UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011

¨	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.)

3232 McKinney Avenue, Suite 400, Dallas, Texas		75204
(Address of Principal Executive Offices)		(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 Registered
Common Stock, par value $0.001 per share		NASDAQ Stock Market LLC

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

None

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

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

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of the Act). Yes ¨ No x

The aggregate market value of the Common Stock held by non-affiliates of the Registrant, computed by reference to the closing price and shares outstanding, was approximately $126 million as of December 31, 2011, and approximately $129 million as of June 30, 2011, the last business day of the Registrant’s most recently completed second quarter. Shares of Common Stock held by each officer and director of the Registrant and by each person who may be deemed to be an affiliate have been excluded. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, as of March 8, 2012 was 26,344,759.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant’s Definitive Proxy Statement or amendment to this Form 10-K, to be filed with the Securities and Exchange Commission, are incorporated by reference into Part III.

TABLE OF CONTENTS


		Page
Special Note Regarding Forward-Looking Statements			2

PART I
Item 1.	Business		3
Item 1A.	Risk Factors		17
Item 1B.	Unresolved Staff Comments		34
Item 2.	Properties		35
Item 3.	Legal Proceedings		35
Item 4.	Mine Safety Disclosures		35

PART II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		36
Item 6.	Selected Financial Data		38
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		39
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		63
Item 8.	Financial Statements and Supplementary Data		64
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		64
Item 9A.	Controls and Procedures		65
Item 9B.	Other Information		67

PART III
Item 10.	Directors, Executive Officers and Corporate Governance		67
Item 11.	Executive Compensation		67
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		67
Item 13.	Certain Relationships and Related Transactions and Director Independence		67
Item 14.	Principal Accounting Fees and Services		67

PART IV
Item 15.	Exhibits and Financial Statement Schedules		67
Signatures			68

Special Note Regarding Forward-Looking Statements

Certain disclosures and analyses in this Form 10-K, including information incorporated by reference, may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are considered forward-looking statements and reflect current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. Forward-looking statements generally can be identified by use of phrases or terminology such as “anticipate,” “estimate,” “expect,” “project,” “forecast,” “plan,” “intend,” “believe,” “may,” “should,” “can have,” “likely,” “future” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

These forward-looking statements are based on assumptions that we have made in light of our industry experience and on our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. These statements are not guarantees of performance or results. They are subject to risks and uncertainties which may be beyond our control, including those discussed below, in the “Risk Factors” section in Item 1A of this Form 10-K, and elsewhere in this Form 10-K and the documents incorporated by reference herein. Although we believe that these forward-looking statements are based on reasonable assumptions, many factors could cause actual results to vary materially from those anticipated in such forward-looking statements.

Any forward-looking statement contained herein speaks only as of the date on which we make it. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

This Form 10-K also contains market data related to our business and industry. See Item 1 “Business.” This market data includes projections that are based on a number of assumptions. If these assumptions turn out to be incorrect, actual results may differ from the projections based on these assumptions. As a result, our markets may not grow at the rates projected by these data, or at all. The failure of these markets to grow at these projected rates may have a material adverse effect on our business, financial condition, results of operations and the market price of our common stock.

“Archipelago Learning,” “Study Island,” “Northstar Learning,” “EducationCity,” “ESL ReadingSmart”, “Reading Mate” and their respective logos are our trademarks. Solely for convenience, we refer to our trademarks in this Form 10-K without the TM and ^® symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to our trademarks. Other service marks, trademarks and trade names referred to in this document are the property of their respective owners. As indicated in this document, we have included market and industry data obtained from industry publications and other sources. See Item 1 “Business.”

PART I

Item 1.

Business

Overview

Archipelago Learning, Inc. is a leading subscription-based, software-as-a-service (“SaaS”) provider of education products. We provide standards-based instruction, practice, assessments, reporting and productivity tools that support educators’ efforts to reach students in innovative ways and enhance the performance of students via proprietary web-based platforms. As of December 31, 2011, our product lines, which include Study Island, EducationCity, Reading Eggs, ESL ReadingSmart, and Northstar Learning, were utilized by over 14.6 million students in approximately 39,100 schools in all 50 states, Washington, D.C., Canada, and the United Kingdom (“U.K.”). Unless the context requires otherwise, references throughout this report and in the Consolidated Financial Statements and related notes to “Archipelago Learning,” “we,” “us,” “our company” or similar terms refer to Archipelago Learning, Inc. and its subsidiaries.

Archipelago Learning, Inc. was incorporated in November 2009 in connection with our initial public offering. Prior to this, we conducted business through Archipelago Learning Holdings, LLC, and its subsidiaries. Prior to the consummation of our initial public offering, we commenced a corporate reorganization (the “Corporate Reorganization”) whereby Archipelago Learning Holdings, LLC became a wholly owned subsidiary of Archipelago Learning, Inc.

Our business capitalizes on three significant trends in the education market: (1) an increased focus on higher academic standards and educator accountability for student achievement, which has led to periodic assessment in the classroom to gauge student learning and inform instruction, also known as formative assessment; (2) the increased availability and utilization of web-based and mobile technologies to enhance and supplement teacher instruction, engage today’s technology-savvy learners and improve student outcomes; and (3) the need for a more cost-effective solution to traditional educational tools as a result of school budget cuts.

Study Island, our core product line, helps students in Kindergarten through 12th grade (“K-12”) master grade level academic standards in a fun and engaging manner through an easy-to-use online platform. Study Island combines rigorous content that is highly customized to specific standards in reading, math, science and social studies with interactive features and games that engage students and reinforce and reward student accomplishments.

EducationCity, which we acquired in June 2010, provides online preschool through 6th grade (“Pre-K-6”) educational content and assessment programs for schools both in the United States (“U.S.”) and United Kingdom, and complements Study Island’s assessment function with its focus on the initial teaching phases of academic content and large library of flash animation lessons for use in classrooms.

Reading Eggs, which we began distributing in August 2010, is published by Blake Publishing Pty Limited (“Blake Publishing”) in Australia and provides a comprehensive balanced literacy program for preschool through 2^nd grade. In November 2011, we launched Reading Eggspress, a reading and comprehension program for 2^nd through 6^th grades, which is also published by Blake Publishing.

In June 2011, we acquired Alloy Multimedia, which publishes ESL ReadingSmart and ReadingMate, online standards-based programs for English language learners (“ELL”) targeted toward 4^th through 12^th grades.

We also offer online postsecondary programs through our Northstar Learning product line, which provides instruction, practice, assessment and test preparation for targeted high school postsecondary course areas, including GED exam preparation, developmental studies, Allied Health services and PRAXIS teacher certification. Northstar Learning uses a similar platform as Study Island, and is similarly engaging and easy to use.

Our flexible web-based distribution model and in-house content development capabilities allow us to continually update and improve our products, distribute our products in a cost-efficient manner, and price our products affordably. Over the last ten years, for Study Island alone, we have created a digital library of approximately 446,000 proprietary questions and explanations, a simple yet elegant content management system and HTML authoring system, and a built-in ability to dynamically generate additional questions. In addition, EducationCity has built hundreds of elementary school flash animation lessons and interactive activities in reading, math and science over the past 10 years.

We have significantly grown the number of students and schools served by our products since our inception in 2000. From 2000 to 2006, we concentrated our efforts on developing our Study Island products, increasing from 27 products to 429 products during that period. In 2007, we began focusing on managing our growth and operations more efficiently, particularly with the hiring of our management team. In addition, we have developed a sophisticated sales and marketing force that has been successful in growing our sales and customer base. We increased the number of school customers and registered student users of our products, from approximately 7,800 schools and 3.0 million students in 2006, to approximately 39,100 schools and approximately 14.6 million students as of December 31, 2011.

On March 3, 2012, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Plato Learning, Inc., a Delaware corporation (“Plato”) and Project Cayman Merger Corp., a wholly owned Subsidiary of Plato, providing for the merger of Project Cayman Merger Corp. with and into our company, with our company continuing as the surviving corporation (the “Merger”). Upon the Merger becoming effective, we will become a wholly owned subsidiary of Plato and each share of Archipelago common stock issued and outstanding immediately prior to the effective time will be converted into the right to receive $11.10 in cash, without interest, on the terms and subject to the conditions set forth in the Merger Agreement.

Our Markets

The U.S. educational system, consisting of K-12 and postsecondary education, collectively includes approximately 76 million students in approximately 130,000 schools and approximately $1.05 trillion in educational expenditures according to National Center for Education Statistics (“NCES”) and MDR, a Dun & Bradstreet company. The U.S. K-12 education market consists of more than 55 million students in approximately 120,000 schools, according to NCES and MDR.

The U.K. educational system collectively includes approximately 9.4 million students in approximately 28,000 schools, according to the relevant government departments for education. The U.K. primary school market consists of approximately 5.2 million students in approximately 23,000 schools, according to the relevant government departments for education.

Key Dynamics in the K-12 Education Market

A number of key dynamics have impacted the K-12 education market in recent years:

Increased Accountability. In November 2011, the National Center for Education Statistics released the results from the National Assessment of Educational Progress (“NAEP”), also known as the Nation’s Report Card. Overall, the 2011 NAEP results continue an unsettling trend of lagging achievement among the nation’s students. As published in this report, only 40% of 4^th graders in the United States are proficient in math, along with 34% of 8^th graders. Further, just 32% of 4^th and 8^th graders can read proficiently. Stagnant test scores and nagging achievement gaps have been the trend for American students over the last four decades. In recent years, policymakers and parents have paid greater attention to the effectiveness of U.S. public schools, demanding higher educational standards and accountability from teachers, administrators and school districts. States publish accountability reports that show each school’s progress and ability to meet proficiency standards, and these results are often reported by local press outlets. This increased visibility into school performance has led to

increased parent and policymaker pressure on schools and teachers, including at the presidential level. The Federal administration launched the $4.35 billion “Race to the Top” (“RttT”) competition in 2010 to highlight and replicate innovative education strategies as part of the administration’s highly publicized efforts to reform education.

Increased Access to Computers and the Internet. Students use computer technology in and out of the classroom, and many students have access to internet-enabled computers at school and home. Increased usage and acceptance of online technology is changing how educational content is delivered and utilized by teachers and students. According to the Consortium for School Networking, 98% of rural and wealthy schools have high-speed internet access in classrooms, as do classrooms in 93% of poor urban school districts. More than 80% of Americans now have a computer in their homes and, of those, almost 92% have internet access, according to a study on home internet access from The Nielsen Company. In addition, Elementary and Secondary Education Act, or ESEA. mandates that schools improve school-to-home or school-to-parent communication and parental involvement in their child’s education. As a result, schools are increasingly looking for integrated website portals and productivity tools to more easily comply with this mandate, more effectively use student achievement data to keep parents informed and more readily guide parents’ ability to help their children improve their skills and proficiency.

Legislative Environment. There are several key legislative initiatives currently impacting the K-12 education market, including the following:

•

ESEA Reauthorization. In the United States, the increased focus on higher academic standards and assessments as a means to measure educator accountability is largely reflected in legislative efforts such as No Child Left Behind, or NCLB, the common name for the 2001 reauthorization of ESEA. ESEA required all states to have academic standards in place for K-12 students in reading, math and science, and to assess student achievement annually with end of school year assessments. The ESEA legislation was initially scheduled for reauthorization in October 2008, but has been continually delayed. While many politicians believe that the nation’s primary education law needs to be revised, reauthorization legislation has been delayed with NCLB extended via a series of Congressional continual resolutions. Democratic and Republican differences on the Federal role in public education and the best strategies for meaningful educational reforms, coupled with other higher priority legislative objectives, has led to gridlock. While uncertainty continues to surround the substance and timing of ESEA reauthorization, we believe that higher standards, more rigorous assessments and accountability will remain key components of the revised legislation, whenever it occurs, with an increased focus on demonstrating student academic achievement growth, improving high school graduation rates and ensuring college and career readiness. Moreover, we expect that the use of technology to innovate and scale best teaching and learning practices will be a key component of the final reauthorization legislation. In the meantime, the requirements for seeking NCLB waivers continue the focus on high standards, assessment and accountability as summarized below.

•

NCLB Waivers. The original NCLB legislation required all U.S. students to be performing at grade proficiency levels in reading, language arts and mathematics by the 2013-2014 school year in order to achieve adequate yearly progress (“AYP”). However, the U.S. Department of Education has estimated that about 80% of U.S. schools would miss this AYP milestone for the current 2011-2012 school year, which would result in punitive consequences to those schools. With no Congressional action pending to address ESEA reauthorization and the AYP issue, in 2011 the U.S. Secretary of Education, Arne Duncan, announced plans to grant waivers for parts of the NCLB law which would take effect in the 2011-2012 school year. The waivers provide a framework for relief of some of the more onerous restrictions of NCLB, including AYP milestones. During 2011, 11 states applied for these waivers and 10 of those states were granted waivers. An additional 26 states and the District of Columbia submited applications for waivers by the February 2012 deadline.

•

Race to the Top. The U.S. Department of Education implemented its highly publicized RttT competition in 2010 whereby winning states were awarded funds totaling $3.4 billion in aggregate for agreeing to implement bold educational reforms. States receiving these RttT funds are expected to implement educational reforms over the next several years. Eleven states and the District of Columbia

were awarded $3.9 billion and received the monies between August 2010 and January 2011. In March 2011, an additional $500 million in funds were made available through another state competition focused on early education (Pre-K and Kindergarten), the RttT-Early Learning Challenge, with nine state winners receiving grants ranging from $50 million to $100 million. Also in December 2011, the U.S. Department of Education announced that seven states will each receive a share of the $200 million in RttT Round 3 funds to advance targeted K-12 reforms aimed at improving student achievement.

•

Common Core Standards. A requirement for RttT applicants is to signal their intent to officially adopt the Common Core Standards for K-12 in reading and mathematics. As of December 31, 2011, 45 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands had officially adopted the new standards, although adoption of the standards does not bring immediate change in the classroom. We believe that implementation of the Common Core Standards will be a long-term process, as states rethink their teacher training, curriculum, instructional materials and testing. We continue to believe that Common Core Standards implementation will evolve in different ways across the adopting states and will raise the overall rigor of curriculum and assessments, but we increasingly believe that the federal government will not mandate national standards and assessments. Furthermore, there is now a growing movement in some states to oppose the Common Core Standards in order to prevent unwanted federal control over education. A study recently published by Pioneer Institute, the American Principles Project, and the Pacific Research Institute of California estimated that it will cost nearly $16 billion for 45 states plus the District of Columbia to implement the Common Core Standards over a seven year period.

•

Federal 2012 Budget. The Federal budget makes up about 9% of K-12 school budgets and is an important source of funding for purchase of our programs, particularly in large, urban districts. In December 2011, Congress passed an omnibus spending bill for fiscal year 2012. Overall, the Department of Education was funded at $71.3 billion, which is slightly less than last year and $9.3 billion below the President’s request. We believe that passage of this budget will be a positive for K-12 education spending, as many districts and schools were fearful throughout the fall of 2011 that the Congressional “Super Committee” might not reach a budget agreement, which would trigger draconian automatic cuts in federal funding to K-12 education. This uncertainty had caused districts to be cautious in spending throughout the fall of 2011. However, the uncertainty is gone and the overall federal budget is more favorable than expected.

•

Federal 2013 Budget. In February 2012, President Obama presented his proposed FY 2013 federal budget to Congress, which would take effect October 1, 2012. Under this proposal, the Department of Education would receive nearly $70 billion. The proposal may encounter strong opposition from Congress, but we believe this initial proposal is encouraging.

•

State and Local Funding. Most of our U.S. customers are public schools and school districts that are dependent on the availability of public funds, with about 46% of total education expenditures coming from state funds and 45% coming from local funds, which have become more limited as many states or districts face budget cuts due to decreases in their tax bases and rates. State and federal educational funding is primarily funded through income taxes, and local educational funding is primarily funded through property taxes. As a result of the ongoing recession, income tax revenue for the 2008 and 2009 tax years has decreased, which has put pressure on state and federal budgets. However, according to the Nelson A. Rockefeller Institute of Government, state tax revenues grew by 6% in the third quarter of 2011, representing the seventh consecutive quarter that states reported growth in collections on a year-over-year basis. Overall, state tax revenues are now above pre-recession levels, but still below peak levels. In the third quarter of 2011, total state revenues were 2% higher than during the same quarter of 2007, but still 1% lower than the third quarter of 2008. Preliminary figures for October and November 2011 indicate further but softening growth in state tax revenues. Local property tax revenues grew modestly in the third quarter, after three consecutive quarters of decline.

•

Educational Environment in the United Kingdom. The U.K. market and industry trends are also of importance to our business due to our EducationCity product. While the global economic recession has impacted the United Kingdom, the government under British Prime Minister, David Cameron, has attempted to protect education, with the Department for Education budget rising from £35.4 billion to £39 billion over the next four years. This is the money that goes directly to schools. In addition, we believe that teachers will be given greater freedom from bureaucratic burdens to use their professional judgment to meet the needs of their pupils. As a result, we believe that head teachers will have increased flexibility over their budgets, including through simpler, fairer and more transparent funding streams. However, a new research report by the respected think tank Institute for Fiscal Studies (“IFS”), suggests that U.K. public spending on all forms of education could face a 13% reduction in real terms over the next four years between 2011 and 2015. While higher education institutions would be the most affected by such spending reduction, those primary and secondary schools with students from affluent backgrounds would see drastic funding cuts although schools with more deprived students would have their funding protected due to the introduction of the pupil premium. However, many schools would still see an annual 1% spending cut.

Our Competitive Strengths

We believe the following are our key competitive strengths:

Accessible, Dynamic Web-based Platform. Our products are delivered entirely online so they can be used by teachers and students on computers wherever internet access is available, such as classrooms, computer labs, media centers, school libraries, public libraries or at home. Our programs are compatible with existing school and school district enterprise systems and require no additional software, no installation or maintenance and no extensive implementation or training. Moreover, unlike traditional workbooks or software products, our web-based product content is easily and quickly updated whenever content or functionality enhancements are introduced or products are modified due to changes in state standards.

High Impact, Low Cost Solution. Our products offer a comprehensive online educational solution on a hosted platform and provide high quality content, assessment and reporting for core subjects in a wide range of grade levels. This eliminates the need for schools to have multiple vendors or systems, thereby simplifying purchasing, training and implementation. Our products are significantly less expensive than competing traditional print, software and online alternatives provided by large education publishers. Study Island is offered at an annual price per student per subject of as low as $2, or per student for all subjects as low as $3. EducationCity products are priced at $469 per subject, per grade level for an individual school. Reading Eggs products are priced as low as $4 per student. ESL ReadingSmart and Reading Mate are priced as low as $14 per student. Northstar Learning products are priced as low as $5 to $25 per student and are also substantially less expensive than traditional textbook and software products currently purchased by students at community colleges, technical colleges, proprietary or for-profit colleges.

Our products and services are strategically priced to fall within the discretionary spending budgets of teachers and school administrators. We evaluate our pricing on an ongoing basis and determine increases to reflect product enhancements, operating costs, the increased value of our products to our customers, and inflation and other economic factors impacting our markets.

Customized Standards-Based Content. Our products offer online, standards-based instruction, practice and assessments for K-12 built from applicable standards in all 50 states, Washington, D.C., Canada, and the U.K. We believe this deep customization is attractive to educators, providing them with a resource that meets their specific state and grade-level teaching needs in a variety of subjects. During 2011, we completely refreshed the Study Island content in our top five revenue-producing states and continued to add new products in other states. In addition, we launched new common core products in 2010 built from the new reading and math national standards released in June 2010, which are provided to schools at no additional charge. We offer 2,378 products in math, reading/language arts, writing, science, social studies, ELL, French, German, and Spanish. Our products

also include instruction, practice, assessments and test preparation for the General Educational Development (“GED”) and Allied Health licensure exams, as well as developmental studies in college readiness English/language arts and mathematics.

Real-time Student Tracking, Built-in Remediation and Enrichment. Our products also provide real-time reporting on student achievement, allowing educators to quickly identify learning gaps and provide targeted instruction and practice. Our products also provide students with immediate feedback and explanations and, when required, remediation content designed to build foundational skills in order to accelerate students to grade-level proficiency. In addition, our products provide professional development materials that provide best-practice techniques for teachers to help students grasp key concepts and skills.

Engaging, Fun and Easy to Use for Students. Our products utilize a simple, graphical user interface that is intuitive and easy to use. 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. EducationCity and Reading Eggs include animated lessons and activities within the programs to encourage effort and achievement with rewards. By engaging students and providing them with the tools they need to succeed, we enable them to take control of their own learning, boost their confidence and keep them interested in using our products, while creating a culture of academic success.

Management Team with Strong Education and Technology Industry Expertise. Members of our executive management team have extensive experience in the education and technology industries. Our Chairman, President and Chief Executive Officer, Tim McEwen, who has approximately 37 years of experience in the industry joined us in 2007. Our Chief Financial Officer, Mark S. Dubrow, who has approximately 13 years of technology accounting and finance experience, joined us in January 2011. Our Chief Technology Officer, Bobby Babbrah, who joined us in January 2012, has over 18 years of software product/platforms strategy, operations and general management experience, five years of which were at digital divisions of the largest educational publishers in the K -12 market. Our Chief Operating Officer, Martijn Tel, who has over nine years in educational publishing businesses, joined us in 2009. Our Executive Vice President, Product, Marketing and Corporate Strategy, Donna Regenbaum, joined us in January 2011, has more than 20 years of operations and business experience.

Our Growth Strategy

Our goal is to be the leading provider of subscription-based online supplemental education tools across the K-12 and postsecondary education markets through the following strategies:

Expand the Number of Schools Using Our Products. As of December 31, 2011, our products (including Study Island, EducationCity, Reading Eggs, ESL ReadingSmart and Northstar Learning) were used in more than 30,000 schools throughout all 50 states, Washington, D.C. and Canada. Sales to schools in the United States represented approximately 25% of the roughly 120,000 K-12 schools in the United States. We believe that there is a significant opportunity to expand the number of schools that use our products. For instance, compared to 2009, we have experienced a nearly 56% increase in invoiced sales of our products to high schools. However, about 12% of our invoiced sales in 2011 were derived from subscriptions of our products by high schools. We believe the Federal government’s focus on lowering the high school drop-out rate and improving high school graduate college and job readiness will drive increased demand for our high school products. Accordingly, we believe high schools provide us with a significant market opportunity. We also continue to expand our sales organization in specific states, targeting our direct marketing efforts to educators in schools that do not use our products, encouraging a “viral” marketing model through the use of customer references and referrals, providing free product trials and optimizing the appearance of our products in key-word searches on leading web search engines. In addition, as we deepen our school penetration, we increasingly are focused on selling our products at the district level.

Our EducationCity products were used in approximately 9,100 schools in the United Kingdom as of December 31, 2011. Sales to schools in the United Kingdom represented approximately 39% of the roughly 23,000 primary schools in the United Kingdom. With approximately 5.2 million students in approximately 23,000 primary schools in the United Kingdom, we believe that there is a significant opportunity to expand the number of schools in the United Kingdom that use EducationCity. In addition, an effort is currently underway to create new U.K. products focused on secondary schools, which will expand our market opportunity to an additional 4.2 million students in the nearly 5,000 secondary schools in the United Kingdom. Further, we believe other English-speaking countries, including Australia, New Zealand and South Africa, also provide potential near-term growth opportunities, and we intend to develop products for these markets.

In September 2010, we entered into an exclusive royalty agreement with a third party to expand our EducationCity products into China. The expansion is being marketed by the third party provider to obtain subscribers to the EducationCity product in China. EducationCity will receive a base royalty plus an additional royalty for each student per year of access to the localized site. The term of the agreement is for three years, with optional renewal terms.

With the acquisition of ESL ReadingSmart in 2011, we have added nearly 600 schools in the United States as of December 31, 2011. We believe that there is a significant opportunity to expand the number of schools that use ESL ReadingSmart in the United States. Further, we believe that there is a significant opportunity to expand the use of ESL ReadingSmart into the other English-speaking countries, including Canada, United Kingdom, Australia, New Zealand and South Africa.

Increase Revenue per School. In many schools that already subscribe to one or more of our products, we have the opportunity to sell additional Study Island core grade level and subject area products, as well as our other products, such as EducationCity, ReadingEggs and ESL ReadingSmart. Further, we have the opportunity to cross sell our Study Island products to schools currently buying EducationCity, ReadingEggs, and ESL ReadingSmart. Our inside sales team specifically targets our existing customer base to sell add-on products. As we enhance our products with new features and functionality that provide increased value to our customers, we believe we will be able to price these enhancements accordingly, although currently limited somewhat by school budgetary constraints. In addition, the increased complexity of high school subject matter and related assessment standards allow us to price high school products higher than those for the elementary and middle school markets, and high school enrollments are usually larger, resulting in higher average revenue from invoiced sales.

Develop New Products and Enhancements to our Online Platform. We continually develop new products, as well as new features and functionality for our online platform, to address student needs and teacher requests. These products also provide additional revenue opportunities.

•

During 2011, with the acquisition of Alloy Multimedia, we added two new products with the addition of ESL ReadingSmart and ReadingMate, providing a way for teachers to individualize instruction for both non-native and native English speakers in reading and English language arts for students in grades 4 to 12.

•

Version 5 of our Study Island platform was released in late August 2011 in conjunction with the start of the 2011-2012 school year. Features included in the roll-out were: seamless interfacing on mobile devices, new games, interactive flash animations, and enhanced lessons.

•

On November 1, 2011, we launched Reading Eggspress, the latest reading and comprehension program from Blake Publishing for grades 2 to 6.

•

In February 2012, we announced the launch of its latest enhancements for Study Island, including virtual science labs for middle and high school students, embedded Khan Academy videos, and a district dashboard for administrators. In addition, we have launched a new Common Core Benchmarking Program for educators to evaluate proficiencies for the Common Core State Standards in grades 3 to 5, math and reading.

Expand into New Related Markets. We intend to continue to expand our product and service offerings into additional education and related market segments and into new geographic markets. In 2009, we launched Northstar Learning in the postsecondary educational market and began our first international operations by introducing Study Island into the Canadian market. Our 2010 acquisition of EducationCity positioned us in the U.K. market, and we believe that other English-speaking countries, including Australia, New Zealand and South Africa, also provide potential near-term growth opportunities. We also entered into an exclusive royalty agreement in 2010 with a third party to expand our EducationCity product offerings in China. In addition to our geographic expansion, in 2010, we began selling Reading Eggs, an online product focused on teaching younger children how to read, pursuant to a distribution agreement. In June 2011, we entered into the ELL market with the acquisition of Alloy Multimedia, which publishes ESL ReadingSmart and ReadingMate, online, standards-based programs for English language learners targeted toward grades 4 to 12, which we believe also provides opportunities to expand into other English-speaking countries. On November 1, 2011, we launched Reading Eggspress, the latest reading and comprehension program from Blake Publishing for grades 2 to 6. We believe there are additional longer-term opportunities to expand beyond the K-12 market, including opportunities to increase sales of our products directly to parents, public libraries, school libraries and homeschool settings.

