 13, 2009)4.6
    
    Form of Cash Return Vesting Restricted Stock Unit Award Agreement. (filed as Exhibit 4.6 to
Amendment No. 1 to Registration Statement on Form S-1 (File No. 333-161717) filed on October 13,
2009)4.7
    
    Form of Equity Value Vesting Restricted Stock Unit Award Agreement. (filed as Exhibit 4.7 to
Amendment No. 1 to Registration Statement on Form S-1 (File No. 333-161717) filed on October 13,
2009)4.8
    
    Form of Director Restricted Stock Agreement. (filed as Exhibit 4.8 to Amendment No. 5 to
Registration Statement on Form S-1 (File No. 333-161717) filed on November 18, 2009)10.1
    
    2007 Equity Compensation Plan. (filed as Exhibit 10.1 to Registration Statement on Form S-1 (File No. 333-161717) filed on September 3, 2009).10.2
    
    Form of Participation Share Agreement.  (filed as Exhibit 10.2 to Registration Statement on Form S-1 (File No. 333-161717) filed on September 3, 2009).10.3
    
    Form of Indemnification Agreement between Archipelago Holdings, Inc. and each of its directors
and executive officers. (filed as Exhibit 10.3 to Amendment No. 4 to Registration Statement on
Form S-1 (File No. 333-161717) filed on November 17, 2009)10.4
    
    Form of Archipelago Learning, Inc. 2009 Omnibus Incentive Plan.  (filed as Exhibit 10.4 to Amendment No. 1 to Registration  Statement on Form S-1 (File No. 333-161717) filed on October  13, 2009).10.5
    
    Employment Agreement, dated as of January 10, 2007, between Study Island, LLC and Cameron
Chalmers. (filed as Exhibit 10.5 to Registration Statement on Form S-1 (File No. 333-161717)
filed on September 3, 2009)10.6
    
    First Amendment to Employment Agreement, dated as of November 21, 2008, between Study Island, LLC
and Cameron Chalmers. (filed as Exhibit 10.6 to Registration Statement on Form S-1 (File No.
333-161717) filed on September 3, 2009)10.7
    
    Second Amendment to Employment Agreement, dated as of December 31, 2008, between Study Island,
LLC and Cameron Chalmers. (filed as Exhibit 10.7 to Registration Statement on Form S-1 (File No.
333-161717) filed on September 3, 2009)10.8
    
    Employment Agreement, dated as of January 10, 2007, between Study Island, LLC and David Muzzo.
(filed as Exhibit 10.8 to Registration Statement on Form S-1 (File No. 333-161717) filed on
September 3, 2009)10.9
    
    First Amendment to Employment Agreement, dated as of November 21, 2008, between Study Island, LLC
and David Muzzo. (filed as Exhibit 10.9 to Registration Statement on Form S-1 (File No.
333-161717) filed on September 3, 2009)




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.10
    
    Second Amendment to Employment Agreement, dated as of December 31, 2008, between Study Island,
LLC and David Muzzo. (filed as Exhibit 10.10 to Registration Statement on Form S-1 (File No.
333-161717) filed on September 3, 2009)10.11
    
    Employment Agreement, dated as of January 28, 2007, between Study Island, LLC and Timothy McEwen.
(filed as Exhibit 10.11 to Registration Statement on Form S-1 (File No. 333-161717) filed on
September 3, 2009)10.12
    
    First Amendment to Employment Agreement, dated as of March 16, 2007, between Study Island, LLC
and Timothy McEwen. (filed as Exhibit 10.12 to Registration Statement on Form S-1 (File No.
333-161717) filed on September 3, 2009)10.13
    
    Second Amendment to Employment Agreement, dated as of December 31, 2008, between Study Island,
LLC and Timothy McEwen. (filed as Exhibit 10.13 to Registration Statement on Form S-1 (File No.
333-161717) filed on September 3, 2009)10.14
    
    Employment Agreement, dated as of August 31, 2009, between Archipelago Learning, LLC and Timothy
McEwen. (filed as Exhibit 10.14 to Registration Statement on Form S-1 (File No. 333-161717) filed
on September 3, 2009)10.15
    
