Cengage 2011 Annual Report

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Transforming Learning.Transforming Lives.

CENGAGE LEARNING HOLDINGS II L.P.

Annual ReportFor The Fiscal Year Ended June 30, 2011


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As of the end of the period covered by this report, Cengage Learning Holdings II,L.P. and its consolidated subsidiaries (the Company) was not subject to thereporting requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, as amended. Consequently, this report has not and will not be filed with theSecurities and Exchange Commission (SEC). However, Cengage LearningHoldings II, L.P. is obligated pursuant to the indenture, dated as of October 31,2008, among Cengage Learning Holdco, Inc. (a direct 100% wholly ownedsubsidiary of the Company), the Company, as guarantor, and Wells Fargo Bank,National Association, as trustee, governing the 13.75% Senior PIK Notes due2015, and the indentures, dated as of July 5, 2007, among Cengage LearningAcquisitions, Inc. (formerly TL Acquisitions, Inc. and a 100% wholly ownedsubsidiary of Cengage Learning Holdings II, L.P.), the guarantors named thereinand The Bank of New York as trustee, governing the 13.25% Senior SubordinatedDiscount Notes due 2015 and the 10.50% Senior Notes due 2015, and otheragreements relating to the Companys debt and securities, to post, on a publiclyaccessible page on the Companys website and otherwise make available,financial and other information that Cengage Learning Holdings II, L.P. would berequired to file with the SEC were it subject to Sections 13 or 15(d) of theSecurities Exchange Act of 1934, as amended, subject to exceptions consistentwith the terms of the indenture governing the 13.75% Senior PIK Notes and thepresentation of financial information in the Cengage Learning Acquisitions, Inc.Offering Memorandum, dated June 22, 2007, relating to the 10.50% Senior Notes

due 2015 and the 13.25% Senior Subordinated Discount Notes due 2015 and asotherwise provided in the Companys agreements relating to its debt andsecurities. This report is made available pursuant to such obligations.


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Safe Harbor Statement Under the

Private Securities Litigation Reform Act of 1995

This report contains both historical and forward-looking statements. Allstatements other than statements of historical fact are, or may be deemed to be,forward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended. These forward-looking statements are not based on historicalfacts, but rather reflect our current expectations concerning future results andevents. These forward-looking statements generally can be identified by the useof statements that include phrases such as believe, expect, anticipate,intend, estimate, plan, project, foresee, likely, will or other wordsor phrases with similar meanings. Similarly, statements that describe ourobjectives, plans or goals are, or may be, forward-looking statements. Theseforward-looking statements involve known and unknown risks, uncertainties andother factors which may cause our actual results, performance or achievements tobe different from any future results, performance and anticipated achievementsexpressed or implied by these statements. Except as required by law, we do notintend to publicly update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise. In addition, forward-looking statements are subject to certain risks and uncertainties that could causeactual results to differ materially from the Companys historical experience and

present expectations or projections. These risks and uncertainties include, but arenot limited to, those described in the section entitled Risk Factors herein.


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CENGAGE LEARNING HOLDINGS II, L.P.

ANNUAL REPORT FOR THE

FISCAL YEAR ENDED JUNE 30, 2011

TABLE OF CONTENTS

Page No.

Description of the Business 1

Risk Factors 11

Properties 20

Legal Proceedings 21

Market for the Registrants Partners' Equity 21

Changes in and Disagreement with Accountants on Accounting and Financial Disclosure 21

Controls and Procedures 21

Directors and Executive Officers 21

Principal Stockholders 24

Certain Relationships and Related Transactions 24Principal Accountant's Fees and Services 24

Selected Financial Data 26

Selected Quarterly Financial Data 27

Managements Discussion and Analysis of Financial Condition and Results of Operations 28

Quantitative and Qualitative Disclosures About Market Risk 54

Financial Statements 55

Computation of Ratio of Earnings to Fixed Charges 93

Financial Statement Schedule:

Reports of Independent Auditors on Financial Statement Schedule 94

Valuation and Qualifying Accounts 95Exhibits:

Audited financial statements of CourseSmart, LLC for the years ended December 31, 2010 and 2009

Audited financial statements of CourseSmart, LLC for the years ended December 31, 2009 and 2008


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DESCRIPTION OF THE BUSINESS

References in this section to Cengage Learning, we, us, our, or the Company refer to Cengage LearningHoldings II, L.P. and its consolidated subsidiaries, unless the context specifically states or implies otherwise.

Our Company

Cengage Learning is a leading global provider of high-quality content, innovative print and digital products andassociated educational services for the academic (higher education), career (for-profit schools), school (K-12), research(library reference), and professional (continuing education) markets worldwide. The Company's educational solutions aredesigned to deliver authoritative information, increase student engagement, foster academic excellence and professionaldevelopment, and improve learning outcomes.