Pursue Acquisitions and Strategic Relationships. Since 2007, we have sought acquisitions and strategic alliances that expand our product and service offerings, expand our geographic and end markets, and provide additional revenue opportunities. We intend to continue to pursue acquisitions that have products, services and businesses that are compatible with our Archipelago Learning brand identity, culture and corporate mission, such as our recent acquisitions of EducationCity, Alloy Multimedia, and our distribution agreement for Reading Eggs and Reading Eggspress. We expect that our acquisition activity will be focused exclusively on web-based products and services for our target markets. In addition, we believe our large student audience of over 14.6 million students provides a significant and valuable opportunity to enter into strategic relationships in order to cross-sell other appropriate, teacher- and parent-approved products to our students.

Our Products and Services

Archipelago Learning is a leading subscription-based, SaaS provider of education products. Our products provide standards-based instruction, practice, assessments, reporting and productivity tools that support educators’ efforts to reach students in innovative ways and enhance the performance of students via proprietary web-based platforms.

Study Island

Study Island offers subscription-based online products that provide standards-based instruction, practice, assessment and productivity tools for teachers and students. Each of Study Island’s products is specifically built from the requirements for a subject area in a grade level in a particular state. We offer products for math, reading, language arts, writing, science and social studies. Our in-house content development team creates between three and five new subject and grade level product offerings a month, and we offer specialty products based on national standards in subject areas such as technological literacy, health and fine arts. During 2011, students answered approximately 3.7 billion of our practice questions. Customers may subscribe to any number of products to best suit their individual classroom or school needs. Additionally, promotional incentives, such as complimentary months of service, are offered periodically to new Study Island customers, resulting in a subscription term longer than one year.

Students can log in to Study Island from any computer with internet access. Typically, teachers assign topics based on the specific standards or topics that were covered in class during a particular week. In some schools, students are permitted to take control and move through the Study Island program independently, earning awards as each standard is mastered. Once logged in, students can select to move through the content in a traditional, multiple choice test mode or game mode, which includes short game segments to reward student achievement.

Study Island has also linked its program to popular classroom response hand-held devices, or clickers, which are manufactured and sold by other companies and enable Study Island sessions to be conducted in the classroom. The teacher typically teaches a particular standard or sub-topic and then projects Study Island questions on a whiteboard or a projection screen, and students answer using their handheld clickers. The teacher immediately receives results on his or her computer to determine whether the class comprehends the material or whether additional instruction is required. This classroom methodology enables teachers to ensure — as opposed to assume — that learning has effectively occurred.

Study Island offers add-on features and programs, such as a benchmark assessment that enables educators to predict student performance on the end-of-year state assessment and provides diagnostic information to guide instruction. We regularly release new product enhancements to increase the value of Study Island’s core standard specific learning programs, including Version 5 released in late August 2011, which included the roll-out of seamless interfacing on mobile devices, new games, interactive flash animations, and enhanced lessons.

EducationCity

On June 9, 2010, we acquired EducationCity, a leading developer and publisher of online educational learning solutions offered in the United States and the United Kingdom. Similar to Study Island, EducationCity offers subscription-based online products that provide standards-based instruction, practice, assessment and productivity tools for teachers and students. EducationCity offers products for math, reading, language arts, and science for children between three and 12 years old. Animated activities within the program encourage effort and achievement with rewards. Customers may subscribe to any number of products to best suit their individual classroom or school needs. Students can log in to EducationCity from any computer with internet access. Teachers can also utilize the product to teach new concepts in the classroom using the whiteboard tools, which provide teachers with a set of open-ended teaching tools set to relevant academic level.

Reading Eggs

In 2010, we entered into a distribution agreement with Blake Publication to become the U.S. distributor of the school version of Blake Publishing’s Reading Eggs product. Reading Eggs is an online early literacy program from Australia, designed to support core literacy teaching and to help students from ages three to eight become proficient readers. Developed by an experienced team of teachers, education writers, and developers, Reading Eggs comprises 100 research-based lessons within a motivational framework. The program contains an assortment of instructional tutorials, review activities, and games, building on and reinforcing the five key reading pillars – phonemic awareness, phonics, fluency, vocabulary and comprehension. After completing lessons, students complete a mastery quiz that provides teachers with a report of what each child is learning.

In November 2011, we launched Reading Eggspress, a web-based reading and comprehension program for grades 2-6. Reading Eggspress is designed to build reading and comprehension skills for more mature elementary-aged readers. Reading Eggspress provides a wide range of learning resources, lessons, motivational games, e-books, and reporting, all presented in an interactive and virtual environment. Students can explore the stadium, comprehension gym, library, apartment, and mall to earn a variety of learning rewards. Teachers can access instructional study units, teaching notes, student worksheets, teacher demos, and units for interactive whiteboards through an extensive Teacher Toolkit. Reading passages are followed by a set of comprehension questions that assess students’ factual, inferential, and textual understanding. The Reading Eggspress library features more than 600 e-books from leveled illustrated chapter books to full-color fiction and nonfiction, as well as a range of classics. Each e-book includes an online reading quiz. Schools that already subscribe to Reading Eggs have access to Reading Eggspress with their current subscription.

Northstar Learning

In recognition of the significant postsecondary education market opportunity, we developed our Northstar Learning product line, which was initially launched in April 2009. Northstar Learning uses the same proprietary

web platform as Study Island to provide instruction, practice, assessment and test preparation for targeted high enrollment postsecondary course areas. The key features and product functions of Northstar Learning are substantially similar to those of Study Island.

We currently offer Northstar Learning products for GED exam preparation, developmental studies in college readiness, Allied Health and PRAXIS teacher certification. We also offer ten online study guides to help college students master the fundamental skills required for success in Freshman and Sophomore level mathematics, science and history courses.

We intend to develop additional Northstar Learning products to address other vocational and technical career programs that require certification exams and online study guides for more difficult college and university courses. We also intend to expand our marketing and sales efforts to increase awareness of the Northstar Learning brand and products, and replicate our K-12 sales efforts and word-of-mouth viral marketing in the postsecondary market.

ESL ReadingSmart & ReadingMate

In June 2011, with the acquisition of Alloy Multimedia, we added two new products: ESL ReadingSmart and ReadingMate, providing a way for teachers to individualize instruction for both non-native and native English speakers in reading and English language arts for students in grades 4-12.

ESL ReadingSmart offers English language learners content-based instruction to develop English language proficiency, with an emphasis on literacy and academic language development. Statistical analysis has proven that ESL ReadingSmart is an effective intervention that raises students’ reading and language academic performance. ESL ReadingSmart is designed for newcomers, as well as beginning, intermediate, early advanced, and advanced readers. Instructional materials are written at a variety of English proficiency levels, helping teachers address the challenge of teaching ELL students in multi-level classrooms. Lessons for each unit contain activities that support all four modalities of language learning: listening, speaking, reading, and writing.

For native English speakers, ReadingMate is a supplemental reading intervention program that prepares students to read at grade level and develop necessary reading skills. Based on the Common Core State Standards for English language arts and reading, ReadingMate helps students improve their skills for vocabulary development and reading comprehension.

Our Customers

The vast majority of our revenue relates to subscriptions to our products by schools, school districts, and individuals. Approximately 89% of our revenue for the year ended December 31, 2011 relates to subscriptions from U.S. public and private schools and consumer/parent individual buys. As of December 31, 2011, our products were used by over 13.5 million students in more than 30,000 schools across 50 states, Washington, D.C. and Canada. Approximately 10% of our revenue for the year ended December 31, 2011 relates to subscriptions from primary schools in the United Kingdom and parent/consumer individual buys. As of December 31, 2011, our products were used by over 1.1 million students in approximately 9,100 schools in the United Kingdom. Our principle customers in the United States are teachers, school principals, curriculum directors, superintendents, chief technology officers and other administrators. In the United Kingdom, our principle customers are Learning Authority administrators, headmasters, technology directors and other administrators. No single customer accounted for more than 1% of our total invoiced sales in 2011, 2010 or 2009.

Marketing, Sales and Customer Support

Marketing Activities

Archipelago Learning’s marketing strategy is focused on creating multi-brand awareness, generating qualified prospective sales leads, and fostering customer retention while increasing average customer spend. Our marketing efforts target key decision makers and influencers within individual schools and districts, promoting

the many ways our product portfolio benefits teachers and students. Primary marketing activities include email campaigns centered around driving new, up-/cross-sell and renewal business, search engine marketing, social media, topical webinars, trade shows, customer eNewsletters and retention programs.

Field-based and Inside Sales Channels

We have a 180 member team of specialized sales and support professionals who are experienced in generating new sales of online educational products. The U.S. sales team, led by our vice president of sales, is divided into outside or field-based sales representatives overseen by five regional managers, a smaller inside sales team and an inside account manager with a team focused on renewals and sales of add-on products. Our field-based sales representatives are strategically located in and are responsible for larger enrollment metropolitan customer bases, and our inside sales team focuses on sales in more rural geographies. Our U.S. sales strategy begins with site-based or school level contact and focuses on individual school principals and teachers. In certain instances, we have been able to obtain sales at the school district level when we have achieved critical mass with individual schools within the district. Additionally, the U.S. sales team utilizes a consultative sales model to identify needs of schools in order to offer our other products within our product portfolio. Our Northstar Learning sales team focuses exclusively on adult learning centers and postsecondary institutions. In the United Kingdom, EducationCity has both a team of field-based sales representatives and a team of inside sales representatives located in the Rutland, U.K. office. The U.K. sales team consists of 35 employees, including a director of sales & marketing.

Customer Support

We provide our customers with service through our Implementation, Training, and Customer Relations teams. Our Implementation team provides free customized implementation assistance to schools, including contacting schools when we detect low levels of usage to learn how we may improve implementation and usage of our product in the school. Our Training department develops teacher and administrator training materials, hosts webinars and conducts site visits and in-school training sessions, as well as online trainings and phone consultations. Our award winning Customer Relations team provides free unlimited support to our customers, who may contact us via phone, live chat or by email. Our Customer Relations team is primarily comprised of former teachers and individuals with customer service and IT backgrounds.

Our Competition

We compete primarily with other providers of supplemental educational materials and online learning tools. We believe our principal competitors include:

•

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; 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.

We believe the principal competitive factors in our 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

Our systems are built upon lightweight platforms enabling our customers to access the full set of functionality via a standard browser. Our systems operate in a completely hosted manner, eliminating the need for our customers to run any special hardware or software. This is a basic design criterion in our software architecture, to provide the most extensive set of products possible that are completely independent from our customer’s unique systems environment. We will continue to invest in improving the performance, functional depth and the usability of our services to better meet our customer’s needs.

Our systems are constructed as highly scalable, SaaS applications that use commercially available hardware and a combination of proprietary and off-the-shelf software from companies such as Adobe and Microsoft. Our software development team has constructed proprietary services and leveraged existing capabilities such as database connection pooling and user session management tuned to our specific architecture and environment, allowing us to continue to scale our service. This provides a stateless environment, in which users are not bound to a single server but can be routed in the most optimal way to any number of servers, with an advanced data caching layer.

Our systems have been implemented to allow all customers to operate as logically separate tenants in the central applications and databases. This allows us to spread the cost of delivering the total set of services across the user base, such that we do not have to manage thousands of distinct applications with their own business logic and database schemas. As a result, we have the ability to scale our application and core business in a very fast and efficient manner. Moreover, we can focus our resources on building new functionality to deliver to our customer base as a whole rather than on maintaining an infrastructure to support each of their distinct applications.

Our engineering team is constantly focused on improving and enhancing the features, functionality and security of our existing service offerings, as well as developing new capabilities such as the recent release of new versions of ESL ReadingSmart and Study Island. As a result of our proven SaaS model, our existing customers will be able to realize the full value of these enhancements without the need to go through a massive upgrade process. We are currently in the process of significantly upgrading the current Study Island technology platform in order to enhance its scalability for future growth. A separate EducationCity engineering team resides at our offices in the United Kingdom, but works closely with Study Island’s engineering team.

Operations

We serve all of our U.S. customers and users from a single, third-party web-hosting facility located in Dallas, Texas, leased from Colo4Dallas, Inc. The Colo4Dallas facility is built to a high level of availability and control and is secured by around-the-clock guards, biometric access screening and escort-controlled access, and

is supported by on-site backup generators in the event of a power failure. Bandwidth to the internet is provided by multiple independent companies and we continuously monitor the performance of this service. The monitoring features that exist include centralized performance consoles, automated load distribution tools and various self-diagnostic tools and programs.

As part of our disaster recovery arrangements, all of our U.S. customers’ data is replicated in a separate back-up facility near Chicago, Illinois. This is designed to both protect our customers’ data and ensure service continuity in the event of a major disaster. Even in the case of a catastrophic disaster at the Colo4Dallas facility, our strategy will allow for full operation within 24 hours or less.

Our EducationCity U.K. servers, including backup servers, are located in data centers in London, England. We have entered into a contract with a managed services company to provide both primary hosting and disaster recovery services for our U.K. operations. The transition to the new supplier will be completed by the end of the second quarter of 2012.

Integration with District Student Interoperability Systems

The Study Island core web application has been designed to integrate with Student Interoperability Systems, or SIS, which employ the Student Interoperability Framework, or SIF, specifications, as a method for overall student tracking. SIF creates a common set of specifications to allow different applications to interact and share data, and facilitates the use of technology in education. The use of SIF allows Study Island to maintain a real-time roster for each one of its SIF enabled districts, and facilitates the transition of information from one school to another within a district. Our engineering team is available to work directly with a school district’s technology team to assist with information transfers.

Seasonality

In the United States, seasonal trends associated with school budget years and state testing calendars also affect the timing of our sales of subscriptions to new and existing customers. As a result, most new subscriptions and renewals occur in the third quarter because teachers and school administrators typically make purchases for the new academic year at the beginning of their district’s fiscal year, which is usually July 1. Subscriptions to our products generate the vast majority of our revenue. Our products are sold as subscriptions through purchase orders. We rely significantly on our ability to secure renewals for subscriptions to our products as well as sales to new customers. We generally contact schools several months in advance of the expiration of their subscription, to attempt to secure renewal subscriptions. If a school does not renew its subscription within six months after its expiration, we categorize it as a lost school, and if a school subsequently purchases a subscription after this renewal period, we consider it to be a new subscription.

In the United Kingdom, seasonal trends associated with school budget years affect the timing of our sales of subscriptions to new and existing customers. As a result, there is a peak in new subscriptions and renewals late in the first quarter because teachers and school administrators often make purchases at the end of their fiscal year, which is usually April 5. The fourth quarter is also typically strong, with some customers working to calendar year budget periods, while third quarter is weakest due to the U.K. vacation period.

Intellectual Property

We develop proprietary educational content and assessment and reporting materials, and a significant majority of the questions and materials in our products have been developed internally. We rely on copyright protection for our internally developed content. We also own or license a number of trademarks, service marks, trade secrets and other intellectual property rights that relate to our products and services. Our content development costs in the years ended December 31, 2011, 2010 and 2009 were $6.6 million, $4.7 million and $3.8 million, respectively. We continue to invest in our intellectual property as we develop new content and expand the scope of our products and services. As appropriate, we also utilize confidentiality and licensing agreements with our employees, students, independent contractors and suppliers.

We also license a portion of our content from third parties. We attempt to use internally developed or public domain material in our products when possible, but as we continue to develop new products and services, we may enter into licenses with additional third parties.

We own several internet domain names that include the terms Study Island, Archipelago Learning, EducationCity, ESL ReadingSmart, ReadingMate, and Northstar Learning, among others.

Employees

As of December 31, 2011 we had 380 employees, which included three full time equivalent contractors. Our 380 employees include 81 in content development, 195 in sales and marketing, 61 in information technology and programming, and 43 in executive, human resource, finance, accounting and other support functions. Of our 380 employees, 295 are located in the United States and 85 are in the United Kingdom. None of our employees are represented by a collective bargaining agreement. We believe our employee relations are good.

Available Information

We make available free of charge, through our Internet website (www.archlearning.com), our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers, including us, that electronically file with the SEC at www.sec.gov. Additionally, such materials are available in print upon the written request of any shareholder to our offices located at 3232 McKinney Avenue, Suite 400, Dallas, Texas 75204, Attention: Investor Relations.

Item 1A.

Risk Factors

Risks Related to Our Business

In addition to other risks described in this report, the following risk factors should be considered in evaluating our business and future prospects:

Our business could be adversely affected as a result of uncertainty related to the Merger.

The announcement and pendency of the Merger may be disruptive to our business relationships and business generally, which could have an adverse impact on our financial condition and results of operations. For example:

•

the attention of our management may be directed to transaction-related considerations and may be diverted from the day-to-day operations of our business;

•

our employees may experience uncertainty about their future roles with us, which might impair our ability to attract and retain key personnel and other employees; and

•

customers or other business partners may experience uncertainty about our future and may choose to delay purchases or renewals with us, seek alternative relationships with third parties or seek to alter their business relationships with us.

Further, the Merger Agreement generally requires us to operate our business in the ordinary course pending consummation of the Merger, and it restricts us, subject to certain limited exceptions, from taking certain specified actions until the Merger is complete or the Merger Agreement is terminated, including, without limitation, not exceeding a certain amount in capital expenditures, not making certain acquisitions, not entering into certain types of contracts and other matters. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the Merger that could be favorable to us and our stockholders. In addition, we have incurred, and will continue to incur, substantial costs, expenses and fees related to the Merger, including expenses in connection with the retention of legal advisors, financial advisors, and consultants and the costs of defending against any lawsuits filed against us and our directors in connection with the Merger, and many of these costs, expenses and fees must be paid regardless of whether the Merger is completed. In addition, upon termination of the Merger Agreement under specified circumstances, we may be required to pay the Plato a termination fee of up to $10.2 million. This payment could affect the structure, pricing and terms proposed by a third party seeking to acquire or merge with us and could deter such third party from making a competing acquisition proposal. In the event of termination of the Merger Agreement under specified circumstances by Plato, our remedy may be limited to receipt of a cash reverse termination fee of approximately $20.4 million. There can be no assurance that a remedy will be available to us in the event of a breach or that any damages incurred by us in connection with the Merger will not exceed the amount of the reverse termination fee.

If we are unable to effectively manage these risks, our business, financial condition or results of operations may be adversely affected.

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.

The vast majority of our customers are public schools and school districts. Although public funding varies by state and municipality, public schools and districts typically receive most of their funding from state and local governments and a smaller portion from the federal government. Budget appropriations for education at all levels of government are determined through the political process and, as a result, the funding schools receive may fluctuate.

State and federal educational funding is primarily funded through income taxes, and local educational funding is primarily funded through property taxes. As a result of the ongoing recession, income tax revenue has decreased, which has put pressure on state and federal budgets. In addition, with the recent decline in real estate values in almost every state and the resulting reassessments, property tax revenue has also declined. However, according to the Nelson A. Rockefeller Institute of Government, state tax revenues are now above pre-recession levels, but still below peak levels. In the third quarter of 2011, total state revenues were 2% higher than during the same quarter of 2007, but still 1% lower than the third quarter of 2008. Preliminary figures for October and November 2011 indicate further but softening growth in state tax revenues. Local property tax revenues grew modestly in the third quarter, after three consecutive quarters of decline. The decline in tax revenues and unfavorable economic conditions has resulted in education budget cuts and led to lower overall spending, including lower technology spending, by our current and potential clients. If tax revenues do not increase in future years or if they continue to decrease, this could materially adversely affect our revenue. According to the Center on Budget and Policy Priorities, 42 states made cuts or have proposed cuts to education funding in their 2012 budgets totaling $103 billion and 29 states have projected shortfalls totaling $44 billion for 2013 budgets. Declines in tax receipts and gaps in states’ budgets could result in continued decreased education spending as well as cuts in recently enacted federal education spending programs, reduced school budgets and reduced availability of discretionary funds, all of which could materially adversely affect our revenue and results of operations.

If national educational standards and assessments, including common core standards, 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.

With the reauthorization of the Elementary and Secondary Education Act, or ESEA, commonly known during the Bush administration as No Child Left Behind, in 2001, Congress conditioned the receipt of federal funding for education on the establishment of educational standards, annual assessments and the achievement of adequate yearly progress milestones. These standards are established at the state level, and there are currently no national educational standards that are required to be assessed pursuant to ESEA. As part of ESEA, each state is required to establish clear performance standards for each grade level in reading, math and science in grades 3 through 8, and for high school exit or end-of-course exams. Most of our invoiced sales from subscriptions of our U.S. products are concentrated in grades K-8, which accounted for approximately 78%, 80% and 87% of our invoiced sales in 2011, 2010 and 2009, respectively. Subscriptions of our U.S. products by high schools accounted for approximately 12%, 12% and 11% of our invoiced sales in 2011, 2010 and 2009, respectively.

In 2009, the National Governors Association Center for Best Practices (“NGA Center”) and the Council of Chief State School Officers (“CCSSO”) launched a project to develop Common Core Standards for K-12 in reading and mathematics. As of December 31, 2011, 45 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands had officially adopted the new standards.

While it is uncertain exactly how this initiative will play out over the next two to three years, a shift to national performance standards or a reduction in the use of government-imposed standards may result in a material decline in demand in the markets that we serve.

In addition, our products are specifically built from the varying assessment standards in all 50 states, which we believe differentiates them from the products offered by our competitors. If national standards and assessments replace the current state assessments, it would be easier for competitors to develop similar products tailored to one national set of standards rather than multiple state standards. If such an increase in competition occurred, our ability to compete effectively could be negatively impacted and our revenue and profitability could materially decline.

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.

The ESEA legislation was initially scheduled for reauthorization in October 2008, but has been continually delayed. While many politicians believe that the nation’s primary education law needs to be revised, Democratic and Republican differences on the Federal role in public education and the best strategies for meaningful educational reforms, coupled with other higher priority legislative objectives, has led to gridlock. As a result, uncertainty continues to surround the substance and timing of ESEA reauthorization. If ESEA is not reauthorized or extended or does not maintain or increase the importance of state-by-state education standards and assessments, or if other federal or state legislation were to lessen the importance of such standards and assessments, our products and services could become significantly less valuable to our customers, and our revenue and profitability could materially decline.

Our 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.

We were founded in 2000 and began offering our Study Island products in 2001. Since our founding, we have continually launched new products, entered additional states, acquired new products, and experienced rapid growth and increasing market share in the expanding market for online learning. We began offering our Study Island products in all 50 states as of the 2008-2009 school year. We launched our Northstar Learning product line in April 2009. In June 2010, we acquired EducationCity, an online Pre-K-6 educational content and assessment program for schools in the United States and United Kingdom. In August 2010, we began selling Reading Eggs, an online product focusing on teaching young children to read. In August 2011, we acquired ESL ReadingSmart and ReadingMate, online standards-based programs for English language learners. Because many of our current products and services are relatively new and we have recently entered new markets, we may be unable to evaluate the relative success and future prospects, particularly in light of our goals to continually grow our existing and new customer base, expand our product and service offerings, acquire and integrate complementary businesses and enter new markets.

In addition, our growth, recent product introductions and entry into new markets may place a significant strain on our resources and increase demands on our executive management, personnel and systems, and our operational, administrative and financial resources may be inadequate. We may also not be able to maintain or accelerate our current growth rate, effectively manage our expanding operations, or achieve planned growth on a timely or profitable basis, particularly if the number of students and educators using our products and services increase or their demands and needs change as our business expands. Our management will be required to expand its knowledge of diverse aspects of the education industry and maintain relationships with key customers across several sectors of the education market. If we are unable to manage our growth and expand operations effectively, we may experience operating inefficiencies, the quality of our products and services could deteriorate, and our business and results of operations could be materially adversely affected.

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.

The use of online learning technology is a relatively new approach in the traditional K-12 education markets. There can be no assurance that online products and services will achieve long-term success in the K-12 or postsecondary education markets. Our success depends in part upon the continued adoption by teachers and school districts of technology-based education initiatives. Some academics and educators oppose online

education in principle and have expressed concerns regarding the perceived loss of control over the education process that can result from offering content online. As a necessary corollary to the acceptance of web-based education in the classroom, our growth depends in part on parental acceptance of the role of technology in education and the availability of internet access in the home. If the acceptance of technology-based education does not continue to increase, our ability to continue to grow our business could be materially impaired.

Our revenue is primarily generated by sales of subscriptions to our products over the term of the subscription. Our customer renewal rates are difficult to predict and declines in our sales of our products or our customer renewal rates may materially adversely affect our business and results of operations.

Customer subscriptions provide the vast majority of our revenue and we anticipate that revenue from sales of these subscription products will continue to account for a substantial majority of our revenue for the next few years. Our products are sold as subscriptions through purchase orders. The average subscription period for our products is 16 months. We also occasionally sell multi-year subscriptions. Additionally, promotional incentives, such as complimentary months of service, are offered periodically to new customers, resulting in a subscription term longer than one year. Our customers are not obligated to renew their subscriptions at the end of the term, nor are they required to pay any penalties if they fail to renew their subscriptions. Because of constraints on the use of state, local and federal funding, some of our customers are only able to purchase subscriptions for 12-month periods. As a result, our customers have no obligation to renew their subscriptions after the expiration of their initial subscription period. Our sales team begins the renewal process approximately six months prior to a subscription ending and consider this a renewal opportunity; however, our customers may choose to renew for fewer students or fewer products, which would reduce our revenue. Sales of our products or services or our customer renewal rates may decline or fluctuate as a result of a number of factors, including decreased demand, adverse regulatory actions, decreased school funding, pricing pressures, competitive factors or any other reason. These and other factors that have affected our product sales or customer renewal rates in the past are not predictive of the future, and, as a result, we cannot accurately predict customer renewal rates. If sales to new customers decline or our customers do not renew their subscriptions at previous levels, our revenue may decline, which would negatively impact our business, financial condition, results of operations and cash flow.

Our 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.

The sales model for our products relies heavily on word-of-mouth referrals among teachers and school administrators who purchase our products and services for use by their students. If policymakers at the district or state level determine that our products and services are not the best option for schools in their district or state, or if they decide to decrease or discontinue the use of web-based educational products, individual teachers and school administrators may lose the ability to decide what, if any, online educational products and services they use. Such action may result in the loss of our customers and may materially limit our ability to attract new customers. In addition, our competitors may more successfully market their products and services at the district or state level, which could result in a decline in sales of our products and services.

Fluctuations in sales or renewals may not be immediately reflected in our results of operations.

Our products are sold as subscriptions, generally through purchase orders. We recognize revenue from these customers monthly over the term of each of their subscriptions, which averages 16 months. We also occasionally sell multi-year subscriptions. Additionally, promotional incentives, such as complimentary months of service, are offered periodically to new customers, resulting in a subscription term longer than one year. As a result, substantially all of the revenue we recognize in any period is deferred revenue from subscriptions purchased during previous periods. Consequently, a decline in new sales or subscription renewals in any particular period will not necessarily be fully reflected in the revenue in that period and will negatively affect our revenue in future periods. In addition, we may be unable to adjust our cost structure to reflect this reduced revenue. Accordingly,

the effect of significant downturns in sales, subscription renewals or market acceptance of our products and services may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as the majority of revenue from new customers would be recognized ratably over the applicable subscription term.