    Employment Agreement, dated as of May 22, 2007, between Study Island, LLC and James Walburg.
(filed as Exhibit 10.15 to Registration Statement on Form S-1 (File No. 333-161717) filed on
September 3, 2009)10.16
    
    First Amendment to Employment Agreement, dated as of December 31, 2008, between Study Island, LLC
and James Walburg. (filed as Exhibit 10.16 to Registration Statement on Form S-1 (File No.
333-161717) filed on September 3, 2009)10.17
    
    Employment Agreement, dated as of August 31, 2009, between Archipelago Learning, LLC and James
Walburg. (filed as Exhibit 10.17 to Registration Statement on Form S-1 (File No. 333-161717)
filed on September 3, 2009)10.18
    
    Employment Agreement, dated as of August 28, 2009, between Archipelago Learning, LLC and Julie
Huston. (filed as Exhibit 10.18 to Registration Statement on Form S-1 (File No. 333-161717) filed
on September 3, 2009)10.19
    
    Employment Agreement, dated as of September 15, 2008, between Study Island, LLC and Ray Lowrey.
(filed as Exhibit 10.19 to Registration Statement on Form S-1 (File No. 333-161717) filed on
September 3, 2009)10.20
    
    First Amendment to Employment Agreement, dated as of December 31, 2008, between Study Island, LLC
and Ray Lowrey. (filed as Exhibit 10.20 to Registration Statement on Form S-1 (File No.
333-161717) filed on September 3, 2009)10.21
    
    Credit Agreement, dated as of November 16, 2007, by and among Study Island, LLC, the other
persons designated as credit parties from time to time, General Electric Capital Corporation, as
a lender and as agent for all lenders, NewStar Financial, Inc., as syndication agent, the other
parties thereto as lenders and GE Capital Markets, Inc. and NewStar Financial, Inc., as joint
lead arrangers and joint bookrunners. (filed as Exhibit 10.21 to Registration Statement on Form
S-1 (File No. 333-161717) filed on September 3, 2009)10.22
    
    Amendment No. 1 to Credit Agreement, dated as of May 21, 2008. (filed as Exhibit 10.22 to
Registration Statement on Form S-1 (File No. 333-161717) filed on September 3, 2009)10.23
    
    Amendment No. 2 to Credit Agreement, dated as of February 18, 2009. (filed as Exhibit 10.23 to
Registration Statement on Form S-1 (File No. 333-161717) filed on September 3, 2009)10.24
    
    Amendment No. 3 to Credit Agreement, dated as of April 30, 2009. (filed as Exhibit 10.24 to
Registration Statement on Form S-1 (File No. 333-161717) filed on September 3, 2009)10.25
    
    Amendment No. 4 to Credit Agreement, dated as of May 15, 2009. (filed as Exhibit 10.25 to
Registration Statement on Form S-1 (File No. 333-161717) filed on September 3, 2009)10.26
    
    Amendment No. 5 to Credit Agreement, dated as of September 2, 2009. (filed as Exhibit 10.26 to
Registration Statement on Form S-1 (File No. 333-161717) filed on September 3, 2009)




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.27
    
    Guaranty and Security Agreement, dated as of November 16, 2007, by and among Study Island, LLC,
General Electric Capital Corporation and the other grantors party thereto. (filed as Exhibit
10.27 to Registration Statement on Form S-1 (File No. 333-161717) filed on September 3, 2009)10.28
    
    Office Building Lease, by and between 3400 Carlisle, Ltd. and Study Island, LLC. (filed as
Exhibit 10.28 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 333-161717)
filed on October 13, 2009)10.29
    
    First Amendment to Lease, by and between 3400 Carlisle, Ltd. and Study Island, LLC. (filed as
Exhibit 10.29 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 333-161717)
filed on October 13, 2009)10.30
    
    Second Amendment to Lease, by and between 3400 Carlisle, Ltd. and Study Island, LLC. (filed as
Exhibit 10.30 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 333-161717)
filed on October 13, 2009)10.31
    