The global education industry enjoys positive growth fundamentals and has grown consistently over a long period oftime, driven primarily by increasing population and economic development. It encompasses a diverse set of products,systems, and services, including the direct delivery of instruction, textbooks and other educational material, supportivetechnology, infrastructure and services directed at students, faculty and educational institutions at all levels.

The market for educational products and services is in a period of significant change as customers migrate towardsdigital solutions that integrate content traditionally provided in print textbooks and academic services designed to facilitatethe educational process and improve student outcomes. Cengage Learnings heritage as a leading educational publisher,

coupled with our investments in technology and academic services, positions us to benefit from favorable industry growthtrends and the migration to digital solutions. In fiscal year 2011, our domestic digital revenue (comprised of sales of digitalproducts not packaged with a print textbook and sales of hybrid print and digital products driven by the value-added digitalcomponents) comprised approximately 32% of our total domestic revenue, while stand-alone print products comprisedapproximately 68% of our total domestic revenues.

Cengage Learning competes in six specific educational markets; academic, career, school, research, professional, andinternational. We maintain two reportable business segments, Domestic and International.

Domestic

In the United States, Cengage Learning produces a variety of print, digital and hybrid educational solutions for students,instructors, educational institutions, libraries and professionals in the academic, career, school and professional markets, and

digitally-enabled reference information, certification test preparation, compliance training and other learning and researchtools for a broad range of customers. We also provide associated educational services to support the use of our products byour customers.

International

Cengage Learning distributes educational solutions in over 110 countries and territories across all major disciplines.The majority of our revenue is derived from adaptations of domestic resources for various markets throughout the world. Wealso publish and sell indigenous course materials and provide learning, research and reference solutions in various formats toindividuals and businesses located outside the U.S. In addition, we provide English language teaching (ELT)products tomeet the needs of the growing international market, which currently has more than one billion learners worldwide.Individual markets are generally defined by country, each with unique customer needs, distribution channels and salesstrategies.

For a full description of our markets and organizational structure, seeOur MarketsandOrganization, Operations andHistory below, respectively.

Our Strengths

We believe the following competitive strengths have been instrumental in our success and position us for future growth:

Editorial Capabilities

Our ability to develop authoritative, pedagogically-sound content that improves learning outcomes is one of our corecompetencies. This capability is a key factor in driving sales as the market for educational solutions is increasingly focused


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on student outcomes with technological developments enabling enhanced measurement of, and government regulationslinking student aid funding to, quantifiable outcomes. Our capability in this area requires not only contributions from ourleading authors, but also a deep understanding of and commitment to the lengthy process needed to produce high qualitysolutions. We have demonstrated this capability, developed over a number of decades, which can be applied to all disciplinesand across multiple product formats.

Economies of Scale

As one of the leading providers of print and digital educational solutions in each of our markets, we benefit fromsignificant economies of scale. Our economies of scale allow us to:

develop publications and digital solutions in a timely and cost-effective manner,

use our extensive sales force to sell multiple products across the academic, research, career, professional and schoolmarkets, and more easily introduce new product offerings to the market,

obtain volume purchasing benefits from our suppliers, and

leverage our fixed costs, including our distribution systems, to enhance profitability.

Key Sources of Our Competitive Advantage

In addition to our economies of scale, a variety of additional competitive advantages support Cengage Learnings strongposition in the market. We have established leading market positions in many disciplines, in part as a result of our long-termpartnerships with authors who are recognized experts in their fields and with third party licensors of authoritative researchmaterials. We have been successful in both attracting talented authors and developing long-term, collaborative relationshipswith them. For example, our leading authors include N. Gregory Mankiw, former Chairman of the Presidents Council ofEconomic Advisers and among the most respected and well-known authors of texts in the introductory economics market,and Fred S. Kleiner, the author of Gardners Art through the Ages, Cengage Learnings premier art history survey, now in its14thedition. We typically obtain copyright ownership over the materials our authors produce and enter into agreements thatinclude non-competition clauses.

Cengage Learnings market leadership positions are also supported by our relationships with our customers acrossmarkets and product typeswhich are often long-standing and a source of stability for our business. Our customers

familiarity with our educational solutions fosters high levels of loyalty and repeat business at the student, instructor andinstitutional levels.

Innovation

For over a decade, Cengage Learning has been a leader in developing high quality digital solutions designed tocomplement our textbooks. These digital solutions include supplemental content, homework solutions and assessmentcapabilities that are designed to measurably increase student engagement and educational outcomes. Examples of our digitalplatforms includeAplia(our Web-based solution that enables instructors to incorporate homework and related courseworkacross many academic disciplines), SAM(Skills Assessment Manager, our proficiency-based assessment and training tool forcomputing), and OWL(Online Web Learning, our online learning system for chemistry), each of which has enjoyedsubstantial market success.