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 cash flow may fluctuate as a result of seasonal variations in our business, principally due to:

•

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.

A significant percentage of our new sales and subscription renewals in the United States occur in the third quarter because teachers and school administrators typically make purchases for the new academic year at the beginning of their district’s fiscal year, which is usually July 1. The fourth calendar quarter has historically produced the second highest level of sales and renewals, followed by the second quarter and finally the first quarter.

In the United Kingdom, seasonal trends associated with school budget years affect the timing of sales of subscriptions to new and existing customers. As a result, there is a peak in new subscriptions and renewals late in the first quarter because teachers and school administrators often make purchases at the end of their fiscal year, which is usually April 5. The fourth quarter is also typically strong, with some customers working to calendar year budget periods, while third quarter is weakest due to the U.K. vacation period.

Because payment in full for subscriptions is typically due at the time of subscription or renewal, and our operating expense, of which labor and sales commissions make up the largest portion, historically have been fairly consistent throughout the year, we typically have higher cash flow in the quarters with stronger sales and renewals. We expect quarterly fluctuations in our cash flow to continue.

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.

The performance and reliability of our technology infrastructure is critical to our business. Any failure to maintain satisfactory online product performance, reliability, security or availability of our web platform infrastructure may significantly reduce customer satisfaction and damage our reputation, which would negatively impact our ability to attract new customers and obtain customer renewals. The risks associated with our web platform include:

•

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;

•

breakdowns or system failures resulting from the release of new features or functionality, which may cause unintended malfunctions of software or hardware;

•

human error by systems engineers, programmers, other internal staff, collocation or other vendor staff;

•

performance issues, such as low response time or bugs, that detract from the user experience;

•

increased complexity or more difficult navigation resulting from implementation of new features and functionality, that detract from the user experience;

•

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.

In addition, increases in the volume of traffic on our websites could strain the capacity of our existing infrastructure, which could lead to slower response times or system failures. This would cause a disruption or suspension of our product and service offerings.

Any web platform interruption or inadequacy that causes performance issues or interruptions in the availability of our websites could reduce customer satisfaction and result in a reduction in the number of customers using our products and services. If sustained or repeated, these performance issues could reduce the attractiveness of our websites and products and services.

We may need to incur additional costs to upgrade our computer systems in order to accommodate system disruptions, security risks and increased demand if we anticipate that our systems cannot handle higher volumes of traffic in the future. We may also need to upgrade our web platform and systems as new technologies become available that we are required to implement in order to keep our infrastructure up-to-date and product offerings relevant, or we are forced to make upgrades in response to new competitors or significant improvements to existing competitors’ web platforms and system capabilities. However, the costs and complexities involved in expanding and upgrading our systems may prevent us from doing so in a timely manner and may prevent us from adequately meeting the demand placed on our systems.

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.

All of web platform servers and routers, including backup servers, are currently located in facilities in Dallas, Texas; Chicago, Illinois and London, England. As part of our disaster recovery arrangements, our Study Island customers’ data is replicated in a separate back-up facility near Chicago, Illinois. We have entered into a contract with a managed services company to provide both primary hosting and disaster recovery services for our U.K. operations. The transition to the new supplier will be completed by the end of the second quarter of 2012.

Any disruption of operations of or damage to these servers could materially harm our ability to operate our business. We also may need to make additional investments to improve the performance of our platform and prevent disruption of our services. Any disruption or significant interruption in the operations of our data centers may result in a loss of customer satisfaction and limit our ability to retain and attract customers.

We rely in part on our call center to generate sales leads and maintain a high level of customer service. Any significant interruption in the operation of our call center, including an interruption caused by our failure to expand or upgrade our systems or to manage these expansions or upgrades, could reduce our ability to receive and respond to requests for help or service, process orders and provide products and services, which could result in lost or cancelled sales and damage to our reputation.

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.

Our products and services require the disclosure of student information by educational institutions and credit card information by some customers. The vast majority of our product users are minors. The Child Online Protection Act and the Children’s Online Privacy Protection Act restrict the distribution of materials considered harmful to children and impose additional restrictions on the ability of online services to collect information from minors. Many states have also passed laws requiring notification to users when there is a security breach of personal data. Additionally, the Family Educational Rights and Privacy Act, or FERPA, protects the privacy and restricts the disclosure of student information, and we must remain FERPA-compliant through security policies, processes, systems and controls, including using software that detects hackers and other unauthorized or illegal activities. We cannot predict whether new technological developments could circumvent these security measures. If the security measures that we use to protect personal or student information or credit card information are ineffective, we may be subject to liability, including claims for invasion of privacy, impersonation, unauthorized purchases with credit card information or other similar claims. In addition, the Federal Trade Commission and several states have investigated the use of personal information by certain internet companies. We could incur significant expense and our business could be materially adversely affected if new regulations regarding use of personal information are introduced, if our security measures are ineffective or if our privacy practices are investigated.

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.

As web-based commerce continues to evolve, increasing regulation by federal, state or foreign agencies becomes more likely. In addition, taxation of services provided over the internet or other charges imposed by government agencies or by private organizations for accessing the internet may also be imposed. Any regulation imposing greater fees for internet use or restricting information exchange over the internet could result in a decline in the use of the internet and the viability of internet-based services, which could materially harm our business.

We may not be able to develop new products and services or expand our existing product lines in a timely and cost effective manner.

Our products are built from specific state standards for a particular grade level and subject in the K-12 market. With these standards continually changing and our release of new products, our product and content development teams may not be able to respond to changing market requirements on a timely basis. In addition, we are entering new markets, such as the postsecondary and international markets, which will place new demands on our product and content development teams. These are new, unproven markets for us, and if we are not able to generate sufficient new revenue to exceed the incremental costs associated with developing and delivering new products and entering new markets, our results of operations may be materially and adversely affected. Furthermore, we may be unable to develop and offer additional products and services on commercially reasonable terms and in a timely manner, if at all, or maintain the quality and consistency necessary to keep pace

with changes in market requirements and respond to competitive pressures. A failure to do any of these things may result in a material decline in our revenue and may prevent us from maintaining profitability.

We may not realize the expected benefits of acquisitions because of integration difficulties and other challenges. In addition, if we acquire or invest in any other 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.

The success of the acquisitions, including EducationCity and Alloy Multimedia, will depend, in part, on our ability to integrate those operations with our existing business. The integration process may be complex, costly and time-consuming. We may not accomplish the integration of these businesses smoothly, successfully or within the anticipated cost range or timeframe. The diversion of our management’s attention from our pre-existing operations to the integration effort and any difficulties encountered in combining operations could prevent us from realizing the full benefits anticipated to result from the acquisitions and could adversely affect our business.

In addition, as part of our growth strategy, we may acquire or invest in additional complementary companies, services and technologies. We cannot assure you that we will be able to consummate any such acquisitions or investments on favorable terms or at all. If we fail to properly evaluate and execute our acquisitions or investments, our business and prospects may be seriously harmed. Such acquisitions and investments involve numerous risks, including:

•

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;

•

potential loss of customers;

•

risk of not maintaining or increasing sales volume;

•

inability to generate sufficient revenue to offset acquisition or investment costs;

•

delays in customer purchases due to uncertainty;

•

risk of failing to implement our business plan for the acquired business; and

•

potential impact on our internal controls and compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002.

In connection with our acquisitions or investments, we may also incur additional debt and related interest expense, as well as unforeseen liabilities, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, we may issue additional equity in connection with these transactions, which would result in dilution to our existing stockholders.

If we are unable to maintain and enhance our brand identity, our business and results of operations may suffer.

The continued development of our brand identity is important to our business, and expanding brand awareness is critical to attracting and retaining our customers. Although our Study Island brand has existed since

2000 and EducationCity has existed since 1999, our Northstar Learning, and Archipelago Learning brands are newer, having launched in 2009. Two brands we acquired in 2011, ESL ReadingSmart and ReadingMate, were launched in 2002. Our existing and potential customers may not be aware of the relationship of our brands with one and another, particularly Archipelago Learning serving as an umbrella for each of our products, ESL ReadingSmart serving as an ELL product, and Northstar Learning serving as a postsecondary education product line. Our newer brands are unproven and may not be successfully received by our customers. In addition, we have launched our products in a number of new states over the last several years and intend to launch our products in international markets in the future. In addition, we plan to launch our EducationCity U.K. products into additional grade levels in the future. As we continue to increase subscriptions and extend our geographic reach, maintaining quality and consistency across all of our products and services may become more difficult to achieve, and any significant and well-publicized failure to maintain this quality and consistency will have a detrimental effect on our brand. We cannot provide assurances that our sales and marketing efforts will be successful in further promoting our brand in a competitive and cost-effective manner. If we are unable to maintain and enhance our brand recognition and increase awareness of our products and services, or if we incur excessive sales and marketing expense, our business and results of operations could be materially adversely affected.

Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our sales and marketing expenditures in recruiting new customers.

Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our sales efforts, including our ability to:

•

secure additional new school and district customers as our penetration increases;

•

retain existing customers and sell them additional products and services;

•

continue our strong “word-of-mouth” customer referrals;

•

retain our most productive sales managers and staff;

•

compete effectively against larger competitors to secure district level sales; and

•

build an “education” thought leadership position with key state and district education administrators.

In addition, our future growth and profitability will depend in large part upon the effectiveness and efficiency of our marketing expenditures, including our ability to:

•

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;

•

provide timely and appropriate sales collateral to assist the sales team;

•

determine the appropriate creative message and media mix for advertising, marketing and promotional expenditures;

•

determine the most appropriate pricing models and simple quote generator for customers and sales reps;

•

effectively manage marketing costs, including creative and media expense, in order to maintain acceptable customer acquisition costs;

•

keep the website navigation and messaging simple and relevant to customers;

•

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.

Our planned sales and marketing efforts and expenditures may not result in increased revenue or generate sufficient levels of product and brand awareness, and we may not be able to increase our net sales at the same rate as we increase our sales and marketing efforts and expenditures.

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.

If our products or services contain defects, errors or security vulnerabilities, our reputation could be harmed, which could result in significant costs to us and impair our ability to sell our products and services in the future. Because our products and services are complex and because we do not “pre-launch” any of our products or upgrades to any third parties prior to the official launch, they may contain undetected errors or defects, known as “bugs”. Bugs can be detected at any point in time, but are more common when a new product or service is introduced or when new versions are released. We expect that, despite our testing, errors will be found in the future. If an error occurs, our product and service offerings may be disrupted, causing delays or interruptions. Significant errors, delays or disruptions could lead to:

•

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;

•

rebates or refunds of subscription fees;

•

increased service expense or payment of damages; or

•

increased competitive focus on our existing and prospective customer base.

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.

We need to anticipate, develop and introduce new products, services and applications on a timely and cost effective basis that keeps pace with technological developments and changing customer needs. In late August 2011, we released Version 5 of our Study Island platform, with features including seamless interfacing on mobile devices, new games, interactive flash animations, and enhanced lessons. If we fail to continue to develop or sell products and services cost effectively that respond to these or other technological developments and changing customer needs, we may lose market share and revenue and our business could materially 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.

Our trademarks, copyrights, trade secrets, trade dress and designs are valuable and integral to our success and competitive position. However, we cannot assure you that we will be able to adequately protect our proprietary rights through reliance on a combination of copyrights, trademarks, trade secrets, confidentiality procedures, contractual provisions and technical measures. Protection of trade secrets and other intellectual

property rights in the markets in which we operate and compete is highly uncertain and may involve complex legal questions. We cannot completely prevent the unauthorized use or infringement of our intellectual property rights, as such prevention is inherently difficult. Despite enforcement efforts against software piracy, we lose significant revenue due to illegal use of our software. If piracy activities increase, they may further harm our business.

We also expect that the more successful we are, the more likely that competitors will try to illegally use our proprietary information and develop products that are similar to ours, which may infringe on our proprietary rights. In addition, we could potentially lose future trade secret protection for our source code if any unauthorized disclosure of such code occurs. The loss of future trade secret protection could make it easier for third parties to compete with our products by copying functionality. Any changes in, or unexpected interpretations of, the trade secret and other intellectual property laws in any country in which we operate may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our confidential information and trade secret protection. If we are unable to protect our proprietary rights or if third parties independently develop or gain access to our or similar technologies, our business, revenue, reputation and competitive position could be materially adversely affected.

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.

We may be sued for infringing the intellectual property rights of others or be subject to litigation based on allegations of infringement or other violations of intellectual property rights. Regardless of merits, intellectual property claims are often time-consuming and expensive to litigate and settle. In addition, to the extent claims against us are successful, we may have to pay substantive monetary damages or discontinue any of our products, services or practices that are found to be in violation of another party’s rights. We also may have to seek a license and make royalty payments to continue offering our products and services or following such practices, which may significantly increase our operating expense.

The confidentiality, non-disclosure and other agreements we use to protect our products, trade secrets and proprietary information may prove unenforceable or inadequate.

We protect our products, trade secrets and proprietary information, in part, by requiring all of our employees to enter into agreements providing for the maintenance of confidentiality and the assignment of rights to inventions made by them while employed by us. We also enter into non-disclosure agreements with our technical consultants, customers, vendors and resellers to protect our confidential and proprietary information. We cannot assure you that our confidentiality agreements with our employees, consultants and other third parties will not be breached, that we will be able to effectively enforce these agreements, that we will have adequate remedies for any breach, or that our trade secrets and other proprietary information will not be disclosed or will otherwise be protected.

We also rely on contractual and license agreements with third parties in connection with their use of our products and technology. There is no guarantee that such parties will abide by the terms of such agreements or that we will be able to adequately enforce our rights, in part because we rely, in many instances, on “click-wrap” licenses, which are licenses that can only be read and accepted online and are not negotiated or signed by individual licensees. Accordingly, some provisions of our licenses, including provisions protecting against unauthorized use, copying, transfer, resale and disclosure of the licensed software program, may be unenforceable under the laws of several jurisdictions.

We have not registered copyrights for all of our products, which may limit our ability to enforce them.

We have not registered our copyrights in all of our software, written materials, website information, designs or other copyrightable works. The U.S. Copyright Act automatically protects all of our copyrightable works, but

without registration we cannot enforce those copyrights against infringers or seek certain statutory remedies for any such infringement. Preventing others from copying our products, written materials and other copyrightable works is important to our overall success in the marketplace. In the event we decide to enforce any of our copyrights against infringers, we will first be required to register the relevant copyrights, and we cannot be sure that all of the material for which we seek copyright registration would be registrable in whole or in part, or that once registered, we would be successful in bringing a copyright claim against any such infringers.

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 own several domain names that include the terms Study Island, Archipelago Learning, EducationCity, ESL ReadingSmart, ReadingMate, and Northstar Learning, among others. Third parties may acquire substantially similar domain names that decrease the value of our domain names and trademarks and other proprietary rights which may hurt our business. Moreover, the regulation of domain names in the United States and foreign countries is subject to change. Governing bodies could appoint additional domain name registrars or modify the requirements for holding domain names. Governing bodies could also establish additional “top-level” domains, which are the portion of the web address that appears to the right of the “dot,” such as “com,” “net,” “gov” or “org.” As a result, we may not maintain exclusive rights to all potentially relevant domain names in the United States or in other countries in which we conduct business, which could harm our business and reputation.

We do not own all of the software, content and other technologies used in our products and services.

Some of our products and services include intellectual property owned by third parties, including licensed content for reading passages and other educational content. From time to time we may be required to renegotiate with these third parties or negotiate with new third parties to include or continue using their technology or content in our existing products, in new versions of our existing products or in wholly new products. We may not be able to negotiate or renegotiate licenses on commercially reasonable terms, or at all, and the third-party software we use may not be appropriately supported, maintained or enhanced by the licensors. If we are unable to obtain the rights necessary to use or continue to use third-party technology or content in our products and services, or if those third parties are unable to support, maintain and enhance their software, we could experience increased costs or delays or reductions in product releases and functionality until equivalent software or content can be developed, identified, licensed and integrated.

Our future success depends on our ability to retain our key employees.

We are dependent on the services of Tim McEwen, our Chairman, Chief Executive Officer and President; Mark Dubrow, our Chief Financial Officer; Martijn Tel, our Chief Operating Officer; Bobby Babbrah, our Chief Technology Officer; Donna Regenbaum, our Executive Vice President of Strategy, Product and Marketing, our other vice presidents and senior editors, and other members of our senior management team. Other than non-compete provisions of limited duration included in employment agreements that we have with certain executives, we do not generally seek non-compete agreements with key personnel, and they may leave and subsequently compete against us. The loss of service of any of our senior management team, particularly those who are not party to employment agreements with us, or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could have a material adverse effect on our business.

We may be unable to attract and retain the skilled employees needed to sustain and grow our business.

Our success to date has largely depended on, and will continue to depend on, the skills, efforts and motivations of our executive team and employees, who generally have significant experience with our company and within the education industry. Our success also depends largely on our ability to attract and retain highly qualified IT engineers and programmers, content writers and editors, sales and marketing managers and corporate

management personnel. We may experience difficulties in locating and hiring qualified personnel and in retaining such personnel once hired, which may materially and adversely affect our business.

We intend to continue 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.

We launched our Study Island products in Canada in 2009, and we also completed the acquisition of EducationCity in June 2010, whose products are used in approximately 9,100 schools in the United Kingdom. In September 2010, we entered into an exclusive royalty agreement with a third party to expand our EducationCity products into China. We also intend to continue to expand into other international markets. The addition of international operations may require significant expenditure of financial and management resources and result in increased administrative and compliance costs. As a result of such expansion, we will be increasingly subject to the risks inherent in conducting business internationally, including:

•

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.

Fluctuations in exchange rates could have an adverse effect on our results of operations, even if our underlying business results improve or remain steady.

Our reporting currency is the U.S. dollar, and we are exposed to foreign exchange rate risk because, following our acquisition of EducationCity, a portion of our net sales and costs are denominated in British Pounds, which we convert to U.S. dollars for financial reporting purposes. We do not engage in any hedging activities with respect to currency fluctuations. Changes in exchange rates on the translation of the earnings in foreign currencies into U.S. dollars are directly reflected in our financial results. As such, to the extent the value of the U.S. dollar increases or decreases against British Pounds, it may negatively impact our reported net income, even if our results of operations denominated in local currency have improved or remained steady. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign currency losses in the future, which could materially and adversely affect our financial position 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.

We may need to raise additional funds in order to achieve growth or fund other business initiatives. This financing may not be available in sufficient amounts or on terms acceptable to us and may be dilutive to existing stockholders if raised through additional equity offerings. Additionally, any securities issued to raise funds may

have rights, preferences or privileges senior to those of existing stockholders. If adequate funds are not available or are not available on acceptable terms, our ability to expand, develop or enhance services or products, or respond to competitive pressures may be materially limited.

Our existing indebtedness could adversely affect our financial condition and we may not be able to fulfill our debt obligations.

As of December 31, 2011, Archipelago Learning, LLC had an outstanding term loan in an aggregate principal amount equal to $74.9 million and no revolving credit loans outstanding under its revolving credit facility which expires in November 2013. The agreements governing this credit facility contain various covenants that limit our ability to, among other things:

•

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.

These restrictions could limit our ability to withstand general economic downturns that could affect our business, obtain future financing, make acquisitions or capital expenditures, conduct operations or otherwise capitalize on business opportunities that may arise. Additionally, we will use a significant portion of our cash flow to pay interest on our outstanding debt, limiting the amount available for working capital, capital expenditures and other general corporate purposes.

We may be more vulnerable to adverse economic conditions than less leveraged competitors and thus less able to withstand competitive pressures. If our cash flow is inadequate to make interest and principal payments on our debt, we might have to refinance our indebtedness or issue additional equity or other securities and may not be successful in those efforts or may not obtain terms favorable to us. Additionally, our ability to finance working capital needs and general corporate purposes for the public and private markets, as well as the associated cost of funding, is dependent, in part, on our credit ratings, which may be adversely affected if we experience declining revenue. Any of these events could reduce our ability to generate cash available for investment or debt repayment or to make improvements or respond to events that would enhance profitability. We may incur significantly more debt in the future, which will increase each of the foregoing risks related to our indebtedness. The obligations under our credit facility are guaranteed by AL Midco, LLC, or AL Midco, and are secured by liens on substantially all of the assets owned by Archipelago Learning, LLC and AL Midco. For a more detailed description of our credit facility, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Credit Facility.”

Our current Credit Facility expires in November 2013. Additional financing may not be available to us at that time, or if it is available, it may not be available on acceptable terms. Our inability to obtain the necessary financing on acceptable terms may prevent us from developing new products effectively, maintaining and improving our current products and network, and completing advantageous acquisitions. Our inability to obtain the necessary financing could seriously harm our business, financial condition, results of operations and prospects.

Risks Related to Our Common Stock

There are risks and uncertainties associated with our proposed Merger with Plato Learning, Inc.

On March 3, 2012, we entered into the Merger Agreement with Plato. There are a number of risks and uncertainties relating to the Merger. The Merger may not be consummated at all or may not be consummated in

the timeframe or manner currently anticipated, as a result of a variety of factors, including but not limited to the failure to satisfy one or more of the closing conditions set forth in the Merger Agreement or Plato’s failure to obtain sufficient financing to complete the Merger. There can be no assurance that the requisite stockholder or regulatory approvals required by the Merger Agreement will be obtained, that the other conditions to closing of the Merger will be satisfied or waived or that other events will not intervene to delay or result in the termination of the Merger Agreement. In addition, lawsuits may be filed against us and our directors in connection with the Merger that, among other things, seek to enjoin the consummation of the Merger. If the plaintiffs in any such potential lawsuit are successful in obtaining injunctive or other relief restraining, enjoining or otherwise prohibiting the consummation of the Merger, such injunctive or other relief could prevent the Merger from being consummated.

For example, as discussed in Part I, Item 3 – Legal Proceedings of this annual report, on March 7, 2012, the Company, Plato, Merger Sub and members of our board of directors were named as defendants in a class action lawsuit (the “Shareholder Lawsuit”) relating to our proposed Merger with Plato. The Shareholder Lawsuit challenges our proposed Merger with Plato and seeks, among other things, to enjoin the proposed Merger, to recover damages in the event that the proposed Merger is consummated and to award the named plaintiff in such suit its fees and expenses in connection with the Shareholder Lawsuit, including reasonable attorneys’ and experts’ fees and expenses. Although the Company believes that the Shareholder Lawsuit is without merit, it could be time consuming, expensive and divert the attention of management away from the operation of the business. If the plaintiffs in the Shareholder Lawsuit are successful in obtaining injunctive or other relief restraining, enjoining or otherwise prohibiting the consummation of the Merger, such injunctive or other relief could prevent the Merger from being consummated. In addition, the other parties to the Shareholder Lawsuit may make demands against us for indemnification against losses arising from such lawsuit. The Company has also become aware of at least one additional potential shareholder lawsuit related to the proposed Merger. Because the Shareholder Lawsuit was only recently filed, the likely outcome cannot be predicted, and we have not determined the probability or extent of the resulting damages, if any.

If the Merger is not completed for any reason, our stockholders will not receive any payment for their shares pursuant to the Merger Agreement, and the price of our common stock may change to the extent that the current market price of our common stock reflects an assumption that the Merger will be consummated. In addition, if the Merger is not completed, we expect that our management will operate our business in a manner similar to that in which it is being operated today and that our stockholders will continue to be subject to the same risks and opportunities to which they currently are subject, including, among other things, the nature of the industry on which our business largely depends, and general industry, economic, regulatory and market conditions. Any delay in closing or failure to close the Merger could have an adverse effect on our operating results and business generally, our business relationships, including with our customers and employees, and our ability to pursue alternative strategic transactions or implement alternative business plans. If the Merger Agreement is not adopted by our stockholders, or if the Merger is not consummated for any other reason, there can be no assurance that any other transaction acceptable to us will be offered or that our business, prospects or results of operations will not be adversely affected.

Our stock price may fluctuate significantly, and you may not be able to resell your shares at or above the current market price.

The trading price of our common stock is likely to be volatile and subject to wide price fluctuations in response to various factors, including:

•

a delay in consummating, or a failure to consummate, the Merger with Plato;

•

regulatory or political developments;

•

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;

•

litigation and governmental investigations; and

•

changing economic conditions.

These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. In March 2012, a Shareholder Lawsuit was filed against the Company, Plato, Merger Sub and members of our Board of Directors related to the Merger Agreement with Plato. We could incur substantial costs defending the lawsuit, and any additional stockholder lawsuits that could potentially be filed against us in the future. Such lawsuits could also divert the time and attention of our management from our business.

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.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade recommendations regarding our stock, or if our results of operations do not meet their expectations, our stock price could decline and such decline could be material.

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.

If our existing stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease significantly. The perception in the public market that our existing stockholders might sell shares of common stock could also depress our market price. As of December 31, 2011, we had 26,340,135 shares of common stock outstanding, including shares of restricted common stock. Holders of 621,204 shares are party to lockup agreements related to the acquisition of EducationCity. After these lock-up agreements have expired and holding periods have elapsed, 621,204 of additional shares will be eligible for sale in the public market. The market price of shares of our common stock may drop significantly when the restrictions on resale by our stockholders lapse. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities.

Insiders have substantial control over us and could limit your ability to influence the outcome of key transactions, including a change of control.

As of December 31, 2011, our principal stockholders, directors and executive officers and entities affiliated with them owned approximately 50.4% of the outstanding shares of our common stock. As a result, these

stockholders, if acting together, would be able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. In addition, we have elected to opt out of Section 203 of the Delaware General Corporation Law, which prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder,” and we will be able to enter into transactions with our principal stockholders. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and may materially adversely affect the market price of our common stock.

As a result of being a public company, we are obligated to maintain proper and effective internal control over financial reporting and are subject to other requirements that are 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.

We are required to file with the Securities and Exchange Commission, or SEC, annual and quarterly information and other reports that are specified in Section 13 of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We are also be required to ensure that we have the ability to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis. In addition, we are subject to other reporting and corporate governance requirements, including the requirements of NASDAQ, and certain provisions of the Sarbanes-Oxley Act of 2002 and the regulations promulgated thereunder, which impose significant compliance obligations upon us. As a public company, we are required to:

•

prepare and distribute periodic public reports and other stockholder communications in compliance with our obligations under the federal securities laws and NASDAQ rules;

•

maintain the roles and duties of our board of directors and committees of the board;

•

maintain a comprehensive financial reporting and disclosure compliance functions;

•

maintain an accounting and financial reporting department, including personnel with expertise in accounting and reporting for a public company;

•

maintain closing procedures at the end of our accounting periods;

•

maintain or outsource an internal audit function;

•

maintain investor relations function;

•

maintain 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.