    Office Building Lease, dated as of January 12, 2007, by and between Turtle Creek Limon, LP and
Study Island, LLC. (filed as Exhibit 10.31 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 333-161717) filed on October 13, 2009)10.32
    
    First Amendment to Lease dated, as of January 17, 2008 by and between Turtle Creek Limon, LP and
Study Island LLC. (filed as Exhibit 10.32 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 333-161717) filed on October 13, 2009)10.33
    
    Second Amendment to Lease dated, as of September 30, 2008 by and between Turtle Creek Limon, LP
and Study Island LLC. (filed as Exhibit 10.33 to Amendment No. 1 to Registration Statement on
Form S-1 (File No. 333-161717) filed on October 13, 2009)10.34
    
    Employment Agreement, dated as of October 12, 2009, between Archipelago Learning, LLC and Martijn
Tel. (filed as Exhibit 10.34 to Amendment No. 2 to Registration Statement on Form S-1 (File No.
333-161717) filed on November 2, 2009)10.35
    
    Third Amendment to Lease, dated as of October 23, 2009, by and between Turtle Creek Limon, LP and
Archipelago Learning, LLC. (filed as Exhibit 10.35 to Amendment No. 2 to Registration Statement
on Form S-1 (File No. 333-161717) filed on November 2, 2009)10.36
    
    Archipelago Learning, Inc. Employee Stock Purchase Plan. (filed as Exhibit 10.36 to Amendment No.
4 to Registration Statement on Form S-1 (File No. 333-161717) filed on November 17, 2009)10.37
    
    Amendment No. 6 to Credit Agreement, dated as of November 2, 2009. (filed as Exhibit 10.37 to
Amendment No. 3 to Registration Statement on Form S-1 (File No. 333-161717) filed on November 9,
2009)10.38
    
    First Amendment to Employment Agreement, between Archipelago Learning, LLC and Julie Huston.
(filed as Exhibit 10.38 to Amendment No. 3 to Registration Statement on Form S-1 (File No.
333-161717) filed on November 9, 2009)10.39
    
    Employment Agreement, dated as of November 9, 2009, between Archipelago Learning, LLC and Allison
Duquette. (filed as Exhibit 10.39 to Amendment No. 3 to Registration Statement on Form S-1 (File
No. 333-161717) filed on November 9, 2009)10.40
    
    Voting Agreement, among Providence Equity Partners, Cameron Chalmers, David Muzzo and MHT-S1 L.P.
(filed as Exhibit 10.40 to Amendment No. 4 to Registration Statement on Form S-1 (File No.
333-161717) filed on November 17, 2009)10.41
    
    Form of Nonqualified Stock Option Award Agreement. (filed as Exhibit 10.41 to Amendment No. 4 to
Registration Statement on Form S-1 (File No. 333-161717) filed on November 17, 2009)10.42
    
    Transfer and Contribution Agreement. (filed as Exhibit 10.42 to Amendment No. 4 to Registration
Statement on Form S-1 (File No. 333-161717) filed on November 17, 2009)10.43
    
    Assignment and Merger Agreement. (filed as Exhibit 10.43 to Amendment No. 4 to Registration
Statement on Form S-1 (File No. 333-161717) filed on November 17, 2009)10.44
    
    Certificate of Merger. (filed as Exhibit 10.44 to Amendment No. 4 to Registration Statement on
Form S-1 (File No. 333-161717) filed on November 17, 2009)




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.45*
    
    Second Amendment to Employment Agreement, dated as of February 18, 2010, between Archipelago
Learning, LLC and Ray Lowrey.11.1*
    
    Statement re computation of per share earnings (incorporated by reference to Notes to the
Consolidated Financial Statements included in this Annual Report).21.1*
    
    List of Subsidiaries of Archipelago Learning, Inc.23.1*
    
    Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm31.1*
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 200299.1*
    
    Financial Statement Schedule of Condensed Financial Information of Registrant99.2*
    
    Financial Statement Schedule of Valuation and Qualifying Accounts
 
 *
    
    Filed herewith.