Cengage Learning, operating under our Gale brand, is well established as a premier provider of authoritative referencecontent and innovative digital solutions. We have digitized substantially all of our reference content and derive the majorityof our revenue in the library reference market from digital products. Gale enhances its offerings with digital tools that enableusers to search and interact with content and employs a digital-first product development model in which it leads withdigital solutions and follows with derivative print products when appropriate.

Over the course of the last year, Cengage Learning has invested in developingMindTap, an innovative fully integratedsuite of digital products and services designed to engage students through interactivity. The solution combines soundpedagogy, content and technology, and provides instructors unparalleled choices in content, platforms, devices and learningtools. The platform is flexible and can be personalized by instructors and students through a growing library of apps,developed by Cengage Learning and MindApps, created by independent developers, providing access to tools including


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homework solutions, online tutoring, text-to-speech conversion, quizzes, study activities and social media integration.MindTap is being rolled out initially to a select group of early adopters in the Fall of 2011.

Our Strategy

We intend to maintain our strong market positions and increase our revenues and profits by pursuing the followingstrategies:

1. Lead the migration to digital solutions

Our future success depends upon our ability to create high quality content that is accessible and useful to studentsand their instructors. Increasingly, the market demands innovative and customized digital solutions to complementor replace the traditional textbook experience, and online content and functionality in place of reference materials inprint and microfilm. Many of our products are offered concurrently in print, digital and hybrid formats in order toappeal to the broadest set of customer preferences. Digital solutions vary across a spectrum from straightforwardeTextbooksto sophisticated, wholly-digital homework solutions that extend the eTextbookto includesupplemental content, assignable homework, student assessment, personalization and related educational services.Cengage Learning offers numerous solutions to our customers, often with features tailored to the uniquerequirements of individual disciplines. The majority of our reference materials are offered in digital formats and ourvast collection of periodicals, enhanced with proprietary functionality, is available online through librariesthroughout the world.

We believe that our offerings of digital solutions will increasingly enhance and present new opportunities for ourbusiness. In contrast to printed publications, for which we receive revenue only the first time a product is sold, ourdigital products are licensed, allowing us to participate economically in every digital unit consumed. Digital formatsalso free us from the traditional publishing cycle, increasing our speed-to-market and affording us greater flexibilityto incorporate alternative sources of proprietary content. Through our digital solutions, content relating to currentevents with a high degree of instructional relevance can be directly integrated into the classroom experience. Oneexample is the inclusion of Gale reference content, such as our Global Economic Watchproduct, as a real-timesupplement to our economics textbooks. Our ability to offer digital solutions with topical content allows instructorsto include current, real-world examples to demonstrate lessons in a way that is more engaging and impactful forstudents.

2. Demonstrate improved learning through superior outcomes

Delivering improved student outcomes has always been central to the mission of Cengage Learning. Our ability todeliver solutions that improve student outcomes drives adoptions and increases our sales. The importance of studentoutcomes in the market has been increased recently by regulations that tie government financial aid to demonstrableeducational outcomes, and by publicity relating to the implementation of the regulations. We believe that ourproducts and services deliver effective learning experiences that yield improved student outcomes. These outcomescan be delivered best through an integration of content, technology and services. In our view, the focus on studentoutcomes serves to increase the importance of the publisher in the higher education landscape. As the marketcontinues to evolve, outcomes will become the basis upon which publishers likely will be judged and, in anticipationof this, we are not only investing in our solutions, but also in the means of measuring their efficacy.

3. Leverage our core business to drive international growth

Cengage Learning is an international provider of educational and reference materials with operations that span theglobe. The solutions we develop for our domestic business are frequently adapted for international use, and includenot only conventional textbooks, but also our vocational, research, school, and ELT content and technology. Wealso engage local authors and develop products to meet the precise needs our customers in individual geographiclocations. Through this mix of adaption and organic development, we are able to apply the benefits of our globalscale while retaining the customization required for success in diverse international markets.


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improve academic performance. With a focus on concept mastery and automatic grading, theseeasy-to-use digital resources are designed to produce demonstrable outcomes. CourseMasterincludes our discipline specific platforms such as Aplia, SAM, and OWL.

Course360, a customized fully online course program that engages and motivates students, andmeasurably improves learning outcomes.

o MindTapis a fully integrated, highly interactive suite of digital learning solutions designed to engagestudents and offer instructors choice in content, platforms, devices and learning tools. MindTapis device-agnostic, giving students access to their course materials anytime, anywhereon their desktops, laptops,tablets or mobile phones.