These requirements entail a significant commitment of resources. We may not be successful in maintaining these requirements and the maintenance of these requirements could adversely affect our business or results of operations. In addition, if we fail to maintain the requirements with respect to our internal accounting and audit functions, our ability to report our results of operations on a timely and accurate basis could be impaired.

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.

Our certificate of incorporation and bylaws include certain provisions that could have the effect of discouraging, delaying or preventing a change of control of our company or changes in our management, including, among other things:

•

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.

These provisions in our certificate of incorporation and bylaws may discourage, delay or prevent a transaction involving a change in control of our company that is in the best interest of our minority stockholders. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging future takeover attempts.

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.

We currently intend to retain our future earnings, if any, for the foreseeable future, to repay indebtedness and to fund the development and growth of our business. We do not intend to pay any dividends to holders of our common stock and the agreements governing our credit facility significantly restrict our ability to pay dividends. As a result, capital appreciation in the price of our common stock, if any, will be your only source of gain or income on an investment in our common stock.

Our certificate of incorporation contains a provision renouncing our interest and expectancy in certain corporate opportunities.

Our certificate of incorporation provides for the allocation of certain corporate opportunities between us and Providence Equity Partners. Under these provisions, neither Providence Equity Partners, its affiliates and subsidiaries, nor any of their officers, directors, agents, stockholders, members or partners will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. For instance, a director of our company who also serves as a director, officer or employee of Providence Equity Partners or any of its subsidiaries or affiliates may pursue certain acquisition or other opportunities that may be complementary to our business and, as a result, such acquisition or other opportunities may not be available to us. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations or prospects if attractive corporate opportunities are allocated by Providence Equity Partners to itself or its subsidiaries or affiliates instead of to us.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

Our corporate headquarters are located at 3232 McKinney Avenue, Suite 400, Dallas, Texas 75204. Our material properties are listed below:


Location	Type	Lease Expiration	Square Footage
Dallas, Texas	Headquarters	2020		37,218
Dallas, Texas	Former headquarters	2012		18,508
Naperville, Illinois	EducationCity U.S.	2012		13,226
Rutland, U.K.	EducationCity U.K.	2014		9,000
Houston, Texas	ESL ReadingSmart office	2012		340
Dallas, Texas	Hosting colocation facility	2014		504
Chicago, Illinois	Hosting colocation facility	2012		225

Item 3.

Legal Proceedings

In connection with our proposed Merger with Plato, on March 7, 2012, the Company, Plato, Merger Sub and members of our board of directors were named as defendants in a class action lawsuit (the “Shareholder Lawsuit”) filed in the County Court at Law Number 3 in Dallas County, Texas on behalf of our public shareholders. The Shareholder Lawsuit alleges: (i) breaches of fiduciary duties by members of our board of directors in connection with the proposed Merger, (ii) a claim for aiding and abetting the breach of fiduciary duty against all defendants, (iii) that the proposed Merger is inadequate, unfair and unreasonable, and (iv) that the Merger Agreement unfairly deters competitive offers. The Shareholder Lawsuit seeks to enjoin the proposed Merger, to recover damages in the event that the proposed Merger is consummated and to award the named plaintiff in such suit its fees and expenses in connection with the Shareholder Lawsuit, including reasonable attorneys’ and experts’ fees and expenses. The Company has also become aware of at least one additional potential shareholder lawsuit related to the proposed Merger. The Company believes that the Shareholder Lawsuit and any potential similar lawsuits are without merit and intends to assert appropriate defenses.

Item 4.

Mine Safety Disclosures

Not Applicable

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our 2012 Proxy Statement or amendment to this Form 10-K will include information relating to the compensation plans under which our equity securities are authorized for issuance, under the heading, “Equity Compensation Plan Information”, and we incorporate such information herein by reference. Please refer to Note 14, Stock-Based Compensation, in the notes to the Consolidated Financial Statements included in this Annual Report, for additional information relating to our compensation plans under which our equity securities are authorized for issuance.

Market for Our Common Stock

We completed our initial public offering (“IPO”) on November 25, 2009, and our common stock began trading on the NASDAQ Global Market on November 20, 2009, under the symbol “ARCL”. The closing price of our common stock on March 5, 2012 was $11.09. The following table sets forth the high and low sales prices of our common stock for the years ended December 31, 2011 and 2010, as reported by NASDAQ:


	High		Low
Year-ended December 31, 2011:
Fourth quarter	$	10.86	$	8.06
Third quarter		10.60		8.03
Second quarter		10.61		8.20
First quarter		11.89		8.09
Year-ended December 31, 2010:
Fourth quarter	$	12.95	$	8.18
Third quarter		12.35		9.37
Second quarter		16.27		11.27
First quarter		21.22		13.77

Holders

As of March 8, 2012, there were 26 direct holders of record of our common stock. Including holders in broker accounts under street names, we estimate our stockholder base to be approximately 850 as of March 8, 2012.

Dividends

We have not paid dividends on our capital stock during our fiscal years ending December 31, 2011 and 2010. We do not anticipate paying any dividends on our capital stock for the foreseeable future. Our ability to pay dividends on our common stock is restricted by the terms of our credit facility and may be further restricted by any future indebtedness we incur. Our business is conducted through our subsidiaries. Dividends from, and cash generated by our subsidiaries will be our principal sources of cash to repay indebtedness, fund operations and pay dividends. Accordingly, our ability to pay dividends to our stockholders is dependent on the earnings and distributions of funds from our subsidiaries.

Any future determination to pay dividends will be at the discretion of our board of directors and will take into account:

•

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.

Sales of Unregistered Securities

In connection with the acquisition of EducationCity on June 9, 2010, we issued 1,242,408 shares of Archipelago Learning, Inc. common stock, par value $0.001 per share, to the former owners of EducationCity. The

issuance of these shares of common stock was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof, as it was a transaction by the issuer not involving a public offering of securities.

Archipelago Learning Purchases of its Equity Securities

None.

Stock Performance Graph

The following shall not be deemed incorporated by reference into any of our other filings under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, except to the extent we specifically incorporate it by reference into such filing.

The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the NASDAQ Composite Index and a group of our peers for the period beginning on November 20, 2009 (the date our common stock commenced trading on NASDAQ) through December 31, 2011, assuming an initial investment of $100, with reinvestment of dividends.

The peer group we have selected includes companies from the educational technology, higher education and SaaS industries, reflecting the industries in which we take part. The group includes the following companies: American Public Education, Inc.; Athenahealth, Inc.; Blackbaud, Inc.; Bridgepoint Education, Inc.; Capella Education Company; Concur Technologies, Inc.; Grand Canyon Education, Inc.; K12, Inc.; Rightnow Technologies, Inc.; Rosetta Stone, Inc.; Salesforce.com, Inc.; Strayer Education, Inc.; Taleo Corporation and The Ultimate Software Group Incorporated.

The data in the graph below represent historical data and are not indicative of, not intended to forecast, future performance of our common stock.

LOGO

Item 6.

Selected Financial Data

The following selected consolidated financial data has been derived from our audited consolidated financial statements. The selected financial data should be read in conjunction with our consolidated financial statements and related notes in Item 15 of this report and our Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this report.

During 2009, we completed our Corporate Reorganization and IPO, resulting in a new equity structure and an inflow of cash and cash equivalents of $46.1 million. See Note 1 in our consolidated financial statements for further information on the Corporate Reorganization and IPO. We also completed the sale of our TeacherWeb business and classified it as a discontinued operation in our consolidated statements of income and cash flows. See Note 6 in our consolidated financial statements for further information on the sale of TeacherWeb.

On June 9, 2010, we acquired EducationCity, which provides online Pre-K-6 instructional content and assessments for reading, math and science. The data below includes the results of EducationCity as of June 9, 2010. See Note 3 in our consolidated financial statements for further information on the acquisition of EducationCity.

On June 24, 2011, we acquired Alloy, which publishes ESL ReadingSmart and ReadingMate, online standards-based programs for English language learners targeted toward grades 4-12. The data below includes the results of Alloy since the date of acquisition. See Note 3 in our consolidated financial statements for further information on the acquisition of Alloy.

On October 4, 2011, we entered into a Securities Purchase Agreement (the “Agreement”) with Bulldog Super Holdco, Inc., a Delaware corporation, which became the ultimate parent company of Blackboard, Inc. Pursuant to the Agreement, we sold our investment in Edline for a total of approximately $12.2 million and received a dividend of approximately $0.6 million in connection with the sale. In addition, we received approximately $2.1 million for a notes receivable from Edline. As a result of this transaction, we recorded a gain of $6.4 million before tax.


	2011		2010		2009		2008		2007
			(In thousands, except per share data)
Consolidated Statements of Income:
Revenue	$	73,265	$	58,650	$	42,768	$	31,415	$	18,250
Gross profit		66,713		53,610		39,694		29,524		17,500
Income from continuing operations		13,779		8,937		12,630		8,230		3,615
Net income from continuing operations		11,945		3,452		6,374		1,114		2,924
Earnings per share from continuing operations:
Basic and diluted	$	0.45	$	0.13	$	0.31	$	0.06	$	0.15
Consolidated Balance Sheet Data:
Deferred revenue	$	64,291	$	59,045	$	36,443	$	26,922	$	16,931
Cash and cash equivalents		64,628		32,398		58,248		13,144		11,060
Total assets		286,344		266,962		192,535		142,025		127,591
Long-term debt, net of current		74,063		74,913		60,876		68,600		69,300
Total liabilities		164,155		159,645		109,525		101,551		89,244
Total equity		122,189		107,317		83,010		40,474		38,347

Item 7.

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

The following discussion is intended to assist in the understanding of our consolidated financial position and our results of operations. This discussion should be read in conjunction with our consolidated financial statements and the related notes in Item 15 of this report.

Overview

Archipelago Learning is a leading subscription-based, SaaS provider of education products. We provide standards-based instruction, practice, assessments and productivity tools that support educator’s efforts to reach students in innovative ways and enhance the performance of students via proprietary web-based platforms. As of December 31, 2011, our products were utilized by over 14.6 million students in approximately 39,100 schools in all 50 states, Washington D.C., Canada, and the United Kingdom.

We were founded in 2000. In 2001, we launched our first Study Island products in two states. By 2009, we developed Study Island products for all 50 states, in the subject areas of reading, writing, mathematics, social studies and science and have grown from serving 57 schools in 2001 with Study Island to approximately 39,100 schools as of December 31, 2011 with our five product lines, Study Island, EducationCity, Northstar Learning, Reading Eggs, and ESL ReadingSmart.

Study Island helps students in K-12 master grade level academic standards in a fun and engaging manner. We entered the postsecondary educational market with the launch of Northstar Learning in April 2009, which uses the same web-based platform as our Study Island products to provide various instruction, assessment and exam preparation content.

In November 2009, we sold our TeacherWeb business to Edline Holdings, Inc. (“Edline”), a private educational technology company offering products and services similar to TeacherWeb. We had previously made an investment in Edline in August 2009. See Notes 6 and 7 in our consolidated financial statements.

In June 2010, we entered the U.K. market with the acquisition of EducationCity, a leading developer and publisher of EducationCity.com, an online Pre-K-6 educational content and assessment program for schools in the United Kingdom and United States. Similar to Study Island, EducationCity maps to standards, combines rigorous content and interactive animations, fun games, and motivational rewards to drive academic success in a fun and engaging manner. Unlike Study Island, EducationCity core classroom and individualized instruction is geared toward the initial teaching phases of academic content. EducationCity helps students learn basic skills and concepts while Study Island helps assess, reinforce and master this knowledge. When used in conjunction with one another, EducationCity and Study Island provide a powerful comprehensive teaching and reinforcement solution to enhance student learning and teacher performance.

In August 2010 and November 2011, we began selling Reading Eggs and Reading Eggspress, respectively, online products focused on teaching young children to read. Reading Eggs and Reading Eggspress are sold under a distribution agreement with Blake Publishing, which requires us to pay a 35% royalty to Blake Publishing for every sale. Beginning in 2011, we are required to pay a minimum royality each year of the agreement. During 2011, we paid royalties based on actual sales which exceeded the agreed minimum royalties per the distribution agreement. Per the agreement, we receive credit against future minimum royalties when actual sales exceed minimum amounts.

In June 2011, through the acquisition of Alloy, publisher of ESL ReadingSmart and ReadingMate, we entered into the English language learners market. ESL ReadingSmart is an online, standards-based program for English language learners targeted toward grades 4 to 12. ESL ReadingSmart offers individualized, content-based instruction to develop English language proficiency with emphasis on literacy and academic language development for newcomers, beginners, intermediate, early advanced, and advanced English learners. For native English speakers, ReadingMate is a supplemental reading intervention program that prepares students to read at grade level and develop necessary reading skills.

Effective September 1, 2011, as a result of the financial and operational integration of Educationcity Inc. into Study Island, we now have two operating segments: the U.S. Market (including Study Island, EducationCity, Northstar Learning, Reading Eggs, and ESL ReadingSmart product lines) and the U.K. Market (Educationcity Limited). We aggregate the two operating segments into one reportable segment based on the similar nature of the products, content and technical production processes, types of customers, methods used to distribute the products, and similar rates of profitability. See Note 16 in our consolidated financial statements for further information on segments and geographic area disclosures.

Subscriptions to our Study Island and EducationCity products generate the vast majority of our revenue. Our products are sold as subscriptions through purchase orders or other evidence of an arrangement. The average subscription period for our products is 16 months, and we occasionally sell multi-year subscriptions. We rely significantly on our ability to secure renewals for subscriptions to our products as well as sales to new customers. We generally contact schools several months in advance of the expiration of their subscription, to attempt to secure renewal subscriptions. If a school does not renew its subscription within six months after its expiration, we categorize it as a lost school, and if a school subsequently purchases a subscription after this renewal period, we consider it to be a new subscription.

2011 and 2012 Events

During 2011, with the acquisition of Alloy Multimedia, we added two new products: ESL ReadingSmart and ReadingMate, providing a way for teachers to individualize instruction for both non-native and native English speakers in reading and English language arts for students in grades 4-12.

In late August, in conjunction with the start of the 2011-2012 school year, we released Version 5 of our Study Island platform. Features included in the roll-out were: seamless interfacing on mobile devices, new games, interactive flash animations, and enhanced lessons.

On November 1, 2011, we launched Reading Eggspress, the latest reading and comprehension program from Blake Publishing for grades 2 to 6.

On March 3, 2012, we entered into a Merger Agreement with Plato. Upon the terms and subject to the conditions set forth in the Merger Agreement, we will become a wholly owned subsidiary of Plato and, upon the Merger becoming effective, each share of Archipelago common stock issued and outstanding immediately prior to the effective time of the Merger will be converted into the right to receive $11.10 in cash, without interest.

Key Legislative Developments that May Impact Our Business and Operations

In the United States, the increased focus on higher academic standards and assessments as a means to measure educator accountability is largely reflected in legislative efforts such as No Child Left Behind, or NCLB, the common name for the 2001 reauthorization of the Elementary and Secondary Education Act, or ESEA. ESEA required all states to have academic standards in place for K-12 students in reading, math and science, and to assess student achievement annually with end of school year assessments.

The original NCLB legislation required all U.S. students to be performing at grade proficiency levels in reading, language arts and mathematics by the 2013-2014 school year in order to achieve adequate yearly progress (“AYP”). However, the U.S. Department of Education has estimated that about 80% of U.S. schools would miss this AYP milestone for the current 2011-2012 school year, which would result in punitive consequences to those schools. The ESEA legislation was initially scheduled for reauthorization in October 2008, but has been continually delayed. While many politicians believe that the nation’s primary education law needs to be revised, reauthorization legislation has been delayed with NCLB extended via a series of Congressional continual resolutions. Democratic and Republican differences on the Federal role in public education and the best strategies for meaningful educational reforms, coupled with other higher priority legislative objectives, has led to

gridlock. While uncertainty continues to surround the substance and timing of ESEA reauthorization, we believe that higher standards, more rigorous assessments and accountability will remain key components of the revised legislation, whenever it occurs, with an increased focus on demonstrating student academic achievement growth, improving high school graduation rates and ensuring college and career readiness. Moreover, we expect that use of technology to innovate and scale best teaching and learning practices will be a key component of the final reauthorization legislation. In the meantime, the requirements for seeking NCLB waivers continue the focus on high standards, assessment and accountability as summarized below.

With no Congressional action pending to address ESEA reauthorization and the AYP issue, in 2011 the U.S. Secretary of Education, Arne Duncan, announced plans to grant waivers for parts of the NCLB law which would take effect in the 2011-2012 school year. The waivers provide a framework for relief of some of the more onerous restrictions of NCLB, including AYP milestones. To be granted waivers, states must perform the following tasks: (1) set performance targets based on whether students graduate from high school ready for college and career rather than having to meet NCLB’s 2014 deadline based on arbitrary targets for proficiency; (2) design locally tailored interventions to help students achieve instead of one-size-fits-all remedies prescribed at the federal level; (3) be free to emphasize student growth and progress using multiple measures rather than just test scores; and (4) have more flexibility in how they spend federal funds to benefit students. During 2011, 11 states applied for these waivers and 10 of those states were granted waivers. An additional 26 states and the District of Columbia submitted applications for waivers by the February 2012 deadline.

The U.S. Department of Education implemented its highly publicized RttT competition in 2010 whereby winning states were awarded funds totaling $3.4 billion in aggregate for agreeing to implement bold educational reforms. States receiving these RttT funds are expected to implement educational reforms over the next several years. Eleven states and the District of Columbia were awarded $3.9 billion and received the monies between August 2010 and January 2011. In March 2011, an additional $500 million in funds were made available through another state competition focused on early education (Pre-K and Kindergarten), the RttT-Early Learning Challenge, with nine state winners receiving grants ranging from $50 million to $100 million. These investments will impact all early learning programs, including Head Start, public pre-K, childcare, and private preschools. Key reforms will include: aligning and raising standards for existing early learning and development programs; improving training and support for the early learning workforce through evidence-based practices; and building robust evaluation systems that promote effective practices and programs to help parents make informed decisions. Also in December 2011, the U.S. Department of Education announced that seven states will each receive a share of the $200 million in RttT Round 3 funds to advance targeted K-12 reforms aimed at improving student achievement. RTT3 focuses on supporting efforts to leverage comprehensive statewide reform, while also improving science, technology, engineering and mathematics education. The seven winning applications include commitments to enhance data systems, raise academic standards, improve principal and teacher support and evaluation systems and implement school interventions in underperforming schools.

A requirement for RttT applicants is to signal their intent to officially adopt the Common Core Standards for K-12 in reading and mathematics. As of December 31, 2011, 45 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands had officially adopted the new standards, although adoption of the standards does not bring immediate change in the classroom. We believe that implementation of the Common Core Standards will be a long-term process, as states rethink their teacher training, curriculum, instructional materials and testing. We continue to believe that Common Core Standards implementation will evolve in different ways across the adopting states and will raise the overall rigor of curriculum and assessments, but we increasingly believe that the federal government will not mandate national standards and assessments. Furthermore, there is now a growing movement in some states to oppose the Common Core Standards in order to prevent unwanted federal control over education. A study recently published by Poineer Institute, the American Principles Project, and the Pacific Research Institute of California estimated that it will cost nearly $16 billion for 45 states plus the District of Columbia to implement the Common Core Standards over a seven year period.

Our products are specifically built from the varying academic and assessment standards in all 50 states, which we believe differentiates them from the products offered by our competitors. However, given the

uncertainty regarding the implementation of Common Core Standards, we have invested both in development of new Common Core products for the 45 adopting states and the District of Columbia as well as continued development of new products and enhancements for existing state standards.

The Federal budget makes up about 9% of K-12 school budgets and is an important source of funding for purchase of our programs, particularly in large, urban districts. In December 2011, Congress passed an omnibus spending bill for fiscal year 2012. Overall, the Department of Education was funded at $71.3 billion, which is slightly less than last year and $9.3 billion below the President’s request. We believe that passage of this budget will be a positive for K-12 education spending, as many districts and schools were fearful throughout the fall of 2011 that the Congressional “Super Committee” might not reach a budget agreement, which would trigger draconian automatic cuts in federal funding to K-12 education. This uncertainty had caused districts to be cautious in spending throughout the fall of 2011. However, the uncertainty is gone and the overall federal budget is more favorable than expected.

In February 2012, President Obama presented his proposed FY 2013 federal budget to Congress, which would take effect October 1, 2012. Under this proposal, the Department of Education would receive nearly $70 billion. The proposal may encounter strong opposition from Congress, but we believe this initial proposal is encouraging.

In addition, most of our U.S. customers are public schools and school districts that are dependent on the availability of public funds, with about 46% of total education expenditures coming from state funds and 45% coming from local funds, which have become more limited as many states or districts face budget cuts due to decreases in their tax bases and rates. State and federal educational funding is primarily funded through income taxes, and local educational funding is primarily funded through property taxes. As a result of the ongoing recession, income tax revenue for the 2008 and 2009 tax years has decreased, which has put pressure on state and federal budgets. However, according to the Nelson A. Rockefeller Institute of Government, state tax revenues grew by 6% in the third quarter of 2011, representing the seventh consecutive quarter that states reported growth in collections on a year-over-year basis. Overall, state tax revenues are now above pre-recession levels, but still below peak levels. In the third quarter of 2011, total state revenues were 2% higher than during the same quarter of 2007, but still 1% lower than the third quarter of 2008. Preliminary figures for October and November 2011 indicate further but softening growth in state tax revenues. Local property tax revenues grew modestly in the third quarter, after three consecutive quarters of decline.

In addition, the Center on Education Policy reported in February 2012 that according to a recent survey, “state budget cuts for elementary and secondary education appear to have bottomed out in many states.” Several of the key findings were as follows: (1) Fewer states anticipated decreases in state funding for K-12 education for fiscal 2012 than had decreases in fiscal 2011 (eight states projected decreases versus 17 prior year); (2) Only three states anticipated cuts more than 5% for fiscal 2012 versus 11 prior year; and (3) 20 states anticipated funding increases for K-12 education in fiscal 2012 versus just 14 prior year, with the increases averaging 3%.

While the federal legislative efforts and budgetary challenges in schools could present challenges to our future sales, we believe that we are positioned to perform well in the current environment for various reasons: (1) we are well aligned with educational reform policies and initiatives, including the Common Core Standards, (2) we make innovation easy as schools shift from print-based solutions to online digital content, instruction, assessment and data reporting, (3) we have a proven model and track record for engaging and improving learning outcomes, (4) we are affordable compared to other educational product offerings and (5) we still have relatively low overall school penetration with room for growth.

The U.K. market and industry trends are also of importance to our business due to our EducationCity product. While the global economic recession has impacted the United Kingdom, the government under British Prime Minister, David Cameron, has attempted to protect education, with the Department for Education budget rising from £35.4 billion to £39 billion over the next four years. This is the money that goes directly to schools. In addition, we believe that teachers will be given greater freedom from bureaucratic burdens to use their

professional judgment to meet the needs of their pupils. As a result, we believe that head teachers will have increased flexibility over their budgets, including through simpler, fairer and more transparent funding streams. That said, a new research report by the respected think tank Institute for Fiscal Studies (“IFS”), suggests that U.K. public spending on all forms of education could face a 13% cut in real terms over the next four years between 2011 and 2015. While higher education institutions would be the hardest hit, those primary and secondary schools with students from affluent backgrounds would see drastic funding cuts although schools with more deprived students would have their funding protected due to the introduction of the pupil premium. However, many schools would still see an annual 1% spending cut.

Results of Operations

Comparison of 2011 and 2010

The table below summarizes our consolidated operating results for the years ended December 31 (dollars in thousands):


							Change
	2011			2010			Dollars			Percentage
Revenue	$	73,265		$	58,650		$	14,615			24.9	%
Cost of revenue		6,552			5,040			1,512			30.0	%

Gross profit		66,713			53,610			13,103			24.4	%
Operating expense:
Sales and marketing		22,786			20,447			2,339			11.4	%
Content development		6,562			4,686			1,876			40.0	%
General and administrative		23,586			19,540			4,046			20.7	%

Total		52,934			44,673			8,261			18.5	%

Income from operations		13,779			8,937			4,842			54.2	%
Other income (expense):
Interest expense		(4,430	)		(4,061	)		(369	)		(9.1	)%
Interest income		256			572			(316	)		(55.2	)%
Foreign currency loss		(18	)		(161	)		143			88.8	%
Derivative loss		—			(49	)		49			100.0	%
Gain on sale of investment		6,359			—			6,359			100.0	%

Total		2,167			(3,699	)		5,866			NM

Net income before tax		15,946			5,238			10,708			NM
Provision for income tax		4,001			1,786			2,215			NM

Net income	$	11,945		$	3,452		$	8,493			NM

Revenue.

We generate revenue from customer subscriptions to standards-based instruction, practice, assessments and productivity tools; training fees for onsite or online training sessions that are primarily provided to new customers; and individual buys, which are individual purchases for access to a product (one subject in a specific state for a specific grade level). Customer subscriptions provide the vast majority of our revenue.

Our subscription purchases are generally evidenced by a purchase order or other evidence of an arrangement. We recognize an invoiced sale in the period in which the purchase order or other evidence of an arrangement is received and the invoice is issued, which may be at a different time than the commencement of the subscription. Revenue for invoiced sales is deferred and recognized ratably over the subscription term beginning on the commencement date of the applicable subscription. The average subscription period for our products is approximately 16 months, and we occasionally sell multi-year subscriptions.

Factors affecting our revenue include: (i) the number of schools, classes or students purchasing our products; (ii) the term of the subscriptions; (iii) subscription renewals; (iv) the number of states or geographies in which we offer products; (v) the number of products we offer in a state or in a geographic region; (vi) the complexity and comprehensiveness of applicable standards, which impacts pricing; (vii) the effectiveness of our regional field-based and inside sales teams; (viii) recognition of revenue in any period from deferred revenue from subscriptions purchased or renewed during the current and prior periods; (ix) federal, state and local educational funding levels; and (x) discretionary purchasing funds available to our customers.

Pricing for subscriptions is based on a variety of factors. Study Island, ReadingEggs, ESL ReadingSmart, and Northstar subscriptions are priced on a fixed price per class or a variable price per school based on the number of students per grade using the products. In addition, subscriptions are priced on a per subject matter basis with discounts given if all of the subjects for a given grade are purchased. Subscription prices also vary by state based on the number, complexity and comprehensiveness of the applicable standards. For EducationCity, schools and/or districts (local authorities) pay a fixed annual subscription fee for each subject.

Revenue for the year ended December 31, 2011 was $73.3 million, representing an increase of $14.6 million, or 24.9%, as compared to revenue of $58.7 million for the year ended December 31, 2010. Of this increase, $7.4 million was due to the inclusion of a full year of revenue from EducationCity as compared to seven months in 2010. In addition, $1.9 million of the increase was due to increased sales of Reading Eggs, which was introduced as a product in August 2010. The remaining increase in revenue during the period was due to Study Island’s product offerings in our more mature states leading to additional sales to existing customers, our increased focus on existing customers and renewal efforts, and our expanded sales force.