Born out of industry demand and developed based on pedagogically sound principles,MindTapincorporates customizable appsdeveloped by Cengage Learning and MindApps created by independentdevelopers that actively encourage students to interact with their course content, as well as their peers andinstructors. MindTaputilizes a seamless blend of authoritative content and a structured but highly flexibleand extensible delivery platform, allowing instructors and students to incorporate open content in thecontext of the overall syllabus.

Services. Cengage Learning offers a variety of services to complete our solutions, providing support to students,instructors and institutions. Our services include course development, custom content development and directsupport to instructors and students to ensure effective use of our print and digital solutions.

Our widely recognized brands are known for high quality products in their specific discipline areas. We utilize thestrength of our brands to gain an important advantage in the process through which instructors select curriculum materials fortheir courses. Our key academic brands include:

Brooks/Cole - mathematics and the physical sciences,

Course Technology - computer concepts, information technology and software applications,

Heinle - ELT and learning programs,

South-Western - business and economics,

Wadsworthhumanities, behavioral and social science

Course materials are sold to instructors, bookstores, institutions, and ultimately students. Cengage Learning and ourprimary competitors influence the decisions governing the required textbooks for a course by marketing directly to theinstructors responsible for selecting their course materials. The selection of course materials is referred to as an adoption inthe industry. We employ approximately 900 sales professionals who focus on placing adoptions.

We also employ a sales force that focuses specifically on institutional sales opportunities. These sales are typicallymore complicated and time consuming than adoptions by individual instructors, but often promise greater unit volume andeconomic value to Cengage Learning. We believe that the market is slowly transitioning towards this institutional purchasingmodel.

We distribute our products primarily through bricks andmortar college bookstores and online book retailers whichsell directly to students. In recent years, we have invested in proprietary online distribution channels. Through

CengageBrain.com, our e-commerce site, we offer over 15,000 products in multiple formats for sale and rentprint books,e-books, individual e-chapters, digital curriculum solutions, study aids and supplemental materialsdesigned to enablestudents to choose solutions that best satisfy their individual needs. Cengage Learning has also invested in CourseSmart,LLC, a venture supported by the leading publishers in North American higher education for distribution of digital coursematerials.

Research

We operate in the research market primarily under our Gale brand. For over 50 years, Gale has been a leading providerof high-quality, authoritative reference and educational content and innovative digital solutions in the library referencemarket. Gales primary customers in the research market are academic, public, K-12, corporate and government libraries.


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Gale has made substantial investments to build its technology infrastructure and is now well-positioned to benefit from theaccelerating migration to reference content in digital formats.

Providers in the research market create and sell specialized encyclopedias and directories, periodical databases,primary-source research collections and other reference materials. Users access reference information via online databases,digital collections and e-books, as well as print and microfilm.

The research market has experienced an increased demand for digital materials and interest in accessing proprietary orexclusive content. The shift from print to digital reference materials reflects a desire for technology-based features, such asadvanced search functions, that enhance the value of reference materials by making them more widely available andaccessible. The growth of proprietary content reflects demand for content with credibility, organization and depth thatdistinguishes it from free content available from popular commercial search engines.

We compete in the research market with other providers of research databases, print, microfilm and narrative materials,including ProQuest-CSA LLC and EBSCO Industries, Inc. We compete based primarily upon our proprietary content andthe functionality of our digital products. Included in our collections are narrative reference works (over 600 titles) with someof the most notable library brands. Gale has aggregated the worlds largest online collection of magazines, journals andnewspapers (more than 20,000 titles) and maintains one of the largest archives of unique primary source special collectionscomprised of more than 200 million pages of information. Our vast research content repository is the source for hundreds ofproprietary print and microfilm products, as well as nearly 300 unique online research databases that are used in libraries andlearning institutions worldwide. Gale has digitized substantially all of its content.

Gale is extending its presence from the library to the classroom by integrating its reference content into CengageLearnings academic products. We are the only producer of course materials with access to proprietary content of this kind,allowing us to differentiate our products from those of our competitors. We believe the timeliness of this content and its highdegree of contextual relevance will increase the value of our digital course materials.

Approximately 71% of Gales revenue is derived from recurring subscriptions and sales, and approximately 93% of itsdigital subscription-based revenue is generated from its previous years customer base. The nature of Gales content and itsvalue to end-users has enabled Gale to experience very high renewal rates for its products.

Gale sells directly to many libraries and library consortia, and also sells via distributors. Internationally, the companyemploys a mixture of direct sales and sales through bookstores, wholesalers and retailers, most managed through local orregional offices. The primary U.S. sales force is comprised of over 100 sales representatives and managers and is

complemented by a significant support team of approximately 450 people. In addition to selling to libraries, Gale alsolicenses its content for integration within Web-based information services. Gale currently has strategic business distributionarrangements with many leading information services, including Amazon.com, Inc., Dow Jones & Company, Inc., LexisNexis, Thomson West, Bloomberg and Microsoft Corporation.

Career

A significant amount of career training in the United States is provided by for-profit schools. Students in the careermarket generally enroll in programs in order to obtain or enhance skills in the field of their choice and increase their earningpotential. Career students often have work and other obligations that do not permit full-time studies in traditional highereducation programs and seek coursework focused on practical skills which can be utilized in the workplace and enable themto achieve career goals. Cengage Learning offers learning solutions including print books, digital media and online coursesfor career studies across major disciplines including beauty and wellness, automotive, business, culinary, hospitality, traveland tourism, emergency services and paralegal studies. We also increasingly offer technology and services to our careercustomers. Our principal competition in the career market is similar to the academic market and includes Pearson Plc,McGraw-Hill Companies, Inc., and John Wiley & Sons, Inc.

Over the past two decades, growth in the career market has outpaced that of the education market as a whole, as for-profit schools have succeeded with a clear value proposition of convenience and skills training. Enrollments in major for-profit schools grew 12% in 2008, 20% in 2009 and 14% in 2010, while overall post secondary enrollments grew by 4% in2008, 7% in 2009 and 4% in 2010. However, the career market has recently been negatively impacted by federal regulationsand related unfavorable publicity, and as a result, enrollments at for-profit career schools have fallen sharply over the lastyear. The regulations and related publicity have contributed to an increased focus on educational outcomes in the careermarket.


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The career market has unique characteristics that distinguish it from the academic markets, including a higher degree ofcustomer concentration as the market as a whole is more consolidated. In contrast to the academic market in which coursematerials are typically adopted by instructors for each class, career schools often buy direct at the institutional level for allstudents and distribute the products to students themselves. Cengage Learning employs a professional sales force comprisedof approximately 80 sales representatives primarily focused on sales to for-profit career schools.

Professional

Publishers in this market create and sell print, digital solutions and other related materials to students who are seekingjob training and assessment solutions, certification preparation, information references or continuing professional educationin the workplace and through professional training programs. Students in this market are typically employed in or pursuingskill-based jobs and seek to enhance their competency, prepare for examinations and achieve certification or licensing in theirchosen profession.

We provide materials in a wide range of professional studies, often extending our offerings for the career market toprofessionals already in the workforce. Our products also include customized materials for employers to provide training totheir employees. For example, we offer theNetLearningmandatory and compliance online solutions to train healthcareprofessionals on the job, Chilton Automotivematerials to train employers automotive technicians to maintain their truckingfleets andMilady Beauty & Wellnesssolutions to train licensed beauty technicians and spa and salon managers.

Cengage Learning employs a direct professional sales force comprised of approximately 20 sales representatives

focused on sales to employers, training programs and directly to professionals seeking additional professional training.

School

The U.S. school, or K-12, market consists of approximately 50 million students and is comprised of state adoption sales,wherein states adopt products for public schools statewide, and open territory sales, where individual public school districtsdetermine which educational products to purchase. While the long term trend supports market growth, the short-termdynamic is characterized by cyclicality in response to state and local budgets, and as a result the market has experiencedseveral years of revenue declines.

Cengage Learning occupies leading market share positions in select elective disciplines, including advanced placementand ELT. We have focused on these disciplines because they leverage the high quality resources we develop for theacademic or career markets, allowing us to quickly and efficiently develop product. We believe these disciplines have more

attractive growth fundamentals than the school market as a whole, enabling Cengage Learning to moderate the impact of thecyclicality of the broader school market on our business. In August 2011, we acquired the National Geographic Societysdigital and print school publishing unit. Through the acquisition, Cengage Learnings offerings to the school market will beenhanced by the National Geographic ELT products, the National Geographic Science series, elementary school level sciencecurriculum, National Geographic Explorer! Magazine and a vast collection of National Geographic content including images,video, maps, illustrations and articles from National Geographic Magazine. For a description of the acquisition, seeAcquisitions below and in Note 21, Subsequent Events to the Consolidated Financial Statements.

International

Cengage Learning is a leading international provider in the global market for course materials with operations inAsia/Pacific, EMEA (Europe, Middle East and Africa) and Latin America. International markets have grown more rapidlythan the U.S. market, often growing at approximately 5% - 10% annually, driven primarily by population growth and risingliving standards. Cengage Learning adapts domestic course materials for various local markets internationally; publishes andsells course materials produced by local authors; and provides learning and reference solutions in various formats toindividuals and businesses located outside the U.S.