The following table sets forth information regarding our invoiced sales as well as other metrics that impact our revenue for the years ended December 31 (dollars in thousands):


	2011			2010
Invoiced sales:
New customers	$	15,815		$	18,207
Existing customers		61,427			51,642
Other sales		1,722			1,536

Total		78,964			71,385
Royalties on invoiced sales		(706	)		(153	)
Change in deferred revenue (1)		(4,993	)		(12,582	)

Revenue	$	73,265		$	58,650

(1)	Changes in deferred revenue in 2011 and 2010 exclude the amount of deferred revenue assumed with the acquisition of EducationCity and Alloy and includes foreign exchange fluctuation impacts


Other metrics:
U.S. schools using our products	30,000	28,500
U.K. schools using our products	9,100	9,000
U.S. products available	2,291	2,269
U.K. products available	87	66

We present invoiced sales data to provide a supplemental measure of our operating performance. We believe the various invoiced sales metrics enable investors to evaluate our sales performance in isolation and on a consistent basis without the effects of revenue deferral and revenue recognition from sales in prior periods. In addition, invoiced sales to new customers and existing customers and invoiced other sales provide investors with important information regarding the source of orders for our products and services and our sales performance in a particular period. Invoiced sales are not recognized under accounting principles generally accepted in the United States, or GAAP, and should not be used an as indicator of, or an alternative to, revenue and deferred revenue. Invoiced sales metrics have significant limitations as analytical tools because they do not take into account the requirement to provide the applicable product or service over the subscription period and they do not match the recognition of revenue with the associated cost of revenue. Reconciliation is provided in the table above between invoiced sales and revenue, the closest GAAP measure to invoiced sales.

Due to purchase accounting for the acquisition of EducationCity and Alloy, we do not recognize the full amounts paid by customers for acquired subscriptions prior to the acquisition. Consequently for EducationCity, the deferred revenue balance at the date of acquisition was reduced from $15.6 million to $9.9 million. The purchase accounting adjustment reduced our revenues by $2.2 million and $2.1 million for the years ended December 31, 2011 and 2010, respectively. For Alloy, the deferred revenue balance at the date of acquisition was not materially reduced, and therefore, the purchase accounting adjustment did not materially impact revenue for the year ended December 31, 2011.

As of December 31, 2011, more than 30,000 schools used our U.S. products and nearly 9,100 schools used our U.K. products. A school is considered to be using our products if it has an active subscription for any or all of the products available to it. The number of schools using our products will increase for sales to new schools and will decrease if schools do not renew their subscriptions. We generally contact schools several months in advance of the expiration of their subscription to attempt to secure renewal subscriptions. If a school does not renew its subscription within six months after its expiration, we categorize it as a lost school. If the school subsequently purchases a subscription to our products after this renewal period, we consider it to be a new subscription.

For the twelve months ended March 31, 2011, we had a renewal rate of 75%, which reflects the percentage of schools that subscribed for our products throughout those twelve months who were up for renewal and then subscribed for our products again in the next period, within six months of their subscription end date. The renewal rate for the twelve months ended March 31, 2011 has decreased compared to the prior year renewal rate of 77%, which was driven primarily by lower renewals for EducationCity U.S. in a period when we announced and closed the EducationCity U.S. sales office.

Cost of Revenue.

Cost of revenue consists of the costs to host and make available our products and services to our customers. A significant portion of the cost of revenue includes salaries and related expense for our engineering employees and contractors who maintain our servers and technical equipment and who work on our web-based hosted platform. Other costs include facility costs for our web platform servers and routers, network monitoring costs, depreciation of network assets and amortization of the technical development intangible assets.

Cost of revenue for the year ended December 31, 2011 increased by $1.5 million, or 30.0%, to $6.6 million from $5.0 million for the year ended December 31, 2010. Of this increase, $0.7 million was due to the inclusion of a full year of costs of EducationCity, which primarily related to additional salaries and benefits costs. The remainder of the increase in cost of revenue was attributable to increased engineering salaries and related costs of $0.8 million, resulting from increased headcount and annual salary increases, along with $0.2 million in increased costs for our disaster recover site along with additional servers, $0.2 million of increased depreciation expense, and $0.1 million in increased recruiting fees related to the increased headcount and the hiring of the new Chief Technology Officer. These increases were offset by increases in internal salaries and related costs that were capitalized during 2011 relating to the development of the new Study Island technology platform, totaling $0.6 million.

Sales and Marketing Expense.

Our sales and marketing expense consists primarily of salaries, commissions and related expense for personnel in our inside and field sales teams, marketing, customer service, training and account management. Commissions are earned when sales are invoiced to customers. Other costs include marketing costs, travel and amortization of customer relationship intangible assets. Marketing expense consists of direct mail, email prospecting, “pay per click” advertising, search engine optimization, printed material, marketing research, and trade shows. Marketing expense generally increases as our sales efforts increase, both in new and existing markets. Our marketing efforts are related to the launch of new product offerings, the introduction of our products and services in new states and geographic regions, and opportunities within a selected market associated with specific events such as timing for the standardized testing in a particular state and upcoming trade shows.

Sales and marketing expense for the year ended December 31, 2011 increased by $2.3 million, or 11.4%, to $22.8 million from $20.4 million for the year ended December 31, 2010. Of this increase, $2.2 million was due to the inclusion of a full year of costs of EducationCity, including $1.0 million in additional salaries and benefits costs, $0.7 million in amortization expense on intangible assets, and $0.4 million in contract labor costs related to the EducationCity U.S. sales force. The remainder of the increase was attributable to increases in Study Island salaries and related costs of $0.5 million resulting from increased headcount, annual salary increases and bonus payments, which was offset by $0.5 million overall reductions in marketing costs as a result of the shift in our marketing strategy from direct mailing to more cost effective electronic marketing campaigns.

Content Development Expense.

Our content development expense primarily consists of salaries and related expense for our content development employees, who are responsible for writing the questions for our products, outsourced content writing costs, and amortization of our program content intangible assets.

Content development expense for the year ended December 31, 2011 increased by $1.9 million, or 40.0%, to $6.6 million from $4.7 million for the year ended December 31, 2010. Of this increase, $1.3 million was due to the inclusion of a full year of costs of EducationCity, including additional salaries and benefits costs of $0.6 million, contract labor costs for content writers of $0.5 million, and amortization expense on intangible assets of $0.1 million. The remainder of this increase was attributable to increases in salaries and related costs for Study Island of $0.4 million related to increased headcount and annual salary increases and a $0.1 million increase contract labor costs for content writing.

General and Administrative Expense.

Our general and administrative expense includes salaries and related expense for our executive, accounting, and other administrative employees, professional services, rent, insurance, travel and other corporate expense.

General and administrative expense for the year ended December 31, 2011 increased by $4.0 million, or 20.7%, to $23.6 million from $19.5 million for the year ended December 31, 2010. Of this increase, $2.1 million was due to the inclusion of a full year of costs of EducationCity, including $0.8 million in additional salaries and benefits costs, $0.4 million in office rent expense, $0.5 million in amortization expense on intangible assets, $0.1 million in telephone and internet charges, and $0.2 million in depreciation expense. The remainder of the increase was due to a $1.6 million increase in salary expense for Study Island due to increased headcount and annual salary increases, a $0.9 million increase in severance expense and accelerated stock-based compensation expense (see Note 14) as a result of the retirement of our former chief financial officer, $0.9 million in costs incurred in 2011 in conjunction with the closing of the EducationCity U.S. sales office in Naperville, Illinois (see Note 18), $0.1 million increased stock based compensation expense associated with additional 2011 grants of stock options and restricted stock, a $0.3 million increase in contract labor costs related to special project work, $0.4 million increased insurance expense due to the new directors and officers insurance that went into effect during the year ended December 31, 2011, and $0.2 million in increased computer software expenses. The increases were offset in part by a reduction in acquisition costs of $1.9 million related to the $3.4 million in transaction costs from the EducationCity acquisition in June 2010 compared to $0.5 million in transaction costs from the acquisition of Alloy in June 2011 and $0.9 million in legal and professional fees incurred related to exploring strategic alternatives during 2011, which resulted in the Merger Agreement with Plato entered into on March 3, 2012. In addition there was a decrease of $1.0 million in costs related to the move to our new headquarters in 2010.

Other Income (Expense).

Interest expense includes interest on our $70.0 million term loan and $10.0 million revolving credit facility entered into in November 2007, interest on our $15.0 million supplemental term loan and $10.0 million supplemental revolving credit facility entered into in June 2010, and amortization of debt financing costs. We had no amounts outstanding under the revolving credit facility as of December 31, 2011 and 2010. We borrowed $10.0 million under our revolving credit facility on June 9, 2010, in connection with our acquisition of EducationCity, and we subsequently repaid it during the quarter ended September 30, 2010. The amounts borrowed under our term loan bear interest at rates based upon LIBOR, plus an applicable margin. Interest expense increased $0.4 million during the period due to the additional $15.0 million supplemental term loan drawn down related to the acquisition of EducationCity in June 2010 and increases in the LIBOR rate during 2011.

Interest income includes income on our cash and cash equivalent investments and from our note receivable from Edline, which was collected in full in October 2011.

Derivative loss for the year ended December 31, 2010 includes changes in the fair value and realized interest income and expense on our interest rate swap, which was required by the terms of our credit facility and was part of our overall risk management strategy. We entered into the swap arrangement in December 2007 with an initial notional amount of $45.5 million. The notional amount of the interest rate swap decreased $30.5 million at the December 21, 2010 termination date. We swapped a floating rate payment based on the three-month

LIBOR for a fixed rate of 4.035% in order to minimize the variability in expected future cash flow due to interest rate movements on our LIBOR-based variable rate debt. We did not designate our interest rate swap as a cash flow hedge. We did not hold any derivative positions during the year ended December 31, 2011.

The foreign currency loss was primarily related to intercompany transactions between EducationCity in the United States and the United Kingdom and U.S. dollar cash accounts held at EducationCity U.K.

Other income (expense) totaled $2.2 million of net other income for the year ended December 31, 2011, which was an increase of $5.9 million, compared to net other expense of $3.7 million for the year ended December 31, 2010. This increase is related to the sale of our investment in Edline (Note 7) during October 2011 resulting in the recognition of a gain of $6.4 million. In this transaction, Archipelago Learning, LLC sold 656,882 shares of Series A Preferred Stock in Edline for a total of approximately $12.2 million. In addition, we received approximately $2.1 million for a notes receivable and a dividend of approximately $0.6 million in connection with the sale of Edline. The Edline sale represents our entire investment in Edline.

Provision for Income Tax.

Our provision for income tax is comprised of federal, foreign, state and local taxes based on our income in the appropriate jurisdictions. Upon our acquisition of EducationCity, we became a taxpayer in the United Kingdom for the taxable income of Educationcity Limited. We recognized tax expense using an effective rate from continuing operations of 25.1% and 34.1% for the years ended December 31, 2011 and 2010, respectively. The effective tax rate for the year ended December 31, 2011 decreased due to a tax benefit related to the decrease in the statutory tax rate in the United Kingdom, the impact of an international tax planning strategy reflected in 2011, and a substantially higher tax basis on the sale of Edline which resulted in a low effective tax rate on the Edline gain.

Comparison of 2010 and 2009

The table below summarizes our consolidated operating results for the years ended December 31 (dollars in thousands):


							Change
	2010			2009			Dollars			Percentage
Revenue	$	58,650		$	42,768		$	15,882			37.1	%
Cost of revenue		5,040			3,074			1,966			64.0	%

Gross profit		53,610			39,694			13,916			35.1	%
Operating expense:
Sales and marketing		20,447			14,048			6,399			45.6	%
Content development		4,686			3,773			913			24.2	%
General and administrative		19,540			9,243			10,297			111.4	%

Total		44,673			27,064			17,609			65.1	%

Income from continuing operations		8,937			12,630			(3,693	)		(29.2	%)
Other income (expense):
Interest expense		(4,061	)		(2,803	)		(1,258	)		(44.9	%)
Interest income		572			159			413			259.7	%
Foreign currency loss		(161	)		—			(161	)		(100.0	%)
Derivative loss		(49	)		(518	)		469			90.5	%

Total		(3,699	)		(3,162	)		(537	)		(17.0	%)

Income from continuing operations before tax		5,238			9,468			(4,230	)		(44.7	%)
Provision for income tax		1,786			3,094			(1,308	)		(42.3	%)

Net income from continuing operations		3,452			6,374			(2,922	)		(45.8	%)

Income from discontinued operation before tax		—			261			(261	)		(100.0	%)
Benefit from income tax on discontinued operation		—			(101	)		101			100.0	%

Net income from discontinued operation		—			362			(362	)		(100.0	%)

Net income	$	3,452		$	6,736		$	(3,284	)		(48.8	%)

Revenue.

Revenue for the year ended December 31, 2010 was $58.7 million, representing an increase of $15.9 million, or 37.1%, as compared to revenue of $42.8 million for the year ended December 31, 2009. Of this increase, $5.1 million was due to the acquisition of EducationCity. In addition, subscription and training revenue is recognized over the term of the subscription, which averaged 15 months. Consequently, our revenue in any period is impacted by invoiced sales from subscriptions purchased or renewed during the current and prior periods.

We increased our standard pricing for Study Island products in January 2010. We do not believe, however, that this pricing increase is meaningful to changes in our revenue. Our pricing structure is complex, using a set of standard prices, but offering discretionary discounts of different amounts for a wide range of circumstances with our clients. Additionally, considering that we recognize revenue from customer subscriptions ratably over the subscription periods (which averaged 15 months), price increases have a delayed impact on revenue within a single period presented in our financial statements.

The following table sets forth information regarding our invoiced sales as well as other metrics that impact our revenue for the years ended December 31 (dollars in thousands):


	2010			2009
Invoiced sales:
New customers	$	18,207		$	15,567
Existing customers		51,642			37,219
Other sales		1,536			1,088

Total		71,385			53,874
Royalties on invoiced sales		(153	)		—
Change in deferred revenue (1)		(12,582	)		(11,106	)

Revenue	$	58,650		$	42,768

(1)	Change in deferred revenue in 2010 excludes the amount of deferred revenue assumed with the acquisition of EducationCity and includes foreign exchange fluctuation impacts


Other metrics:
U.S. schools using our products	28,500	21,705
U.K. schools using our products	9,000	—
U.S. products available	2,269	1,249
U.K. products available	66	—

As a part of the acquisition of EducationCity, we acquired deferred revenue, representing $15.6 million in amounts paid by customers for subscriptions acquired prior to the acquisition. As a part of purchase accounting for the acquisition of EducationCity, we recorded a $5.7 million adjustment to reduce this deferred revenue to the fair value of $9.9 million. The impact of this purchase accounting adjustment reduced our revenues by $2.1 million for the year ended December 31, 2010.

As of December 31, 2010, approximately 28,500 schools used our U.S. products and approximately 9,000 schools used our U.K. products. For the twelve months ended June 30, 2010, we had a renewal rate of 77%, which reflects the percentage of schools that subscribed for our products throughout those twelve months and then subscribed for our products again in the next period, within six months of their subscription end date.

Cost of Revenue.

Cost of revenue for the year ended December 31, 2010 increased by $2.0 million, or 64.0%, to $5.0 million from $3.1 million for the year ended December 31, 2009. Of this increase, $0.9 million was due to the acquisition

of EducationCity. The remainder of the increase in cost of revenue was primarily attributable to increased engineering salaries and related costs of $0.7 million, resulting from increased headcount and annual salary increases, along with $0.4 million in increased costs for our disaster recover site along with additional servers.

Sales and Marketing Expense.

Sales and marketing expense for the year ended December 31, 2010 increased by $6.4 million, or 45.6%, to $20.4 million from $14.0 million for the year ended December 31, 2009. Of this increase, $4.1 million was due to the acquisition of EducationCity. The remainder of the increase was primarily attributable to increases in salaries and related costs of $1.7 million resulting from increased headcount, annual salary increases and bonus payments.

Content Development Expense.

Content development expense for the year ended December 31, 2010 increased by $0.9 million, or 24.2%, to $4.7 million from $3.8 million for the year ended December 31, 2009. Of this increase, $0.5 million was due to the acquisition of EducationCity. The remainder of this increase was primarily attributable to increases in salaries and related costs of $0.4 million related to increased headcount for the development of our enhanced Study Island Version 4 and the launch of additional products in Canada. In addition, the increase was driven by annual salary increases and bonus payments and increased outsourced content writing costs, primarily related to development of our new SAT and ACT products and to Northstar Learning.

General and Administrative Expense.

General and administrative expense for the year ended December 31, 2010 increased by $10.3 million, or 111.4%, to $19.5 million from $9.2 million for the year ended December 31, 2009. Of this increase, $2.4 million of this increase was due to EducationCity’s general and administrative costs subsequent to our acquisition. The remainder of this increase was primarily attributable to $3.4 million in transaction costs related to the acquisition of EducationCity, $1.0 million expenses related to the move of our corporate headquarters, $0.6 million increases in salaries and related costs, primarily due to increased stock-based compensation expense from equity awards granted at our initial public offering and during 2010, and a $2.0 million increase in audit, accounting and legal fees related to the requirements of being a public company.

Other Income (Expense).

Our other income (expense) includes interest expense, interest income and derivative and foreign currency losses.

Interest expense includes interest on our $70.0 million term loan and $10.0 million revolving credit facility entered into in November 2007, interest on our $15.0 million supplemental term loan and $10.0 million supplemental revolving credit facility entered into in June 2010, and amortization of debt financing costs. We had no amounts outstanding under the revolving credit facility as of December 31, 2010 and 2009. We borrowed $10.0 million under our revolving credit facility on June 9, 2010, in connection with our acquisition of EducationCity, and we subsequently repaid it during the quarter ended September 30, 2010. The amounts borrowed under our term loan bear interest at rates based upon either a base rate or LIBOR, plus an applicable margin.

Interest income includes income on our cash and cash equivalent investments and from our note receivable from Edline.

Derivative loss includes changes in the fair value and realized interest income and expense on our interest rate swap, which is required by the terms of our credit facility and is part of our overall risk management strategy. We entered into the swap arrangement in December 2007 with an initial notional amount of $45.5 million. In June 2009, the notional amount of the interest rate swap decreased to $40.5 million and continued to decrease in periodic amounts to a notional amount of $30.5 million at the December 21, 2010 termination date. We swapped a floating rate payment based on the three-month LIBOR for a fixed rate of 4.035% in order to minimize the variability in expected future cash flow due to interest rate movements on our LIBOR-based variable rate debt. We did not designate our interest rate swap as a cash flow hedge.

The foreign currency loss was primarily related to intercompany transactions between EducationCity in the United States and the United Kingdom.

Other income (expense) totaled $3.7 million of net expense for the year ended December 31, 2010, which was an increase of expense of $0.5 million, or 17.0%, compared to net expense of $3.2 million for the year ended December 31, 2009. Interest expense increased $1.3 million during the period due to the additional $15.0 million supplemental term loan and additional $10.0 million drawn on our revolving credit facility in June 2010 related to the acquisition of EducationCity. This increase was offset by a $0.4 million increase in interest income from our note receivable from Edline and a $0.5 million decrease in derivative loss from the settlement of our interest rate swap on December 21, 2010.

Provision for Income Tax.

Our provision for income tax is comprised of federal, foreign, state and local taxes based on our income in the appropriate jurisdictions. Prior to the Corporate Reorganization transaction where stockholders of Archipelago Learning Holdings, LLC exchanged their shares for stock in Archipelago Learning, Inc., we were treated as a partnership and were not a taxpaying entity for federal income tax purposes. As a result, our income was taxed to our members in their individual federal income tax returns. Upon the Corporate Reorganization, we became taxed as a corporation. Upon our acquisition of EducationCity, we became a taxpayer in the United Kingdom for the taxable income of Educationcity Limited. We recognized tax expense using an effective rate from continuing operations of 34.1% and 32.7% for the years ended December 31, 2010 and 2009, respectively. The increase in effective tax rate is primarily due to increased permanent differences representing non-deductible costs related to the acquisition of EducationCity.

Liquidity and Capital Resources

Our primary cash requirements include the payment of our operating expenses, interest and principal payments on our debt, acquisition related costs and capital expenditures. We do not anticipate paying any dividends on our capital stock for the foreseeable future. We may also incur unexpected costs and operating expenses related to any unforeseen disruptions to our servers, the loss of key personnel or changes in the credit markets and interest rates, which could increase our immediate cash requirements or otherwise impact our liquidity.

We finance our operations primarily through cash flows from operations. Several factors outside of our control may impact our cash flows. For example, we believe that there is substantial uncertainty around the substance and timing of the ESEA reauthorization. The terms of its extension, reauthorization or new legislation that would replace it may materially impact the demand for our products. If new legislation lessens the importance of state-by-state testing and assessments, demand for our products may materially decrease, or if competitors can more easily enter our markets because of the establishment of national education standards, we may experience lower cash flows, both of which would affect our liquidity. In addition, if state and local budget cuts in education continue, our public school and school district customers may lack funding to buy our products which may result in fewer sales or require us to lower prices for our products, either of which would have a negative impact on our cash flows.

Our primary sources of liquidity are our cash and cash equivalent balances as well as availability under our revolving credit facility. At December 31, 2011, we had cash and cash equivalents of $64.6 million and $20.0 million of availability under our revolving credit facility. Our total indebtedness was $74.9 million at December 31, 2011, including our additional term loan of $15.0 million borrowed in connection with the acquisition of EducationCity and our amended credit agreement. We believe that our consistent cash flows and our $20.0 million availability under our revolving credit facility combined with our low capital expenditure costs will provide us with sufficient capital to continue to grow our business. There can be no assurance, however, that cash resources will be available to us in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. Our ability to meet our debt service obligations and other capital requirements, including capital expenditures and acquisitions, will depend upon our future results of operations and our ability to obtain additional debt or equity capital and our ability to stay in compliance with our financial covenants, which, in turn, will be subject to general economic, financial, business, competitive, legislative, regulatory and other conditions, many of which are beyond our control. We may also need to obtain additional funds to finance acquisitions, which may be in the form of additional debt or equity. Although we believe we have sufficient liquidity under our revolving credit facility, as discussed above, under extreme market conditions there can be no assurance that such funds would be available or sufficient, and in such a case, we may not be able to successfully obtain additional financing on favorable terms, or at all.

Cash Flows

Our net consolidated cash flows consist of the following, for the years ended December 31 (in thousands):


	2011			2010			2009
Provided by (used in):
Operating activities	$	25,765		$	24,303		$	21,627
Investing activities		9,793			(60,078	)		(3,125	)
Financing activities		(3,274	)		9,575			26,602

Cash Flows from Operating Activities

Net cash provided by operating activities was $25.8 million for the year ended December 31, 2011, compared to $24.3 million during the year ended December 31, 2010. This $1.5 million increase was primarily due to increased cash generated from our invoiced sales which was partially offset by increased operating costs, as discussed in the income statement analysis above.

Net cash provided by operating activities was $24.3 million for the year ended December 31, 2010, compared to $21.6 million during the year ended December 31, 2009. This $2.7 million increase was primarily due to increased cash generated from our invoiced sales which was partially offset by payments for transaction costs related to the acquisition of EducationCity of $3.4 million.

Cash Flows from Investing Activities

Net cash provided by investing activities of $9.8 million for the year ended December 31, 2011 included $12.8 million in proceeds from the sale of our investment in Edline, $2.1 million received for the paydown of the note receivable from Edline, and $0.7 million for the receipt of the remaining proceeds from escrow for the sale of TeacherWeb, offset by $2.0 million for the purchase of Alloy, $3.3 million for the purchase of property and equipment, and $0.5 million for the purchase of a perpetual license for science content.

Net cash used for investing activities for the year ended December 31, 2010 included $61.5 million for the purchase of EducationCity and $2.3 million for the purchase of property and equipment, partially offset by $3.0 million for a re-payment on the note receivable from Edline and $0.7 million for the receipt of part of the escrow from our sale of TeacherWeb.

Net cash used for investing activities for the year ended December 31, 2009 was $3.1 million, including $1.9 million used for the purchase of property and equipment and an investment in and note issued to Edline, for an aggregate of $4.9 million, partially offset by proceeds from the sale of TeacherWeb, our discontinued operation, to Edline.

Cash Flows from Financing Activities

Net cash used in financing activities for the year ended December 31, 2011 was $3.3 million, primarily related to the final payment on a note related to the acquisition of EducationCity for $2.5 million and $0.9 million in principal payments on our term loan.

Net cash provided by financing activities in the year ended December 31, 2010 was $9.6 million, including $15.0 million of additional term loan and $10.0 million drawn on our revolver, less $0.8 million paid in additional financing costs, to finance the acquisition of EducationCity, $2.5 million toward a note payable to a related party, $1.5 million for the payment of offering costs accrued at December 31, 2009 and $0.8 million in principal payments on our term loan. The $10.0 million revolver was repaid during the quarter ended September 30, 2010.

Net cash provided by financing activities in the year ended December 31, 2009 was $26.6 million, including $45.4 million net cash received in our IPO, offset by $11.1 million of net distributions to our members and $7.7 million in principal payments on our term loan, including a payment of $6.5 million paid in connection with the sale of TeacherWeb.

Credit Facility

Our wholly-owned subsidiary, Archipelago Learning, LLC (formerly Study Island, LLC) (“the Borrower”) is the borrower under a credit facility with General Electric Capital Corporation, as agent, composed of a term loan, of which, $74.9 was outstanding as of December 31, 2011, and a $10.0 million revolving credit facility, of which no amounts were outstanding as of December 31, 2011. Our wholly owned subsidiary, AL Midco, LLC (“AL Midco”), is the guarantor under such credit facility. The term loan bears interest rates based upon either a base rate or LIBOR (with a floor of 1.25%) plus an applicable margin (3.75% as of December 31, 2011 and 2010, in each case for a LIBOR-based term loan) determined based on the Borrower’s leverage ratio. Amounts under the revolving credit facility can be borrowed and repaid, from time to time, at the Borrower’s option, subject to the pro forma compliance with certain financial covenants. If amounts are borrowed against the revolving credit facility in the future, those amounts would bear interest based upon either a base rate or LIBOR (with a floor of 1.25%) plus an applicable margin (3.75% as of December 31, 2011) determined based on the Borrower’s leverage ratio. The credit facility also provides for a letter of credit sublimit of $2.0 million.

The Credit Agreement is secured on a first-priority basis by security interests (subject to permitted liens) in substantially all tangible and intangible assets owned by the Borrower and AL Midco. In addition, any future domestic subsidiaries of the Borrower will be required (subject to certain exceptions) to guarantee the Credit Agreement and grant liens on substantially all of its assets to secure such guarantee.

The Credit Agreement requires the Borrower to maintain certain financial ratios, including a leverage ratio (based on the ratio of consolidated indebtedness, net of cash and cash equivalents subject to control agreements, to Consolidated EBITDA, defined in the Credit Agreement as consolidated net income adjusted by adding back interest expense, taxes, depreciation, amortization and certain other non-recurring or otherwise permitted fees and charges), an interest coverage ratio (based on the ratio of Consolidated EBITDA to consolidated interest expense, as defined in the Credit Agreement) and a fixed charge coverage ratio (based on the ratio of Consolidated EBITDA to consolidated fixed charges, as defined in the Credit Agreement). Based on the formulations set forth in the Credit Agreement, as of December 31, 2011, the Borrower was required to maintain

a maximum leverage ratio of 2.00 to 1.00, a minimum interest coverage ratio of 2.75 to 1.00 and a minimum fixed charge coverage ratio of 1.70 to 1.00. As of December 31, 2011, the Borrower’s leverage ratio was 1.04 to 1.00, its interest coverage ratio was 8.42 to 1.00 and its fixed charge coverage ratio was 3.07 to 1.00.

The Credit Agreement also contains certain affirmative and negative covenants applicable to AL Midco, the Borrower and the Borrower’s subsidiaries that, among other things, limit the incurrence of additional indebtedness, liens on property, sale and leaseback transactions, investments, loans and advances, merger or consolidation, asset sales, acquisitions, dividends, transactions with affiliates, prepayments of subordinated indebtedness, modifications of the Borrower’s organizational documents and restrictions on the Borrower’s subsidiaries. The Credit Agreement contains events of default that are customary for similar credit facilities, including a cross-default provision with respect to other indebtedness and an event of default that would be triggered by a change of control, as defined in the Credit Agreement, and which was not triggered by our initial public offering. As of December 31, 2011 the Borrower was in compliance with all covenants.

The Borrower has the right to optionally prepay its borrowings under the Credit Agreement, subject to the procedures set forth in the Credit Agreement. The Borrower may be required to make prepayments on its borrowings under the Credit Agreement if it receives proceeds as a result of certain asset sales, debt issuances or events of loss. In addition, a mandatory prepayment of the borrowings under the Credit Agreement is required each fiscal year in an amount equal to (i) 75% of excess cash flow (as defined by the Credit Agreement) if the leverage ratio as of the last day of the fiscal year is greater than 4.00 to 1.00, (ii) 50% of excess cash flow if the leverage ratio as of the last day of the fiscal year is less than or equal to 4.00 to 1.00 but greater than 3.25 to 1.00, or (iii) 25% of excess cash flow if the leverage ratio as of the last day of the fiscal year is less than or equal to 3.25 to 1.00. No mandatory prepayment is required if the leverage ratio is less than or equal to 2.50 to 1.00 on the last day of the fiscal year.

As of December 31, 2011, $74.9 million of borrowings were outstanding under the term loan and no amounts were outstanding under the revolving credit facility. As of December 31, 2010, $75.8 million of borrowings were outstanding under the term loan and no amounts were outstanding under the revolving credit facility. For the years ended December 31, 2011 and 2010, the weighted average interest rate under the term loan was 5.00% and 4.71%, respectively, before giving effect to the Borrower’s interest rate swap in 2010. The rate on the interest rate swap was the difference between the Borrower’s fixed rate of 4.035% and the floating rate of three-month LIBOR.

Pursuant to the Merger Agreement with Plato, this credit facility is expected to be terminated and outstanding borrowings thereunder to be repaid upon closing of the Merger.

Contractual Obligations

As of December 31, 2011, our contractual obligations and other commitments were as follows (in thousands):


	Payments due by period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long-term debt obligations⁽¹⁾	$	74,913	$	850	$	74,063	$	—	$	—
Operating lease obligations		8,668		1,085		2,199		1,861		3,523
Colocation contracts		1,152		516		636		—		—
Unconditional purchase obligations		783		777		6		—		—

Total contractual obligations	$	85,516	$	3,228	$	76,904	$	1,861	$	3,523

(1)	Interest payments based on variable interest rates on our long-term debt obligations are excluded from our contractual obligations.

Amounts included as other long-term liabilities on our consolidated balance sheet as of December 31, 2011 and 2010 of $0.4 million and $0.3 million, respectively, related to an uncertain tax position, including penalties and interest, are not included in the table above, as the timing of future payments of these amounts is uncertain.

We have a distribution agreement with Blake Publishing for Reading Eggs, which includes a minimum royalty payment requirement to keep the contract in effect, which is not included in the table above. The aggregate minimum requirement over the next ten years under the contract totals $13.4 million.

Additionally, in connection with the Alloy acquisition (Note 3), we are obligated to make contingent payments of up to $1.0 million based upon the achievement of certain sales objectives for products acquired from Alloy.

As a result of the Merger Agreement with Plato, our credit facility is expected to terminate and outstanding borrowings thereunder to be repaid upon the closing of the Merger.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Our discussion and analysis of our consolidated financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates including those related to long-lived intangible and tangible assets, goodwill and stock-based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. All intercompany balances and transactions have been eliminated in consolidation.

The accounting policies we believe to be most critical to understanding our results of operations and financial condition and that require complex and subjective management judgments are discussed below.

Revenue Recognition

We generate revenue from customer subscriptions to standards-based instruction, practice, assessments and productivity tools; training fees, for onsite or online training sessions that are primarily provided to new customers; and individual buys, which are individual purchases for access to our products. Customer subscriptions provide the vast majority of our revenue.

Revenue is recognized when all of the following conditions are satisfied: there is persuasive evidence of an arrangement, the customer has access to full use of the product, the collection of the fees is reasonably assured, and the amount of the fees to be paid by the customer is fixed or determinable. Our arrangements do not contain general rights of return.

Our subscription fees are typically billed prior to the commencement of the subscription term. We defer the total amount of the sale of subscriptions and support as unearned revenue when the customer is invoiced and recognize the revenue on a straight-line basis over the subscription period, beginning on the commencement date of each subscription. The average subscription term is 16 months for our products. We occasionally sell multi-year subscriptions. Additionally, promotional incentives, such as complimentary months of service, are offered periodically to new customers, resulting in a subscription term longer than one year. All of our subscriptions are sold on a non-cancelable basis. As a result, substantially all of the revenue that we recognize in any period

represents deferred revenue from subscriptions purchased or renewed during current and previous periods. From time to time, we may enhance or upgrade our products. Because we provide our products on a single web-based platform, all of our customers generally benefit from new features and functionality released during the subscription term at no additional cost.

Training sessions are offered to our customers in conjunction with the subscriptions to train the customers on implementing, using, and administering our programs. Training revenue is recognized ratably over the subscription term for the related subscription. In cases where the underlying subscription is greater than one year, the related training revenue is deferred and recognized over a 12 month period due to the fact that the vast majority of training is completed in the first year of the subscription. Customer support is provided to customers following the sale at no additional charge and at a minimal personnel cost per call.

In August 2010, we began selling Reading Eggs, an online product focusing on teaching young children to read. In November 2011, we launched Reading Eggspress, a reading and comprehension program for 2^nd through 6^th grades, which is also published by Blake Publishing. These products are both sold under a distribution agreement with Blake Publishing, which requires us to pay a 35% royalty to Blake Publishing for every sale. Revenue related to the sale by us of these products is recognized on a net basis (net of the related royalty owed to Blake Publishing), and the related revenue is recognized upfront at the time of the sale, rather than deferring over the related subscription period.

Business Combinations

We account for business combinations under the acquisition method of accounting. The total cost of an acquisition is allocated to the underlying net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the nature of identifiable intangible assets and the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions. The value assigned to a specific asset or liability, and the period over which an asset is depreciated or amortized can impact future earnings. Some of the more significant estimates made in business combinations relate to the values assigned to identifiable intangible assets, such as customer relationships, content and trade names, and the period over which these assets are amortized.

Goodwill, Intangible Assets and Long-Lived Assets

Goodwill represents the excess of the cost of an acquisition over the fair value of net assets acquired. Goodwill is assessed for impairment at the reporting unit level at least annually or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired.

The goodwill impairment test involves a two-step test. The first step of the impairment test requires the identification of reporting units and comparison of the fair value of each of these reporting units to the respective carrying value. If the carrying value of a reporting unit exceeds its fair value, goodwill is considered potentially impaired and we must complete the second step of the impairment test. The amount of impairment is determined by comparing the implied fair value of reporting unit goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. Specifically, we would allocate the fair value to all of the assets and liabilities of the reporting unit, including internally developed intangible assets with a zero carrying value, in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, we would recognize an impairment charge for the difference. We perform our impairment tests in the fourth quarter of each year.

As a result of the acquisition of EducationCity in June 2010, we had three operating segments, Study Island (including the Study Island, Northstar Learning, Reading Eggs, and ESL ReadingSmart product lines), Educationcity Limited (a United Kingdom company), and Educationcity Inc. (an Illinois company). Effective September 1, 2011, as a result of the financial and operational integration of Educationcity Inc. into

Study Island, we now have two operating segments and reporting units: the U.S. Market (including Study Island, EducationCity, Northstar Learning, Reading Eggs, and ESL ReadingSmart product lines) and the U.K. Market (Educationcity Limited). We aggregate the operating segments into one reportable segment based on the similar nature of the products, content and technical production processes, types of customers, methods used to distribute the products, and similar rates of profitability.

During 2011, we changed the date of our annual goodwill impairment test from December 31 to October 1. The change in goodwill impairment test date is preferable as it aligns the timing of the annual goodwill impairment test with the completion of our planning and budgeting process, which will allow us to utilize the updated business plans that result from the budget process in the discounted cash flow analyses that we use to estimate the fair value of our reporting units and do so on a more timely basis. The change in accounting principle does not delay, accelerate or avoid an impairment charge. We determined it was impracticable to objectively determine projected cash flows and related valuation estimates that would have been used as of each October 1 for periods prior to October 1, 2011 without the use of hindsight. As such, we have prospectively applied the change in annual goodwill impairment testing date from October 1, 2011.

At October 1, 2011, the fair value of goodwill in the both the U.S. Market and U.K. Market reporting units substantially exceeded the carrying value. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we applied a hypothetical 10% decrease to the fair value of each reporting unit. Had the estimated fair value of the U.S. Market and U.K. Market reporting units been hypothetically lower by 10% as of October 1, 2011, the fair value of goodwill would have still significantly exceeded the carrying value.

The fair values of our reporting units performed for our testing in 2011, 2010 and 2009 relied on estimates including the following factors:

•

Data from actual open marketplace transactions. We may utilize data from transactions of businesses in the same or similar lines of business, if available, where those transactions may involve assets or equity, to assist management in evaluating goodwill impairment.

•

Data from comparable companies. The guideline public company method is an application of the market approach whereby market multiples are derived from market prices of stocks of companies that are engaged in the same or similar lines of business, and are actively traded in a free and open market. Our actual results could differ from those of the peer companies under this approach.

•

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. 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 2011, 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.

No impairment loss was identified during the impairment testing performed in 2011, 2010 or 2009. Based upon the results of our impairment testing and events that have occurred subsequently, we do not believe either of our reporting units to be at risk of failing step one of impairment testing for the foreseeable future.

Indefinite-lived intangible assets are tested for impairment at least annually at the same time as the goodwill impairment testing by comparing the fair value of the intangible asset to its book value. No impairment has been identified in our indefinite-lived intangible assets in 2011, 2010 or 2009.

Amortizable intangible assets and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. If impairment indicators exist, an assessment of undiscounted future cash flows to be generated by such assets is made. If the results of the analysis indicate impairment, the assets are adjusted to fair market value. Intangible assets with finite lives are amortized using the straight-line method over their estimated useful lives. No impairment loss has been identified in our intangible or long-lived assets in 2011, 2010 or 2009.

Stock-Based Compensation Expense

Prior to the Corporate Reorganization, Archipelago Learning Holdings, LLC issued Class B and Class C shares to employees as part of their compensation. Each Class B share vested 20% on each anniversary, subject to continued employment or service. The Class C shares were subject to performance hurdles, pursuant to which holders of Class C shares were entitled to distributions only after holders of Class A and Class A-2 shares receive certain multiples of cash-based returns on their respective Class A and Class A-2 shares, subject to such Class C stockholders’ continued employment or service.

At the Corporate Reorganization, the Class B and Class C shares were exchanged for shares of common stock and restricted common stock in Archipelago Learning, Inc. The number of common shares was determined using a calculation of the liquidation value, as defined in the Archipelago Learning Holdings, LLC agreement, of the Class B and Class C shares on the date of the Corporate Reorganization and the initial public offering price of the common stock. Holders of Class B shares received common stock for their vested shares and restricted common stock for their unvested shares, with the same vesting schedule on the restricted stock as they had for their unvested shares. Class C shares held by our chief executive officer, our former chief financial officer, our former chief technology officer and former founders were exchanged for restricted common stock, which vests based on conditions, including the return of capital by Providence Equity Partners. The remaining Class C holders received common stock. The exchange resulted in no additional compensation expense, as the fair value of the common stock and restricted common stock received did not exceed the fair value of the Class B and Class C shares exchanged on the date of the Corporate Reorganization.

On November 17, 2009, our Board of Directors and stockholders approved the 2009 Omnibus Incentive Plan, which authorizes the Board to grant common stock, restricted common stock and options to purchase common stock to our employees, directors or consultants, as compensation for services to be rendered.

We recognize compensation expense based on the grant-date fair value of the awards. Compensation expense for grants of common stock is recognized at the time of grant. Compensation expense for restricted common stock and stock options is recognized over the vesting period of the award. Compensation expense for the Class B shares was recognized ratably over five years and compensation expense for the Class C shares was recognized at the time of issuance. Compensation expense for the restricted common stock exchanged for unvested Class B shares is recognized over the remaining vesting period.

The grant-date fair value of common and restricted common stock is determined using the closing price of the stock as listed on NASDAQ for the date of grant. The common and restricted common shares granted in 2011, 2010 and 2009 had a weighted average grant-date fair value of $10.11, $13.99 and $16.50 per share, respectively. The grant-date fair value of the stock options is determined using the Black-Scholes option-pricing

model, using assumptions determined by management to be appropriate. For the stock options granted during 2011, we used a term of 6.25 years, volatility of 47.6% to 47.9% and a risk free rate of 2.4%, resulting in a weighted average grant-date fair value of $4.97 per share. For the stock options granted during 2010, we used a term of 6.25 years, volatility of 49.3% and a risk free rate of 2.5% to 2.8%, resulting in a weighted average grant-date fair value of $8.00 per share. For the stock options granted during 2009, we used a term of 6.25 years, volatility of 49.3% and a risk free rate of 2.4%, resulting in a grant-date fair value of $8.30 per share.

The determination of the grant-date fair value of the Class B and Class C shares was complex due to the waterfall, the distribution thresholds and the growth of the business, and it required the application of judgment regarding Archipelago Learning Holdings, LLC’s future performance and the likelihood and timing of future liquidity events. Accordingly, we hired an independent valuation firm, to conduct valuation analyses, which were relied upon by management to assess the equity value of Archipelago Learning Holdings, LLC and the fair value of the Class B and Class C shares at the grant date. The independent valuation analyses were prepared as of October 2008 and December 2007 and were relied upon by management for the determination of the grant-date fair value of the January 2009, May 2008 and May 2007 grants. Accordingly, these analyses were used to support our determination of the fair value of the awards as of the grant date.

The valuation analyses were based on information provided by us and used two methods to determine an overall enterprise value for Archipelago Learning Holdings, LLC: (i) the use of multiples of Archipelago Learning Holdings, LLC’s earnings before interest, taxes, depreciation and amortization, or EBITDA, derived from prior Archipelago Learning Holdings, LLC transactions, principally the acquisition of the Company by Providence Equity and the TeacherWeb acquisition and (ii) the use of EBITDA multiples derived from transactions of companies within the same industry. The valuation analyses also looked at comparable companies, but it was determined that this company comparison method would not be relevant in determining the valuation because of Archipelago Learning Holdings, LLC’s smaller size, smaller market, faster growth and significantly greater profitability than comparable companies. The multiples described above (adjusted to reflect projected growth rates to projected EBITDA in future periods) were then applied to estimate projected overall enterprise values for Archipelago Learning Holdings, LLC at various dates in the future based on the probability that an initial public offering or strategic sale of Archipelago Learning Holdings, LLC would occur in the future. Using these enterprise values, the estimated distributions to the Class B and Class C shares at the time of such future liquidity events (taking into account the applicable distribution thresholds) were determined. The present value of the estimated distributions to the Class B shares and certain of the Class C shares were then calculated to determine the fair value of Class B and Class C shares on the grant date. This approach resulted in a grant-date fair value for the Class B shares of $0.26, $0.29 and $0.31 per share for the grants in 2009, 2008 and 2007, respectively, and a grant-date fair value for the Class C shares of $0.06, $0.07 and $0.05 per share for the grants in 2009, 2008 and 2007, respectively. The change in the fair values primarily reflected the increase in the applicable distribution thresholds.

During 2011, certain provisions for 650,488 shares of the restricted Class C shares were modified. As a result, the modified awards were treated as new awards, and the original awards were considered to be forfeited, resulting in the awards being remeasured at the fair value as of the modification dates. The incremental compensation expense, up to $6.0 million, as a result of the modification will be recognized at the time that it becomes probable that the performance conditions of the restricted stock will be satisfied. The achievement of the performance hurdles were not considered to be probable and could not be estimated as of December 31, 2011. Subsequently, as a result of the Merger Agreement with Plato, 489,937 of these performance-based restricted shares are now deemed probable of vesting, which will result in additional stock based compensation expense in the first quarter of 2012 of approximately $4.0 million.

On February 24, 2011, we granted an aggregate of 28,038 restricted stock units to Mr. Tim McEwen, our Chairman, President and Chief Executive Officer, as part his annual compensation for 2010. Subject to Mr. McEwen’s continued employment, 41 2/3%, or 11,682 shares, of the restricted stock units were settled in cash six months after the grant date on August 24, 2011 for $0.1 million in cash, and the remaining 16,356

restricted stock units will be settled in our common stock four years from the grant date on February 24, 2015. Pursuant to the terms of the restricted stock unit agreement, Mr. McEwen also received 28,038 dividend equivalent rights. Each dividend equivalent right relates to one restricted stock unit and entitles him to an amount equal to the per share dividend, if any, paid by us during the period between the grant date and vesting date of the related restricted stock unit. Each dividend equivalent right will vest and be payable in cash at the time that the related restricted stock unit is settled. The restricted stock units that were settled in cash were classified as a liability, and the related stock based compensation cost was recognized over the six month vesting period based on the change in the fair value of the underlying common stock over that period. Compensation expense for restricted stock units that will be settled in common stock is being recognized over the vesting period of the award.

In December 2011, in lieu of granting stock options to employees in the United Kingdom, our Board of Directors, approved a compensation arrangement, referred to as Shadow Options, which upon the occurrence of certain events, including a change in control, would result in the U.K. employees receiving cash payments based on the number of Shadow Options awarded to each employee times the incremental difference in the trading price on the date of vesting and the stock price as of the grant date.

As a result of the Merger Agreement with Plato, upon the closing of the Merger the following will occur:

•

each option (whether vested or unvested) to purchase a share of our common stock will be converted into the right to receive a payment in cash equal to the number of shares of our common stock subject to such option multiplied by the difference between the merger consideration of $11.10 per share (“Merger Consideration”) and the per share exercise price of such option;

•

each share of our common stock that constitutes restricted stock that is vested or that, upon consummation of the Merger, will automatically vest in accordance with its terms, shall be cancelled, terminated and converted into the right to receive a payment in cash equal to the Merger Consideration, together with any accrued cash dividends (if any);

•

each restricted stock unit (whether vested or unvested) and related dividend equivalent right will be cancelled, terminated and converted into the right to receive a payment in cash equal to the Merger Consideration, which cash shall be divided among certain of our named employees;

•

each Shadow Option outstanding immediately prior to the effective time that represents the right to receive a cash payment based on the value of our common stock upon the occurrence of certain events shall, as of the closing of the Merger, be cancelled, terminated and converted into the right to receive a cash amount equal to the excess, if any, of the Merger Consideration per share of our common stock over the date of grant price.

Each share of restricted stock that is unvested at the effective time of the Merger and is not automatically vested pursuant to its terms upon consummation of the Merger will be forfeited, without any consideration paid to the holder thereof. As a result of the vesting of the equity awards, noted above, any remaining unamortized compensation expense related to each respective equity award will be recognized at that time.

The following share-based award activity occurred during the years ended December 31:


	2011		2010		2009		2008			2007
Pre-Reorganization:
Class B Shares granted		—		—		673,287		456,336			5,720,692
Class C Shares granted		—		—		673,287		456,336			5,720,692
Class 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 issued ⁽¹⁾		12,141		1,249,168		1,768		—			—
Restricted Common stock issued		11,326		7,555		1,768		—			—
Stock options granted		559,976		149,999		552,594		—			—
Restricted stock units awarded		28,038		—		—		—			—

(1)

Issuance includes 1,242,408 shares issued in 2010 in connection with the acquisition of EducationCity in June 2010. Such shares were issued in a private placement transaction. See Note 3, Acquisition, in the Notes to the Consolidated Financial Statements included in this Annual Report, for additional information on this transaction. The remaining stock issuances were related to common shares issued as compensation to the board of directors.

The grant date fair value for the Class B and Class C shares granted in January 2009 reflected:

•

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.

It should also be noted that, applying the waterfall and distribution thresholds in the limited liability company agreement, at the January 2009 grant date, a liquidation event at the determined equity value on the date of grant would have resulted in no distributions to the Class B and Class C shares granted on such date.

We believe that the difference between the grant date fair value of the January 2009 grants and the initial public offering price is the result of the following factors:

•

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

Accounts receivable represents amounts billed to customers. We carry our accounts receivable at cost, less an allowance for doubtful accounts, which is based on management’s assessment of the collectability of accounts receivable. We extend unsecured credit to our customers in the ordinary course of business, but mitigate the associated credit risk by performing ongoing credit evaluations of our customers. The vast majority of our customers are public schools, which receive their funding from the local, state and federal government. We evaluate the adequacy of the allowance for doubtful accounts based on a specific customer review of the outstanding accounts receivable.

Recently Issued and Adopted Accounting Standards

Adopted

In September 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements. The new standard modifies the revenue recognition guidance for arrangements that involve the delivery of multiple elements to a customer at different times as part of a single revenue generating transaction. The new standard also expands the disclosure requirements for multiple deliverable revenue arrangements. The new standard was effective for fiscal years beginning on or after June 15, 2010, with earlier adoption permitted. We adopted this standard effective January 1, 2011, which did not have a material impact on our financial position, results of operations or cash flows.

In September 2009, the FASB also issued ASU No. 2009 – 14 - Software (Topic 985)—Certain Revenue Arrangements That Include Software Elements. This standard removes tangible products from the scope of software revenue recognition guidance and also provides guidance on determining whether software deliverables in an arrangement that includes a tangible product, such as embedded software, are within the scope of the software revenue guidance. The new standard was effective for fiscal years beginning on or after June 15, 2010, with earlier adoption permitted. We adopted this standard effective January 1, 2011, which did not have a material impact on our the financial position, results of operations or cash flows.

forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective for any business combination we complete on or after January 1, 2011. The revised disclosure requirements did not affect our financial position, results of operations or cash flows.

Issued

In May 2011, the FASB issued updated guidance to improve the comparability of fair value measurements and related disclosures between GAAP and International Financial Reporting Standards. This update amends the accounting rules for fair value measurements and disclosure. The amendments are of two types: (i) those that clarify FASB’s intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The update is effective for us on January 1, 2012. We do not expect this standard to have a significant impact on our consolidated financial statements.

In June 2011, the FASB issued updated guidance on the presentation of other comprehensive income in the financial statements. The standard eliminates the option of presenting other comprehensive income as part of the statement of changes in stockholders’ equity and instead requires the entity to present other comprehensive income as either a single, continuous statement of comprehensive income or as two separate but consecutive statements. This amendment will be effective for us for the first quarter 2012. We currently report other comprehensive income in the statement of stockholders’ equity and comprehensive income and will be required to update the presentation of comprehensive income to be in compliance with the new standard.

In September 2011, the FASB issued an update to its authoritative guidance regarding goodwill impairment testing that grants an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The updated guidance will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We do not expect this standard to have a significant impact on our consolidated financial statements.

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Due to the LIBOR-based floor of 1.25% and the short-term LIBOR-based rate at December 31, 2011 of 5%, a 1% increase or decrease in the short-term LIBOR rate would have no material impact on our interest rate on the term loan or our interest expense.

In addition, our interest income is sensitive to changes in the general level of U.S. interest rates. We had cash and cash equivalents of $64.6 million and $32.4 million as of December 31, 2011 and 2010, respectively. Our cash and cash equivalents are maintained primarily in short term, treasury-backed accounts.

Effects of Inflation

We believe that inflation has not had a material impact on our results of operations in the periods presented. We cannot assure you that future inflation will not affect our operating expense in future periods.

Foreign Currency Exchange Rate Risk

We are exposed to potential gains or losses from foreign currency fluctuations. Our primary exposure is to changes in exchange rate for the U.S. Dollar versus the British Pound Sterling. During the years ended December 31, 2011 and 2010, approximately 10% and 5%, respectively, of our revenue was in a currency other

than the U.S. Dollar. Based on annual 2011 foreign currency-based revenue of $7.1 million, a ten percent fluctuation in the foreign currency would result in an annual change in revenue of $0.7 million. A ten percent fluctuation in the foreign currency would not materially impact our foreign currency-based net income, which was only $0.4 million for the year ended December 31, 2011.

We are also exposed to foreign currency risk related to its assets and liabilities denominated in a currency other than the U.S. Dollar. Historically, we have not used derivative financial instruments to manage foreign currency exchange rate risk.

Item 8.

Financial Statements and Supplementary Data

Our Consolidated Financial Statements and Supplementary Data are included in Item 15 of this report.

The following table summarizes data derived from our unaudited Consolidated Statements of Income and Cash Flows for each of the three months ended on the dates indicated. The information for each of these quarters has been prepared on the same basis as our audited consolidated financial statements included in this report and, in the opinion of management, includes all adjustments necessary for the fair presentation of the results of operations for such periods. This data should be read in conjunction with the audited consolidated financial statements and the related notes included in Item 15 of this report. These quarterly operating results are not necessarily indicative of our operating results for any future period.


	March 31, 2011		June 30, 2011 (2)		September 30, 2011		December 31, 2011 (3)
Revenue	$	17,303	$	18,288	$	18,223	$	19,451
Gross profit		15,596		16,926		16,481		17,710
Income from continuing operations		2,515		4,010		3,365		3,889
Net income	$	989	$	1,799	$	1,992	$	7,165

Earnings per share:
Basic and diluted	$	0.04	$	0.07	$	0.08	$	0.27


	March 31, 2010		June 30, 2010⁽¹⁾			September 30, 2010		December 31, 2010
Revenue	$	12,549	$	13,597		$	15,449	$	17,055
Gross profit		11,636		12,568			13,915		15,491
Income from continuing operations		3,984		605			1,480		2,868
Net (loss) income	$	2,067	$	(145	)	$	152	$	1,378

Earnings (loss) per share:
Basic and diluted	$	0.08	$	(0.01	)	$	0.01	$	0.05

(1)	On June 9, 2010, we acquired EducationCity. Accordingly, EducationCity has been included in our results since the date of acquisition.