Cengage Learning serves the higher education, vocational, K-12, library reference and ELT markets in selectgeographic areas with a focus on high-growth markets throughout the world. We have four regional businesses that serve anumber of markets generally though local offices and staff with experience in the markets they serve. Our four majorregional markets are served by physical locations in Asia (based in Singapore), EMEA (based in Andover, England),Australia (based in Melbourne) and Latin America (based in Mexico City). We compete in the international markets withPearson Education, Inc., McGraw-Hill Companies, Inc., John Wiley & Sons, Inc., Reed Elsevier Plc and Oxford UniversityPress, Inc., as well as local university and government publishing entities.


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The business mix and strategic focus of these units differ based on prevailing local market demand for learningproducts. Our regional businesses publish adaptations of domestic course materials as well as indigenous course materials,and distribute other available content, including research databases. With a sales force of over 300, located in 25 regionaloffices with sales in over 110 countries and territories, we are well positioned to take advantage of favorable internationalgrowth dynamics.

Organization, Operations and History

Cengage Learning is the successor to Thomson Learning, wholly-owned indirect subsidiaries and divisions of ThomsonReuters Corporation, previously The Thomson Corporation (TOC). On July 5, 2007, Cengage Learning Holdings II, L.P.,a limited partnership controlled by investment funds associated with or designated by Apax Partners, L.P. (Apax), togetherwith OMERS Private Equity, Inc., (i) acquired the stock of certain companies and certain assets, and (ii) assumed certainliabilities, of Thomson Learning (The Acquisition) from TOC.

In July 2010, we reorganized our Academic & Professional, Gale and International businesses to operate as one unit inorder to allow for greater integration of content and technology in our products and services across all areas, eliminateorganizational redundancies, focus technology investments and promote innovation across the Company. We furtherreorganized our functional areas in September 2011.

Our domestic businesses operate with following functional areas:

Learning and Research Solutions includes all product and platform development programs as well as ourinternational businesses

Global Strategy & Business Development includes strategy and business development and direct-to-consumer businesses

Finance and Operations includes all finance functions, along with warehousing and distribution, the GlobalProduction and Manufacturing Services group (GPMS), our centrally managed organization for theproduction and management of our print and digital assets, the central technology group, and real estate andfacilities

Sales and Marketing includes all sales and marketing efforts in the U.S.

We previously operated with two reportable segments worldwide: Academic & Professional and Gale. Following thereorganization in July 2010, while operating day-to-day as one company under common management, we maintain tworeportable segments, Domestic and International, since our Domestic and International operating segments have dissimilar

long-term economic characteristics. Prior year segment data has been restated to conform to current year presentation.

Revenue by Segment

For the year ended June 30, 2011, we had revenues from continuing operations of $1,876 million. Revenues fromcontinuing operations, in millions of U.S. dollars, for each of our segments for the past three years were as follows:


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Printing and binding; raw materials; fulfillment and distribution

GPMS is aligned with our business units and charged with driving best practices across our portfolio in the areas ofworkflow control, cost reduction and content re-use and re-purposing. GPMS manages the preparation of products within anapproved portfolio of pre-press vendors, printers and paper suppliers within strict buying guidelines and pricing agreements.

We execute our fulfillment and distribution functions primarily from Independence, Kentucky. In addition, we maintainsmall distribution and customer service points (some outsourced), to support publishing programs in Australia, LatinAmerica, Asia and Europe. These small distribution and customer service points are locally managed with corporateoversight. By making use of modern distribution systems and materials-handling technologies, we have created efficienciesand reduced operating costs. GPMS has, together with leading providers of print-on-demand technology, implemented print-on-demand services that we use to more efficiently produce certain print products. Our use of print-on-demand servicesreduces the costs associated with producing products that would otherwise remain in inventory for longer periods. We arecontinuing to increase our use of print-on-demand services within the Company and through third parties in our saleschannels.

We have continued our rollout of digital development workflows across both print and digital product lines, utilizingour Content Asset Management System as the key infrastructure. These development processes integrate content andmetadata to support our new product lines such as courseware (Course 360) and custom products.

The primary raw material we use is paper. Paper prices may fluctuate significantly from time-to-time. We attempt to

moderate our exposure to fluctuations in price by entering into single- and multi-year supply contracts with multiple papersuppliers, having alternative suppliers available. For the year ended June 30, 2011, GPMS purchased approximately 61,000tons of paper through direct purchases, as well as purchases made by some of our printers on our behalf.

Employees

As of June 30, 2011, we had approximately 5,500 employees. We believe that relations with our employees aresatisfactory.