(2)	One June 24, 2011, we acquired Alloy, which has been included in our results since the date of acquisition.

(3)

On October 4, 2011, we sold our investment in Edline for a total of approximately $12.2 million and received a dividend of approximately $0.6 million in connection with the sale. In addition, we received approximately $2.1 million for a notes receivable from Edline. As a result of this transaction, we recorded a gain of $6.4 million before tax.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.

Controls and Procedures

Disclosure Controls and Procedures

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Annual Report on Form 10-K, we have evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on their evaluation of these disclosure controls and procedures, our chief executive officer and chief financial officer have concluded that the disclosure controls and procedures were effective as of the date of such evaluation.

Management’s Report on Internal Control Over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We are using the framework set forth in the report entitled “Internal Control-Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission (referred to as “COSO”) to evaluate the effectiveness of our internal control over financial reporting. This evaluation included review of the documentation of controls, testing of operating effectiveness of controls and a conclusion on this evaluation. Based on our assessment, we have concluded our internal control over financial reporting was effective as of December 31, 2011.

Deloitte & Touche LLP, an independent registered public accounting firm, has audited and reported on the consolidated financial statements of Archipelago Learning, Inc., and on the effectiveness of our internal controls over financial reporting. The reports of Deloitte & Touche LLP are contained in this Annual Report.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting in the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Archipelago Learning, Inc.

Dallas, Texas

We have audited the internal control over financial reporting of Archipelago Learning, Inc. and subsidiaries (the “Company”) as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2011 of the Company and our report dated March 15, 2012 expressed an unqualified opinion on those financial statements and financial statement schedules.

/s/ DELOITTE & TOUCHE LLP

Dallas, Texas

March 15, 2012

Item 9B.

Other Information

None.

PART III

We have adopted a code of business conduct and ethics that applies to all of our employees, officers and Directors, including those officers responsible for financial reporting. These standards are designed to deter wrong doing and to promote honest and ethical conduct. The code of business conduct and ethics is available on our website at www.archipelagolearning.com. Any amendments to the code, or any waivers of its requirements, will be disclosed on our website.

The information required by Items 10, 11, 12, 13 and 14 of Part III is incorporated by reference to our definitive proxy statement or amendment to this Form 10-K to be filed with the United States Securities and Exchange Commission no later than April 30, 2012.

PART IV

Item 15.

Exhibits and Financial Statement Schedules

Consolidated Financial Statements

The following financial statements and the report of our independent registered public accounting firm are filed as part of this report on the pages indicated:


Index to Consolidated Financial Statements			69
Report of Independent Registered Public Accounting Firm			70
Consolidated Balance Sheets as of December 31, 2011 and 2010			71
Consolidated Statements of Income for the three years ended December 31, 2011			72
Consolidated Statements of Changes in Equity and Comprehensive Income for the three years ended December 31, 2011			73
Consolidated Statements of Cash Flows for the three years ended December 31, 2011			74
Notes to Consolidated Financial Statements			75

Financial Statement Schedules

Financial statement schedules I and II required by this item are included as exhibits to this Annual Report on Form 10-K.

Exhibit List

See Index to Exhibits following our Consolidated Financial Statements contained in this Annual Report on Form 10-K.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on the 15^th day of March, 2012.


ARCHIPELAGO LEARNING, INC.

By:		/s/ Tim McEwen
		Tim McEwen
		Chairman, President and Chief
		Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned constitutes and appoints each of Tim McEwen and Mark Dubrow, or either of them, each acting alone, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for such person and in his name, place and stead, in any and all capacities, to sign this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that any such attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1934, this registration statement has been signed by the following persons on behalf of the registrant and in the capacities indicated on the 15th day of March, 2012.


Signature		Title

/s/ Tim McEwen Tim McEwen		Chairman, President and Chief Executive Officer (Principal Executive Officer)

/s/ Mark S. Dubrow Mark S. Dubrow		Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

/s/ Brian H. Hall Brian H. Hall		Director

/s/ Thomas F. Hedrick Thomas F. Hedrick		Director

/s/ Ruth E. Orrick Ruth E. Orrick		Director

/s/ David Phillips David Phillips		Director

/s/ Troy Stovall Troy Stovall		Director

/s/ Peter Wilde Peter Wilde		Director

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page
Report of Independent Registered Public Accounting Firm		70
Consolidated Balance Sheets as of December 31, 2011 and 2010		71
Consolidated Statements of Income for the three years ended December 31, 2011		72
Consolidated Statements of Changes in Equity and Comprehensive Income for the three years ended December 31, 2011		73
Consolidated Statements of Cash Flows for the three years ended December 31, 2011		74
Notes to Consolidated Financial Statements		75

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Archipelago Learning, Inc.

Dallas, Texas

We have audited the accompanying consolidated balance sheets of Archipelago Learning, Inc. and subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of income, changes in equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2011. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Archipelago Learning, Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2012 expressed an unqualified on the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Dallas, Texas

March 15, 2012

ARCHIPELAGO LEARNING, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	As of December 31, 2011		As of December 31, 2010
Assets
Current assets:
Cash and cash equivalents	$	64,628	$	32,398
Accounts receivable, net		8,942		10,807
Deferred tax assets		2,418		3,463
Prepaid expenses and other current assets		2,049		3,560

Total		78,037		50,228
Property and equipment, net		4,773		3,760
Goodwill		167,761		165,694
Intangible assets, net		34,026		37,290
Investment		—		6,446
Notes receivable		—		1,934
Other long-term assets		1,747		1,610

Total assets	$	286,344	$	266,962

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable — trade	$	1,730	$	928
Accrued employee-related expenses		3,025		2,518
Other accrued expenses		1,221		1,247
Taxes payable		1,723		979
Deferred tax liabilities		118		384
Deferred revenue		48,915		44,733
Current portion of note payable to related party		—		2,352
Current portion of long-term debt		850		850
Other current liabilities		450		463

Total		58,032		54,454
Long-term deferred tax liabilities		15,222		15,478
Long-term deferred revenue		15,376		14,312
Long-term debt, net of current		74,063		74,913
Other long-term liabilities		1,462		488

Total liabilities		164,155		159,645
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock ($0.001 par value, 10,000,000 shares authorized, none issued and outstanding at December 31, 2011 and 2010)		—		—
Common stock ($0.001 par value, 200,000,000 shares authorized, 26,340,135 and 26,354,198 shares issued and outstanding at December 31, 2011 and 2010, respectively)		26		26
Additional paid-in capital		98,356		95,395
Accumulated other comprehensive income		1,497		1,531
Retained earnings		22,310		10,365

Total stockholders’ equity		122,189		107,317

Total liabilities and stockholders’ equity	$	286,344	$	266,962

See the accompanying notes to the consolidated financial statements.

ARCHIPELAGO LEARNING, INC.

CONSOLIDATED STATEMENTS OF INCOME


	Years Ended December 31,
	2011			2010			2009
	(In thousands, except share and per share data)
Revenue	$	73,265		$	58,650		$	42,768
Cost of revenue		6,552			5,040			3,074

Gross profit		66,713			53,610			39,694
Operating Expense:
Sales and marketing		22,786			20,447			14,048
Content development		6,562			4,686			3,773
General and administrative		23,586			19,540			9,243

Total		52,934			44,673			27,064

Income from continuing operations		13,779			8,937			12,630
Other income (expense):
Interest expense		(4,430	)		(4,061	)		(2,803	)
Interest income		256			572			159
Foreign currency loss		(18	)		(161	)		—
Derivative loss		—			(49	)		(518	)
Gain on sale of investment		6,359			—			—

Total		2,167			(3,699	)		(3,162	)

Income from continuing operations before tax		15,946			5,238			9,468
Provision for income tax		4,001			1,786			3,094

Net income from continuing operations		11,945			3,452			6,374

Income from discontinued operation before tax		—			—			261
Benefit from income tax on discontinued operation		—			—			(101	)

Net income from discontinued operation		—			—			362

Net income	$	11,945		$	3,452		$	6,736

Earnings per share:
Basic:
Continuing operations	$	0.45		$	0.13		$	0.31
Discontinued operation		—			—			0.02

Total	$	0.45		$	0.13		$	0.33

Diluted:
Continuing operations	$	0.45		$	0.13		$	0.31
Discontinued operation		—			—			0.02

Total	$	0.45		$	0.13		$	0.33

Weighted-average shares outstanding:
Basic		25,413,158			24,585,585			20,407,685
Diluted		25,599,767			24,949,956			20,434,486

See the accompanying notes to the consolidated financial statements.

ARCHIPELAGO LEARNING, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY AND COMPREHENSIVE INCOME


	Class A Shares						Class A-2 Shares						Class B Shares						Class C Shares						Preferred Stock				Common Stock					Additional Paid-in Capital		Accumulated Other Comprehensive Income			Retained Earnings			Total Equity
	Units			Value			Units			Value			Units			Value			Units			Value			Shares		Par Value		Shares			Par Value		Additional Paid-in Capital		Accumulated Other Comprehensive Income			Retained Earnings			Total Equity
				(In thousands)
Balance at December 31, 2008		109,545		$	34,792			287		$	750			5,355		$	684			5,903		$	302			—	$	—		—		$	—	$	—	$	—		$	3,946		$	40,474
Distributions		—			(8,000	)		—			—			—			—			—			—			—		—		—			—		—		—			(3,769	)		(11,769	)
Sale of discontinued operation to shareholder		—			2,912			—			—			—			—			—			—			—		—		—			—		—		—			—			2,912
Reorganization		(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		—			—			562
Stock offering		—			—			—			—			—			—			—			—			—		—		3,125			3		43,939		—			—			43,942
Net income, excluding tax charge upon Reorganization		—			—			—			—			—			—			—			—			—		—		—			—		—		—			8,693			8,693

Balance at December 31, 2009		—			—			—			—			—			—			—			—			—		—		25,110			25		76,072		—			6,913			83,010
Stock-based compensation expense		—			—			—			—			—			—			—			—			—		—		—			—		1,762		—			—			1,762
Grants of common and restricted stock		—			—			—			—			—			—			—			—			—		—		14			—		—		—			—			—
Forfeiture of restricted stock		—			—			—			—			—			—			—			—			—		—		(15	)		—		—		—			—			—
Purchase of shares from employee stock purchase plan		—			—			—			—			—			—			—			—			—		—		3			—		23		—			—			23
Issuance of shares in acquisition		—			—			—			—			—			—			—			—			—		—		1,242			1		17,392		—			—			17,393
Additional contributed capital		—			—			—			—			—			—			—			—			—		—		—			—		146		—			—			146
Comprehensive income:
Net income		—			—			—			—			—			—			—			—			—		—		—			—		—		—			3,452			3,452
Currency translation adjustment		—			—			—			—			—			—			—			—			—		—		—			—		—		1,531			—			1,531

Total comprehensive income																																											4,983

Balance at December 31, 2010		—			—			—			—			—			—			—			—			—		—		26,354			26		95,395		1,531			10,365			107,317
Stock-based compensation expense		—			—			—			—			—			—			—			—			—		—		—			—		2,885		—			—			2,885
Grants of common and restricted stock		—			—			—			—			—			—			—			—			—		—		23			—		—		—			—			—
Forfeiture of restricted stock		—			—			—			—			—			—			—			—			—		—		(44	)		—		—		—			—			—
Purchase of shares from employee stock purchase plan		—			—			—			—			—			—			—			—			—		—		7			—		55		—			—			55
Additional contributed capital		—			—			—			—			—			—			—			—			—		—		—			—		21		—			—			21
Comprehensive income:
Net income		—			—			—			—			—			—			—			—			—		—		—			—		—		—			11,945			11,945
Currency translation adjustment		—			—			—			—			—			—			—			—			—		—		—			—		—		(34	)		—			(34	)

Total comprehensive income																																											11,911

Balance at December 31, 2011		—		$	—			—		$	—			—		$	—			—		$	—			—	$	—		26,340		$	26	$	98,356	$	1,497		$	22,310		$	122,189

See the accompanying notes to the consolidated financial statements.

ARCHIPELAGO LEARNING, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
	2011			2010			2009
	(In thousands)
Cash flows from operating activities
Net income	$	11,945		$	3,452		$	6,736
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of debt financing costs		456			357			208
Accretion of interest on note payable to a related party		148			—			—
Depreciation and amortization		6,630			4,396			2,720
Stock-based compensation		2,885			1,762			562
Allowance for doubtful accounts		(143	)		201			25
Unrealized loss on interest rate swap		—			—			(839	)
Deferred income taxes		364			1,225			2,565
Deferred rent		351			734			—
Loss on disposal of assets		98			182			—
Gain on sale of investment		(6,359	)		—			—
Deduction of net income from discontinued operation		—			—			(362	)
Operating cash provided by discontinued operation		—			—			904
Changes in operating assets and liabilities, net of acquisitions, disposition, and discontinued operation:
Accounts receivable		1,884			630			(1,713	)
Prepaid expenses and other		263			(1,387	)		(854	)
Accounts payable and accrued expenses		2,144			1,495			144
Deferred revenue		5,147			12,341			11,106
Foreign currency transaction loss		(33	)		—			—
Other liability		(15	)		(1,085	)		425

Net cash provided by operating activities		25,765			24,303			21,627

Cash flows from investing activities
Acquisitions		(1,978	)		(61,472	)		—
Proceeds from escrow for sale of TeacherWeb		653			650			—
Proceeds from the sale of (investment in) Edline		12,240			—			(2,734	)
Collection (funding) of note receivable from Edline		2,098			2,997			(2,144	)
Sale of discontinued operation to Edline		—			—			3,701
Purchase of property and equipment		(3,285	)		(2,268	)		(1,855	)
Proceeds from the sale of property and equipment		—			15			—
Purchase of property and equipment – discontinued operation		—			—			(93	)
Purchase of intangibles		(500	)		—			—
Dividends received from Edline		565			—			—

Net cash provided by (used in) investing activities		9,793			(60,078	)		(3,125	)

Cash flows from financing activities
Return of Capital distributions to members		—			—			(8,000	)
Contribution from member in Reorganization		—			146			693
Tax distributions to members		21			—			(3,769	)
Payment of debt financing costs		—			(804	)		—
Proceeds from offering (payment of offering cost)		—			(1,460	)		45,402
Proceeds from term loan		—			15,000			—
Proceeds from revolver		—			10,000			—
Payments on revolver		—			(10,000	)		—
Purchase of common stock from ESPP		55			23			—
Payments on term loan		(850	)		(830	)		(7,724	)
Payments of note payable to a related party		(2,500	)		(2,500	)		—

Net cash (used in) provided by financing activities		(3,274	)		9,575			26,602

Effect of foreign exchange on cash and cash equivalents		(54	)		350			—
Net change in cash and cash equivalents		32,230			(25,850	)		45,104
Beginning of period		32,398			58,248			13,144

End of period	$	64,628		$	32,398		$	58,248

Supplemental information
Cash paid for interest	$	3,815		$	3,592		$	2,691
Cash paid for income taxes		2,504			1,490			67
Non-cash investing and financing activities
Accrued purchases of property and equipment	$	308		$	6		$	95
Accrued 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
Issuance of shares in business acquisitions (Note 3)		—			17,392			—
Issuance of note payable for purchase of EducationCity (Note 3)		—			4,688			—

See the accompanying notes to the consolidated financial statements.

ARCHIPELAGO LEARNING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

Archipelago Learning, Inc. (the “Company”) is a leading subscription-based, software-as-a-service (“SaaS”) provider of education products. The Company provides standards-based instruction, practice, assessments and productivity tools that improve the performance of educators and students via proprietary web-based platforms. As of December 31, 2011, the Company’s products were utilized by schools in all 50 states, Washington D.C., Canada, and the United Kingdom. Study Island, the Company’s core product line, helps students in Kindergarten through 12th grade (“K-12”) master grade level academic standards in a fun and engaging manner.

Archipelago Learning, Inc. was incorporated as a Delaware corporation on August 4, 2009. Prior to November 19, 2009, the Company was operated under Archipelago Learning Holdings, LLC (the “LLC”). On November 19, 2009, in connection with the Company’s initial public offering (the “IPO”), the Company entered into a transaction (the “Reorganization”) whereby all of the shares of the LLC were exchanged for common stock and restricted common stock in the Company, and the LLC became a wholly-owned subsidiary of the Company. The Reorganization was accounted for as a transaction with entities under common control, thus assets, liabilities, operations and cash flows of the LLC prior to the Reorganization are presented as the results of the Company and earnings per share data is presented under the equity structure of the Company, utilizing the number of shares of the LLC exchanged for common stock of the Company, applied to past transactions.

The Company completed its IPO on November 25, 2009. A total of 7,187,500 shares were sold, of which 3,125,000 were sold by the Company.

The Company completed its sale of TeacherWeb on November 2, 2009. The operations and cash flows of TeacherWeb have been presented as a discontinued operation in the Company’s consolidated financial statements.

In June 2010, the Company acquired Educationcity Limited (“EducationCity”), an online Pre-K-6 educational content and assessment program for schools in the United Kingdom (“U.K.”) and United States (“U.S.”). In August 2010, the Company began selling Reading Eggs, an online product focused on teaching young children to read. In November 2011, the Company launched Reading Eggspress, a reading and comprehension program for grades 2 to 6. Reading Eggs and Reading Eggspress are sold under a distribution agreement with Blake Publishing, which requires the Company to pay a 35% royalty to Blake Publishing for every sale. In June 2011, the Company acquired Alloy Multimedia (“Alloy”), publisher of ESL ReadingSmart and ReadingMate, online standards-based programs for English language learners targeted toward grades 4-12. The Company also offers online post-secondary programs through its Northstar Learning product line.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation — The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and include the accounts of our subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates — Management uses estimates and assumptions in preparing financial statements in accordance with GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported sales and expenses. We base our estimates on historical experience and on other relevant assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Accordingly, actual results could differ from the estimates that were used. The Company’s most significant estimates and assumptions include those relating to stock based compensation and valuation of goodwill and intangible assets.

Revenue Recognition — The Company generates revenue from customer subscriptions to standards-based instruction, practice, assessments and productivity tools; training fees for onsite or online training sessions that are primarily provided to new customers; and individual buys, which are individual purchases for access to a product. Customer subscriptions provide the vast majority of the Company’s revenue.

Revenue is recognized when all of the following conditions are satisfied: there is persuasive evidence of an arrangement, the customer has access to full use of the product, the collection of the fees is reasonably assured, and the amount of the fees to be paid by the customer is fixed or determinable. The Company’s arrangements do not contain general rights of return.

Revenue from customer subscriptions is recognized ratably over the subscription term beginning on the commencement date of each subscription. The average subscription term is 16 months for our products, and all subscriptions are on a non-cancelable basis. When additional months are offered as a promotional incentive, those months are part of the subscription term. As part of their subscriptions, customers generally benefit from new features and functionality with each release at no additional cost.

Training sessions are offered to the Company’s customers in conjunction with the subscriptions to train the customers on implementing, using, and administering the programs. Training revenue is recognized ratably over the subscription term for the related subscription. In cases where the underlying subscription is greater than one year, the related training revenue is deferred and recognized over a 12 month period due to the fact that the majority of training is completed in the first year of the subscription. Customer support is provided to customers following the sale at no additional charge and at a minimal cost per call.

Reading Eggs and Reading Eggspress are sold under a distribution agreement with Blake Publishing, which requires the Company to pay a 35% royalty to Blake Publishing for every sale. Revenue related to the sale by the Company of the Reading Eggs product is recognized on a net basis (net of the related royalty owed to Blake Publishing). Reading Eggs revenue is recognized at the time of the sale, rather than deferred over the related subscription period.

The Company does not incur significant up-front costs related to providing its products and services and therefore does not defer any expenses.

Cost of Revenue — Cost of revenue includes the cost to host and make available the Company’s products and services to its customers. A significant portion of the cost of revenue includes salaries and related costs of engineering employees and contractors who maintain the Company’s servers and technical equipment and work on the Company’s web-based hosted platform. Other costs include facility costs for the Company’s web platform servers and routers, network monitoring costs, depreciation of network assets and amortization of the technical development intangible assets.

Operating Expense — Operating expense consists of sales and marketing, content development and general and administrative expense. Sales and marketing expense consists primarily of salaries, commissions and related costs for the Company’s inside and field sales teams, marketing, customer service, training and account management. Sales and marketing also includes direct marketing costs, travel and amortization of customer relationship intangible assets. Content development expense consists primarily of salaries and related costs for employees who write the questions for the Company’s products and amortization of content intangible assets. General and administrative expense consists primarily of salaries and related costs for executives, finance and accounting, human resources, customer relations and order management. General and administrative expense also includes professional services, rent, insurance, travel, depreciation and other corporate expenses.

Software Development Costs — Software development costs are accounted for as software to be sold, leased, or otherwise marketed as a separate product or as part of a product or process, whether internally developed or purchased. The fair-value of the core web-based delivery technology was recognized as an

intangible asset upon the Company’s acquisition and is amortized over 10 years. The Company recognized additional intangible assets upon the acquisitions of Alloy in June 2011 and EducationCity in June 2010, which are being amortized over four and 15 years, respectively. The Company is continually improving, upgrading, and enhancing the software used to deliver the Company’s content and these costs are being expensed as incurred.

For internally developed capitalizable projects, software development costs are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized to the extent that the capitalizable costs do not exceed the realizable value of such costs, until the product is available for general release to customers. The Company defines the establishment of technological feasibility as the completion of all planning, designing, coding and testing activities that are necessary to establish products that meet design specifications including functions, features and technical performance requirements. During the year ended December 31, 2011, $1.1 million in internally developed software costs were capitalized. No such costs were capitalized during the years ended December 31, 2010 and 2009.

As of December 31, 2011 and 2010, the Company has total net book value of capitalized software of $8.5 million and $8.6 million, respectively, which is amortized over four to 15 years. The Company amortized software development costs of $0.8 million, $0.5 million and $0.3 million for the years ended December 31, 2011, 2010 and 2009, respectively. Capitalized software is included in property and equipment in the Company’s consolidated balance sheets.

Content Development Costs — The fair-value of the content was recognized as an intangible asset upon the Company’s acquisition and is amortized over 10 years. The fair value of the Alloy and EducationCity content were recognized in June 2011 and 2010, respectively, in conjunction with the purchase price accounting for those acquisitions, and are being amortized over four and 15 years, respectively. The Company is continually improving and upgrading the content delivered to customers, including planned enhancements and upgrades such as assessment products for teachers, embedded professional development, lesson plans and lessons, video content, special needs support, writing utility, digital lockers and new and more sophisticated games, as well as tailoring products to new markets. Such costs are expensed as incurred.

Cash and Cash Equivalents — Cash is generally invested in highly liquid investments with original maturities of three months or less. Cash equivalents are stated at cost, which approximates market value. As of December 31, 2011, the Company had cash and cash equivalents totaling $57.6 million with a few major financial institutions in the United States and had $7.0 million in foreign accounts. As of December 31, 2010, the Company had cash and cash equivalents totaling $26.6 million with a few major financial institutions in the United States and had $5.8 million in foreign accounts.

Concentrations of Credit Risk — The Company maintains deposits with major financial institutions which exceed federally insured limits. Management periodically assesses the financial condition of the institution and believes that any possible credit risk is minimal. The Company has not experienced any loss from such risk.

Accounts Receivable — Accounts receivable represents amounts billed to customers. Accounts receivable is carried at cost, less an allowance for doubtful accounts, which is based on management’s assessment of the collectability of accounts receivable. The Company extends unsecured credit in the ordinary course of business, but mitigates the associated credit risk by performing ongoing credit evaluations of its customers. The vast majority of the Company’s customers are public schools, which receive their funding from the local, state and federal government. The Company evaluates the adequacy of the allowance for doubtful accounts based on a specific customer review of the outstanding accounts receivables. The Company’s allowance for doubtful accounts was $0.1 million and $0.2 million at December 31, 2011 and 2010, respectively. No individual customer balances exceeded 10% of the balance of accounts receivable for the years ended December 31, 2011 or 2010.

Property and Equipment — Property and equipment are recorded at cost, less accumulated depreciation. Depreciation on property and equipment is recognized over the assets estimated useful lives using the straight-line method. The estimated useful lives of property and equipment are as follows:


		Estimated useful life
Furniture and fixtures		4 to 7 years
Office equipment		4 to 7 years
Computer equipment		3 to 5 years
Computer software		3 to 4 years
Leasehold improvements		Lesser of the lease term or useful life

Major repairs or replacements of property and equipment are capitalized. Maintenance repairs and minor replacements are charged to expense as incurred. The cost of property and equipment sold or retired and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in operating expense.

Leases — The Company leases certain properties under operating leases, generally for periods of three to 10 years. Certain of the leases contain renewal options and escalating rent provisions. For lease agreements that provide for escalating rent payments or free-rent occupancy periods, the Company recognizes rent expense on a straight-line basis over the non-cancelable lease term plus option renewal periods, where the exercise of the option appears to be reasonably assured. Deferred rent is included in both accrued liabilities and other non-current liabilities in the consolidated balance sheets.

Goodwill, Intangible Assets and Long-Lived Assets — Goodwill represents the excess of the cost of an acquisition over the fair value of net assets acquired. Goodwill is assessed for impairment at the reporting unit level at least annually or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. The goodwill impairment test involves a two-step test. The first step of the impairment test requires the identification of the reporting units, and comparison of the fair value of each of these reporting units to the respective carrying value.

As a result of the acquisition of EducationCity in June 2010, the Company had three operating segments and reporting units, Study Island (including the Study Island, Northstar Learning, Reading Eggs, and ESL ReadingSmart product lines), Educationcity Limited (a United Kingdom company), and Educationcity Inc. (an Illinois company). Effective September 1, 2011, as a result of the financial and operational integration of Educationcity Inc. into Study Island, the Company now has two operating segments and reporting units: the U.S. Market (including Study Island, EducationCity, Northstar Learning, Reading Eggs, and ESL ReadingSmart product lines) and the U.K. Market (Educationcity Limited). The Company aggregates the operating segments into one reportable segment based on the similar nature of the products, content and technical production processes, types of customers, methods used to distribute the products, and similar rates of profitability.

The fair value of each reporting unit is determined based on valuation techniques using the best information that is available, including data from open marketplace transactions, data from comparable companies and discounted cash flows. If the carrying value is less than the fair value, no impairment exists and the second step is not performed. If the carrying value is higher than the fair value, there is an indication that impairment may exist and the second step must be performed to compute the amount of the impairment. In the second step, the impairment is computed by comparing the implied fair value of reporting unit goodwill with the carrying amount of that goodwill.

During 2011, the Company changed the date of its annual goodwill impairment test from December 31 to October 1 for all reporting units. The change in goodwill impairment test date is preferable as it aligns the timing of the annual goodwill impairment test with the completion of the Company’s planning and budgeting process, which will allow the Company to utilize the updated business plans that result from the budget process in the

discounted cash flow analyses that are used to estimate the fair value of the Company’s reporting units and to do so on a more timely basis. The change in accounting principle does not delay, accelerate or avoid an impairment charge. The Company determined it was impracticable to objectively determine projected cash flows and related valuation estimates that would have been used as of each October 1 for periods prior to October 1, 2011, without the use of hindsight. As such, the Company has prospectively applied the change in the annual goodwill impairment testing date from October 1, 2011.

At October 1, 2011, the fair value of both the U.S. Market and U.K. Market reporting units substantially exceeded the carrying value. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we applied a hypothetical 10% decrease to the fair value of each reporting unit. Had the estimated fair value of the U.S. Market and U.K. Market reporting units been hypothetically lower by 10% as of October 1, 2011, the fair value of goodwill would have still significantly exceeded the carrying value.

The Company has not recognized any impairment losses in the years ended December 31, 2011, 2010 or 2009.

Management’s judgment is a significant factor in determining whether an indicator of impairment has occurred. During 2011, 2010 and 2009, management relied on estimates in determining the fair value of each reporting unit for step one, which include the following factors:

•

Data from actual open marketplace transactions. The Company may utilize data from transactions of businesses in the same or similar lines of business, 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.

Indefinite-lived intangible assets are tested for impairment at least annually at the same time as the goodwill impairment test by comparing the fair value of the intangible asset to its book value. No impairment has been identified in the Company’s indefinite-lived intangibles assets in the years ended December 31, 2011, 2010 or 2009.

Amortizable intangible assets and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. If impairment indicators exist, an assessment of undiscounted future cash flows to be generated by such assets is made. If the results of the analysis indicate impairment, the assets are adjusted to fair market value. Intangible assets with finite lives are amortized using the straight-line method over their estimated useful lives. No impairment loss was identified for intangible or long-lived assets in any of the years presented.

Deferred Financing Costs — Deferred financing costs, included in other long-term assets in the consolidated balance sheets, were incurred to obtain long-term financing and are amortized using the effective interest method over the term of the related debt. The amortization of deferred financing costs, classified in interest expense in the consolidated statements of income, was $0.5 million, $0.4 million and $0.2 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Income Taxes — The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the provision for income tax in the consolidated statements of income. The Company evaluates the probability of realizing the future benefits of its deferred tax assets and provides a valuation allowance when realization of the assets is not reasonably assured.

The Company recognizes in its financial statements the impact of tax positions that meet a “more likely than not” threshold, based on the technical merits of the position. The tax benefits recognized from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company recognizes penalties and interest related to unrecognized tax benefits in current tax expense.

Stock-Based Compensation Expense — Prior to the Company’s IPO, the Company granted shares of separate classes of stock to employees. The estimated fair values of the shares awarded prior to the IPO were determined using a market approach to develop an overall enterprise value, which included the use of pricing multiples derived from transactions of companies within the Company’s same industry and the Company’s past transactions. The companies selected for comparison are all engaged in a technology-based education-related business. The multiples selected were applied to an estimate of the Company’s future earnings to arrive at an estimated enterprise value for its equity. This equity value was then allocated to the different classes of stock using discounted cash flows, based on the respective rights of the classes to distributions from future earnings.

The Company currently grants common stock, restricted common stock, restricted stock units, and stock options to employees, directors and consultants under its 2009 Omnibus Incentive Plan. The estimated fair value of common stock, restricted common stock, and restricted stock units granted after the Company’s IPO is based on the grant-date closing price of the stock. The estimated fair values of stock options awarded are calculated using the Black-Scholes option pricing model.

The Company recognizes compensation expense based on the grant-date fair value of the awards over the required service or performance periods. The Company recognized approximately $3.0 million, $1.8 million, and $0.6 million in stock-based compensation expense related to grants of common stock, restricted common stock, restricted stock units, and stock options in the years ended December 31, 2011, 2010, and 2009, respectively.

Earnings per Share — Prior to the Reorganization, there were various classes of stock, which were entitled to earnings based on a priority established in the LLC’s Amended and Restated Limited Liability Company Agreement (“the LLC Agreement”). The Class A shares were entitled to a return of capital and a preferred return before any other class of shares was entitled to earnings. The Class A shares were entitled to 100% of the earnings for the period from January 1, 2007 to the Reorganization. Earnings per share was calculated based on the shares of common stock that were exchanged for the Class A shares in the Reorganization for all periods prior to the Reorganization.

Subsequent to the Reorganization, earnings per share is computed using the two-class method, considering the restricted common shares, due to their participation rights in dividends of the Company. Under this method, the Company’s net income is reduced by the portion of net income attributable to the restricted common shares, and this amount is divided by the weighted average shares of common stock outstanding.

Foreign Currency—The functional currency for our non-U.S. subsidiary, EducationCity U.K., is the Great British Pound. Upon consolidation, most of the assets and liabilities of this subsidiary are translated at the rates of exchange as of the balance sheet date, except equity, which is translated at historic rates. Revenue and

expenses for this subsidiary are translated at average rates of exchange for the period. Translation gains and losses are included in accumulated other comprehensive income as a component of stockholders’ equity. Transaction gains and losses resulting from assets and liabilities denominated in a currency other than the functional currency are included in the consolidated statements of income as a component of other income (expense).

Seasonality

In the United States, seasonal trends associated with school budget years and state testing calendars also affect the timing of the Company’s sales of subscriptions to new and existing customers. As a result, most new subscriptions and renewals occur in the third quarter because teachers and school administrators typically make purchases for the new academic year at the beginning of their district’s fiscal year, which is usually July 1. The Company’s fourth quarter has historically produced the second highest level of new subscriptions and renewals, followed by the second and first quarters.

Recently Issued and Adopted Accounting Pronouncements —

Adopted

In September 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements. The new standard modifies the revenue recognition guidance for arrangements that involve the delivery of multiple elements to a customer at different times as part of a single revenue generating transaction. The new standard also expands the disclosure requirements for multiple deliverable revenue arrangements. The new standard was effective for fiscal years beginning on or after June 15, 2010, with earlier adoption permitted. The Company adopted this standard effective January 1, 2011, which did not have a material impact on the financial position, results of operations or cash flows of the Company.

In September 2009, the FASB also issued ASU No. 2009 – 14 - Software (Topic 985) - Certain Revenue Arrangements That Include Software Elements. This standard removes tangible products from the scope of software revenue recognition guidance and also provides guidance on determining whether software deliverables in an arrangement that includes a tangible product, such as embedded software, are within the scope of the software revenue guidance. The new standard was effective for fiscal years beginning on or after June 15, 2010, with earlier adoption permitted. The Company adopted this standard effective January 1, 2011, which did not have a material impact on the financial position, results of operations or cash flows of the Company.

In December 2010, the FASB issued ASU 2010-29 - Disclosure of Supplementary Pro Forma Information for Business Combinations, which changes the disclosures of supplementary pro forma information for business combinations. The new standard clarifies that if a public entity completes a business combination and presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures under ASC topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective for any business combination we complete on or after January 1, 2011. The revised disclosure requirements did not affect the Company’s financial position, results of operations or cash flows.

Issued

In May 2011, the FASB issued updated guidance to improve the comparability of fair value measurements and related disclosures between GAAP and International Financial Reporting Standards. This update amends the accounting rules for fair value measurements and disclosure. The amendments are of two types: (i) those that clarify FASB’s intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The update is effective for the Company on January 1, 2012. We do not expect this standard to have a significant impact on our consolidated financial statements.

In June 2011, the FASB issued updated guidance on the presentation of other comprehensive income in the financial statements. The standard eliminates the option of presenting other comprehensive income as part of the statement of changes in stockholders’ equity and instead requires the entity to present other comprehensive income as either a single, continuous statement of comprehensive income or as two separate but consecutive statements. This amendment will be effective for the Company for the first quarter 2012. We currently report other comprehensive income in the statement of stockholders’ equity and comprehensive income and will be required to update the presentation of comprehensive income to be in compliance with the new standard. We do not expect the revised presentation requirements to affect the Company’s financial position, results of operations or cash flows.

3. ACQUISITION

Alloy Multimedia

On June 24, 2011, pursuant to a Stock Purchase Agreement, the Company purchased 100% of the equity of Alloy, the publisher of ESL ReadingSmart and ReadingMate, online standards-based programs for English language learners for $2.0 million in cash. In addition to the cash paid at the time of the acquisition, the Company is obligated to make contingent payments of up to $1.0 million based upon the achievement of certain sales objectives. The fair values of these payments were estimated to be $0.5 million and were included as a cost of the acquisition.

As part of the acquisition, the Company incurred $0.5 million in transaction costs, including legal and professional fees, which are recorded in general and administrative expense on the consolidated statements of income for the year ended December 31, 2011.

Between the acquisition date and June 30, 2011, Alloy’s revenues and expenses were not significant, and therefore, have not been included in the consolidated statements of income of the Company. Beginning July 1, 2011, Alloy’s results have been included in the consolidated statements of income of the Company. Revenues of $0.2 million and net losses of $0.1 million arising from Alloy are included in the consolidated statements of income for the year ended December 31, 2011.

During the quarter ended December 31, 2011, the Company finalized its purchase accounting for the acquisition of Alloy. The final valuation of the fair value of the assets and liabilities acquired resulted in a decrease in contingent consideration and a decrease in goodwill by $0.1 million. The following table presents the composition of the purchase price and the final amounts recorded in the Company’s balance sheet for assets and liabilities acquired on June 24, 2011(in thousands):


Purchase price:
Cash paid to seller, net of cash received	$	1,978
Estimated fair values of future contingent payments		475

Total purchase price	$	2,453

Assets (liabilities) acquired:
Accounts receivable	$	34
Deferred tax assets		65
Fixed assets		5
Intangible assets		651
Accounts payable and accrued expenses		(12	)
Deferred revenue		(185	)
Deferred tax liability		(185	)

Total	$	373

Remaining value, allocated to goodwill	$	2,080

The goodwill acquired is not expected to be deductible for tax purposes.

Pro-forma results of operations, assuming this acquisition was made at the beginning of the earliest period presented, have not been presented because the effect of this acquisition is not material to the Company’s results.

EducationCity

On June 9, 2010, the Company purchased 100% of the equity of EducationCity for a purchase price of: (i) $65.1 million in cash; (ii) 1,242,408 shares of common stock of the Company; and (iii) $5.0 million in additional deferred cash consideration, of which $2.5 million were paid by the Company on each of December 31, 2010 and December 31, 2011. The Company also paid the sellers $0.2 million for a post-closing working capital adjustment. The acquisition was financed with cash on hand and the proceeds of a new $15.0 million supplemental term loan and $10.0 million in revolving loan commitments.

As part of the acquisition, the Company incurred $3.4 million in transaction costs, including legal and professional fees, which are recorded in general and administrative expense on the consolidated statements of income for the year ended December 31, 2010.

Revenues of $5.1 million and net losses of $1.7 million arising from EducationCity are included in the consolidated statements of income for the year ended December 31, 2010.

The following unaudited pro forma information summarizes the Company’s results of operations, as if the acquisition of EducationCity had occurred as of January 1, 2010. The pro forma information adjusts for the effects of amortization of acquired intangibles and additional debt incurred. For 2010, the pro forma basic and diluted earnings per share includes an additional 1,242,408 shares reflecting the effect of the acquisition. The unaudited pro forma financial data is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved if such acquisition had occurred on the date indicated, nor is it necessarily indicative of future consolidated results (in thousands, except per share data):


	Year Ended December 31, 2010
Revenue	$	62,928
Net income from continuing operations		4,593
Net income		4,593
Basic and diluted earnings per share	$	0.18

During the quarter ended September 30, 2010, the Company finalized its purchase accounting for the acquisition of EducationCity. The following table presents the composition of the purchase price and the final amounts recorded in the Company’s balance sheet as of June 9, 2010 for assets and liabilities acquired (in thousands):


Purchase price:
Cash paid to sellers, net of cash received	$	61,472
Note payable		4,688
Issuance of common stock		17,392

Total	$	83,552

Assets (liabilities) acquired:
Accounts receivable	$	4,026
Deferred tax assets		1,890
Other assets		955
Intangible assets		26,860
Accounts payable and accrued expenses		(676	)
Deferred tax liabilities		(10,149	)
Deferred revenue		(9,900	)

Total	$	13,006

Remaining value, recorded to goodwill	$	70,546

The goodwill acquired was not deductible for tax purposes.

4. FAIR VALUE MEASUREMENTS

FASB ASC 820 establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of input are defined as follows:

•

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.

FASB ASC 820 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation.

The Company’s cash equivalents consist of highly liquid money market funds. The fair values of our cash equivalents were determined based upon market prices.

The following table summarizes assets and liabilities that are measured and recorded at fair value on a recurring basis (in thousands):


	Level 1		Level 2		Level 3		Total
As of December 31, 2011
Assets — cash equivalents	$	32,122	$	—	$	—	$	32,122
As of December 31, 2010
Assets — cash equivalents	$	27,816	$	—	$	—	$	27,816

The carrying amounts and estimated fair values of the Company’s financial instruments that are not reflected in the financial statements at fair value are as follows, as of December 31 (in thousands):


	2011				2010
	Carrying Amount		Fair Value		Carrying Amount		Carrying Amount
Investment	$	—		—	$	6,446	$	6,446
Notes receivable		—		—		1,934		1,934
Note payable to related party		—		—		2,352		2,352
Term loan (including current maturities)		74,913		74,913		75,763		75,763

The investment included in the table above was in Edline LLC (“Edline”), a company that offers web-based technological solutions for schools and educators. Edline is not publicly traded and the fair value of the investment was not readily determinable in prior periods. On October 4, 2011, the Company sold its entire investment in Edline to Bulldog Super Holdco, Inc., which became the ultimate parent of Blackboard, Inc., for $12.2 million dollars. See Note 7 for further discussion of this transaction.

The Company had two promissory notes receivable totaling $1.9 million plus interest from Edline. Both of these notes bore interest at 12.5% per annum payable in kind. The interest and principal amount on these notes receivable were due on June 30, 2016. On October 4, 2011, Edline repaid the promissory notes in full in connection with the Company’s sale of its investment in Edline. The Company received $2.1 million, which represented the $1.9 million principal outstanding, and $0.2 million interest.

For the year ended December 31, 2010, the note payable to related party (see Note 3) was estimated to approximate its carrying value as the final scheduled payment was within one year. In December 2011, that note payable was paid in full.

The fair value of our long-term debt (see Note 9) at December 31, 2011 and 2010 was estimated to approximate its carrying value based on (i) the recentness of entering into, or amending, our credit facility, (ii) the variable rate nature of our credit facility and (iii) the interest rate spreads charged on our loans fluctuating with the total leverage ratio, which is a measurement of our creditworthiness.

5. PROPERTY AND EQUIPMENT

Property and equipment as of December 31, 2011 and 2010 consisted of the following (in thousands):


	2011			2010
Computer equipment	$	5,097		$	4,051
Furniture and fixtures		666			745
Office equipment		670			407
Computer software		1,618			1,195
Leasehold improvements		318			207
Capital projects in process		1,234			—

		9,603			6,605
Accumulated depreciation		(4,830	)		(2,845	)

Total	$	4,773		$	3,760

Depreciation expense was $2.2 million, $1.5 million and $1.1 million for the years ended December 31, 2011, 2010 and 2009, respectively.

6. DISCONTINUED OPERATION

On November 2, 2009, the Company completed the sale of the operations of TeacherWeb to Edline Holdings, Inc. (“Edline”) for an aggregate purchase price of $13.0 million, consisting of $6.5 million in cash (reduced by approximately $1.5 million of cash remaining on TeacherWeb’s balance sheet), Series A shares of Edline valued at $3.7 million and $2.8 million of five-year debt securities that bear interest at 9.5% per annum and require semi-annual interest-only payments. In addition, the Company made a $1.6 million distribution to its members in the fourth quarter of 2009 to enable them to meet certain tax obligations associated with the TeacherWeb sale. As a result of the sale and the Company’s previous investment in Edline, the Company held 11.2% of Edline’s outstanding Series A shares and $4.9 million of Edline’s senior debt. Edline was controlled by one of the Company’s stockholders who, prior to the IPO was the controlling stockholder of the Company. As such, the sale was treated as a transaction between entities under common control and the excess of the sale consideration received and the book value of net assets sold was recognized in additional paid-in capital. The operations of TeacherWeb during the period that the Company owned it are treated as a discontinued operation on the consolidated statements of income and cash flows.

Revenue from TeacherWeb of $2.1 million for the year ended December 31, 2009 was reported in discontinued operations in the consolidated statements of income.

7. INVESTMENT

On August 14, 2009, the Company and two related parties entered into a unit purchase agreement with Edline, a company that offers web-based technological solutions for schools and educators. The Company purchased 285,601 Series A shares of Edline for $2.7 million (which reflects a reduction of $0.2 million of transaction fees the Company received in connection with the transactions), Edline also borrowed $2.1 million from the Company pursuant to a five-year promissory note, In November 2009, Edline acquired TeacherWeb, Inc. from the Company (Note 6), which was partially financed through a 5 year, $2.8 million promissory note between Edline and the Company.

On October 4, 2011, Archipelago Learning, LLC, a wholly owned subsidiary of the Company, entered into a Securities Purchase Agreement (the “Agreement”) with Bulldog Super Holdco, Inc., a Delaware corporation, which became the ultimate parent company of Blackboard, Inc. Pursuant to the Agreement, Archipelago Learning, LLC sold 656,882 shares of Series A Preferred Stock in Edline for a total of approximately $12.2 million (the “Edline Sale”). In addition, the Company received approximately $2.1 million for a notes receivable and a dividend of approximately $0.6 million in connection with the Edline Sale. The Edline Sale represented the Company’s entire investment in Edline. The Company recorded a gain of $6.4 million before tax. As a result of the Edline Sale, Tim McEwen, the Chairman, President and Chief Executive Officer of the Company, has resigned from the Board of Directors of Edline, on which he had previously served. The Edline Sale was in connection with a series of transactions pursuant to which Blackboard was acquired by affiliates of Providence Equity Partners, which beneficially owns 47% of the Company’s outstanding shares of common stock, and pursuant to which Edline became a subsidiary of Blackboard.

8. GOODWILL AND INTANGIBLE ASSETS

The Company has recorded goodwill and intangible assets in connection with the purchase transaction on January 10, 2007 where substantially all of the assets of Study Island, LP, a Texas partnership, were sold to a subsidiary of the LLC. The transaction was recorded as a business combination with the resulting assets acquired and liabilities assumed being recorded at fair value. In addition, the Company has recorded goodwill and intangible assets in connection with the acquisition of Alloy on June 24, 2011 and EducationCity on June 9, 2010 (Note 3). Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives.

Amortization expense for the years ended December 31, was recorded to the following captions in the consolidated statements of income (in thousands):


	2011		2010		2009
Cost of revenue	$	271	$	188	$	84
Sales and marketing		3,083		2,280		1,362
Content development		499		346		166
General and administrative		598		114		—
Income from discontinued operation		—		—		355

Total	$	4,451	$	2,928	$	1,967

The components of the balances of goodwill and intangible assets for the Company’s one reportable segment as of December 31, are as follows (dollars in thousands):


			2011
	Amortization Period (Years)		Gross Carrying Amount		Acquisitions		Accumulated Amortization			Currency Translation			Net Balance
Goodwill		N/A	$	165,694	$	2,080	$	—		$	(13	)	$	167,761

Total			$	165,694	$	2,080	$	—		$	(13	)	$	167,761

Indefinite-lived intangible assets:
Trade names		N/A	$	4,010	$	56	$	—		$	103		$	4,169
Finite-lived intangible assets:
Customer relationships		9-10		29,370		418		(9,408	)		608			20,988
Technical development / program content		10-15		9,560		638		(2,040	)		310			8,468
Non - compete agreements		4-5		1,040		39		(724	)		46			401

Total			$	43,980	$	1,151	$	(12,172	)	$	1,067		$	34,026

During 2011, $2.1 million in goodwill and $0.7 million of the intangibles were recorded as the result of the acquisition of Alloy (Note 3). In addition, during 2011, the Company entered into a perpetual licensing agreement for a suite of online curriculum-focused science programs, including flash animation science lessons and labs. This perpetual license has been recorded as an intangible asset within technical development / program content.


			2010
	Amortization Period (Years)		Gross Carrying Amount		Acquisitions		Accumulated Amortization			Currency Translation		Net Balance
Goodwill		N/A	$	94,373	$	70,546	$	—		$	775	$	165,694

Total			$	94,373	$	70,546	$	—		$	775	$	165,694

Indefinite-lived intangible assets:
Trade names		N/A	$	1,000	$	3,010	$	—		$	105	$	4,115
Finite-lived intangible assets:
Customer relationships		9-10		13,620		15,750		(6,331	)		586		23,625
Technical development / program content		10-15		2,500		7,060		(1,269	)		300		8,591
Non - compete agreements		4-5		—		1,040		(121	)		40		959

Total			$	17,120	$	26,860	$	(7,721	)	$	1,031	$	37,290

The estimated amortization expense for each of the five succeeding years and thereafter as of December 31, 2011, is as follows (in thousands):


2012	$	4,451
2013		4,084
2014		3,984
2015		3,879
2016		3,709
Thereafter		9,750

	$	29,857

The weighted-average remaining useful life of the finite lived intangibles assets as of December 31, 2011 is 8.0 years.

9. CREDIT FACILITY

The Company’s wholly-owned subsidiary, Archipelago Learning, LLC (formerly Study Island, LLC) (“the Borrower”) is the borrower under a credit facility with General Electric Capital Corporation, as agent, composed of a $70.0 million term loan and a $10.0 million revolving credit facility and the Company’s wholly owned subsidiary, AL Midco, LLC (“AL Midco”), is the guarantor under such credit facility. The term loan bears interest rates based upon either a base rate or LIBOR (with a floor of 1.25%) plus an applicable margin (3.75% as of December 31, 2011 and 2010, in each case for a LIBOR-based term loan) determined based on the Borrower’s leverage ratio. Amounts under the revolving credit facility can be borrowed and repaid, from time to time, at the Borrower’s option, subject to the pro forma compliance with certain financial covenants. If amounts are borrowed against the revolving credit facility in the future, those amounts would bear interest based upon either a base rate or LIBOR (with a floor of 1.25%) plus an applicable margin (3.75% as of December 31, 2011) determined based on the Borrower’s leverage ratio. The credit facility also provides for a letter of credit sublimit of $2.0 million.

The Credit Agreement has been amended from time to time, most recently in June 2010, to permit the acquisition of EducationCity and to add a $15.0 million supplemental term loan and an additional $10.0 million to the revolving credit facility, both of which were drawn in order to finance the acquisition. The Borrower subsequently repaid the $10.0 million revolving credit facility during the quarter ended September 30, 2010.

The Credit Agreement requires the Borrower to maintain certain financial ratios, including a leverage ratio (based on the ratio of consolidated indebtedness, net of cash and cash equivalents subject to control agreements, to consolidated EBITDA, defined in the Credit Agreement as consolidated net income adjusted by adding back interest expense, taxes, depreciation expenses, amortization expenses and certain other non-recurring or otherwise permitted fees and charges), an interest coverage ratio (based on the ratio of consolidated EBITDA to consolidated interest expense, as defined in the Credit Agreement) and a fixed charge coverage ratio (based on the ratio of consolidated EBITDA to consolidated fixed charges, as defined in the Credit Agreement).

The Credit Agreement contains certain affirmative and negative covenants applicable to AL Midco, the Borrower and the Borrower’s subsidiaries that, among other things, limit the incurrence of additional indebtedness, liens on property, sale and leaseback transactions, investments, loans and advances, merger or consolidation, asset sales, acquisitions, dividends, transactions with affiliates, prepayments of subordinated indebtedness, modifications of the Borrower’s organizational documents and restrictions on the Borrower’s subsidiaries. The Credit Agreement contains events of default that are customary for similar credit facilities, including a cross-default provision with respect to any other indebtedness and an event of default that would be triggered by a change of control, as defined in the Credit Agreement. As of December 31, 2011, the Borrower was in compliance with all covenants. The Credit Agreement is secured on a first-priority basis by security interests (subject to permitted liens) in substantially all of the assets of the Borrower and AL Midco.

The Borrower has the right to optionally prepay its borrowings under the Credit Agreement, subject to the procedures set forth in the Credit Agreement. The Borrower may be required to make prepayments on its borrowings under the Credit Agreement if it receives proceeds as a result of certain asset sales, additional debt issuances, or events of loss. In addition, a mandatory prepayment of borrowings under the Credit Agreement is required each fiscal year in an amount equal to (i) 75% of excess cash flow (as defined by the Credit Agreement) if the leverage ratio as of the last day of the fiscal year is greater than 4.00 to 1.00, (ii) 50% of excess cash flow if the leverage ratio as of the last day of the fiscal year is less than or equal to 4.00 to 1.00 but greater than 3.25 to 1.00, or (iii) 25% of excess cash flow if the leverage ratio as of the last day of the fiscal year is less than or equal to 3.25 to 1.00. No mandatory prepayment is required if the leverage ratio is less than or equal to 2.50 to 1.00 on the last day of the fiscal year. The Borrower will not be required to make a mandatory prepayment related to the years ended December 31, 2011, 2010 and 2009. The Borrower made a mandatory prepayment of $0.5 million during the second quarter of 2009 related to the excess cash flow generated for the year ended December 31, 2008.

Principal payments on the Borrower’s term loan due over the next four years and beyond as of December 31, 2011, are as follows (in thousands):


2012	$	850
2013		74,063

Total debt		74,913
Less: current maturities		(850	)

Total long-term debt	$	74,063

10. TAXES

Prior to the Reorganization, the LLC was not a taxpaying entity for federal income tax purposes. As a result, the LLC’s income was taxed to its members in their individual federal income tax returns. Upon the Reorganization, the Company became a taxpaying entity and a net deferred tax liability of $2.0 million was recognized into tax expense in the consolidated statement of income for the year ended December 31, 2009. The Company’s discontinued operation, TeacherWeb, was a taxpaying entity for federal income tax purposes.

The components of net income (loss) from continuing operations before income taxes are as follows (in thousands):


	2011			2010			2009
United States	$	16,518		$	5,602		$	9,468
Foreign		(572	)		(364	)		—

Total	$	15,946		$	5,238		$	9,468

The components of the Company’s income tax provision for the years ended December 31 are as follows (in thousands):


	2011			2010			2009
Continuing operations:
Current provision:
Federal	$	3,181		$	106		$	—
State		224			(147	)		529
Foreign		71			430			—

Total		3,476			389			529
Deferred provision:
Federal		1,554			2,387			2,407
State		202			(475	)		158
Foreign		(1,231	)		(515	)		—

Total		525			1,397			2,565

Tax provision from continuing operations	$	4,001		$	1,786

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Archipelago Learning, Inc. 10-K