Seasonality and comparability

Our revenues, operating profit and operating cash flows are impacted by the inherent seasonality of the academiccalendar. Changes in our customers ordering patterns may impact the comparison of our results in a quarter with the same

quarter of the previous year, or in a fiscal year with the prior fiscal year, where our customers may shift the timing of materialorders for any number of reasons, including, but not limited to, changes in academic semester start dates or changes to theirinventory management practices.

Intellectual property

Substantially all of our proprietary publications and products, including our proprietary customer facing technology, arecovered by copyright in the U.S. and by virtue of international treaties and conventions, in most developed countriesthroughout the world. As the copyright holder, we have the exclusive right to reproduce, distribute, publicly display andperform, and to create derivative versions of the copyrighted works. We also obtain significant content, materials andtechnology through license arrangements with third party licensors.

We do not own any franchises or concessions, but we have registered certain patents, trademarks and service marks inconnection with our publishing businesses. The Company also obtains domain name protection for its internet domains. Webelieve we have taken, and continue to take, in the ordinary course of business, all appropriate available legal steps to protectour intellectual property in all relevant jurisdictions.

We rely on our authors for substantially all of the content for our learning solutions. In almost all cases, copyrightownership has been assigned to us by the original author(s). In certain specific instances, the author may retain the copyright,granting us an exclusive license to utilize the work. In both cases, the term of copyright is generally the life of the authorplus 70 years (works first published prior to 1978 generally have a copyright term of 95 years from the date of firstpublication). With respect to materials created as works made for hire, the term of copyright is the shorter of 95 years frompublication or 120 years from creation. For works first published in the U.S. after 1978, authors have a statutory right toterminate any assignment or license for a five-year period generally commencing 35 years after publication.


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Environmental matters

We generally contract with independent printers and binders for their services, and our operations are generally nototherwise affected by environmental laws and regulations. However, as the owner and lessee of real property, regardless offault, it is possible that we could face liability if contamination were to be discovered on the properties we own or lease. Weare currently unaware of any material environmental liabilities or other material environmental issues relating to ourproperties or operations and anticipate no material expenditures for compliance with environmental laws or regulations. Seeour Properties listing for a description of our significant leased premises.

Acquisitions

In August 2011, we completed the acquisition of the National Geographic Societys School Publishing Unit. The assetsacquired include National Geographics digital and print school publishing unit, including its English language trainingproducts, the National Geographic Science series, its elementary school level science curriculum, National GeographicExplorer! Magazines and literacy and content publishing brand.

In connection with the acquisition, Cengage Learning and the National Geographic Societys exclusive arrangement forCengage Learnings development, marketing and distribution of National Geographic branded ELT materials will beexpanded to include the school, academic and research markets both domestically and internationally. Cengage Learningalso acquired the right to license National Geographic content including over 11 million images, 100,000 hours of video,maps, illustrations, articles from National Geographic Magazine and other content. See Note 21 Subsequent Eventsto the

Consolidated Financial Statements.

Discontinued Operations

On November 30, 2010, we completed the sale of certain non-strategic operations comprising our distance learningbusinesses located in Australia and New Zealand. Pursuant to the terms of the arrangement, we contributed cash of $5.0million to the businesses upon divestiture. The loss on the sale was $4.0 million. These businesses had previously beenclassified as assets held for sale and reported as discontinued operations.

During the year ended June 30, 2009, we completed the sale of our distance learning businesses in the United Kingdomand the Netherlands, as well as our local language academic business located in Spain. As a result of these sales, we recordeda net gain of $2.5 million. These businesses had been classified as assets held for sale and reported as discontinuedoperations.


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RISK FACTORS

The following factors affect our business and the industry in which we operate. The risks and uncertainties described

below are not the only ones we face. Additional risks and uncertainties not presently known or that we currently consider

immaterial may also have an adverse effect on our business. If any of the matters discussed in the following risk factors were

to occur, our business, financial position and results of operations could be materially adversely affected.

We operate in h igh ly competitive markets and competi tion may reduce our market share, revenues and prof itabil ity.

We operate in highly competitive markets with significant established competitors, such as Pearson Education, Inc.,McGraw-Hill Companies, Inc., John Wiley & Sons, Inc., Scholastic Inc., ProQuest-CSA LLC, Reed Elsevier Plc, EBSCOIndustries, Inc., Macmillan Publishers Ltd. and Oxford University Press, Inc. We compete primarily on the basis of thequality of our content and author reputation, the effectiveness of our digital solutions, customersfamiliarity with ourproducts and, to a lesser extent, price. Many of our competitors have substantial financial resources, recognized brands,technological expertise and market experience. Our competitors are also continuously enhancing their products and services,developing new products and services and investing in technology. Some of our competitors are acquiring additionalbusinesses in key sectors that will allow them to offer a broader array of products and services than they currently provide.Some of our competitors have greater resources than us, and therefore, may be able to adapt more quickly to new or emergingtechnologies and changes in customer requirements, or devote greater resources to the development, promotion and sale oftheir products than we can. We may also face competition from businesses that have not traditionally participated in ourmarkets, such as Internet service companies and search providers, that could pose a threat to some of our businesses by

providing more in-depth offerings, adapting their products and services to meet the demands of our customers or combiningwith one of our traditional competitors to enhance their products and services.

We may not be able to compete successfully with our current and future competitors. Competition may require us toreduce the price of our products and services or make additional capital investments that would adversely affect our profitmargins. If we are unable or unwilling to do so, we may lose market share and our business, financial position and results ofoperations may be adversely affected.

We may not be able to attract or r etain the key author s that we need to remain competiti ve and grow.

We depend on our ability to attract and retain talented authors and develop long-term, collaborative relationships withthem. We operate in a number of highly visible markets where there is intense competition for successful, published authors.Authorship of a market-leading textbook may increase the market visibility of an author and result in their recruitment by

other publishers or increase the royalties we must pay such authors. Our inability to attract new authors, the loss of certain ofour high profile authors or increased costs incurred in attracting or retaining authors could harm our business, results ofoperations and financial position.

We compete with the used textbook market and rental textbook programs for sales of our textbooks, and the growth of the

used textbook market and/or r ental textbook programs may adversely af fect our business.

The higher education used textbook market has grown in recent years, driven primarily by more efficient distribution ofused books and the cost of new textbooks. Our textbook customers are often presented with the option to purchase a new orused textbook, and we do not generate revenues from any sale after the initial sale of our textbooks. In addition, anincreasing number of bookstores and online companies are offering textbook rental programs. Historically, the difficulty inmaking used textbooks available to students limited the growth of the used textbook market. The Internet, however, hasmade the used textbook market more efficient and has significantly increased student access to used textbooks. The rental

market also increases the efficiency of the used textbook market by increasing the return rate of rented used textbooks whichare rented multiple times. If the supply of used textbooks and/or textbook rental programs increases, students mayincreasingly look to purchase used textbooks and/ or rent textbooks as an alternative to purchasing our new textbooks. Weprimarily compete against used and rental textbooks on the basis of supply and price. If we are unable to effectively competewith growing competition presented by the used textbooks and rental textbook markets, we could experience a loss in salesand our business, financial position and results of operations may be adversely affected.

I ncreased accessibi li ty of fr ee or relati vely inexpensive information and material s may reduce demand for or impact

pri cing of our products and services.

In recent years, more public sources of free or relatively inexpensive information and research materials have becomeavailable, particularly in digital formats and through Internet search engines, and digital versions of products have been


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offered at lower pricing than similar products offered in traditional media such as print. We expect these trends to continue.For example, some governmental and regulatory agencies have increased the amount of information they make publiclyavailable for free and publishers have offered e-books at prices below the price of print books. Technological changes andthe availability of free or relatively inexpensive information and materials have also affected changes in consumer behaviorand expectations. Public sources of free or relatively inexpensive information and lower pricing for digital products mayreduce demand and impact the prices we can charge for our products and services. To the extent that technological changesand the availability of free or relatively inexpensive information and materials limit the prices we can charge or demand for

our products and services, our business, financial position and results of operations may be adversely affected.

Changes in governmental pr ograms and pri vate lending practices may reduce our r evenues or profi tabil ity.

Students comprise a large portion of our consumer base. Many of these students depend on government and privatefunding, in the form of loans or grants, to pay for their education. Many of these programs are highly regulated and subjectto frequent and substantial changes. In recent years, legislative and regulatory changes have resulted in limitations on and, insome cases, reductions in levels of payments to students. Without sufficient government-sponsored loan programs, some ofthese students may have to forego higher education opportunities. As a result, any decreases or delays in government-sponsored student loans or grants could reduce enrollment and negatively impact our business.

In addition, our library reference customers rely on various sources of governmental funding, primarily from state andlocal governments, to purchase products and services we offer. Accordingly, any decreases or delays in government fundingfor libraries, decreases in budgets or changes in spending patterns could negatively impact our business, financial positionand our results of operations and financial position.

I f we cannot successful ly implement our business strategy, then our business, fi nancial position and resul ts of operations

could be materiall y adversely af fected.

Our ability to successfully implement our business strategy is subject to a number of risks, many of which are beyondour control, including:

rising development costs due to customers requirements for more customized instructional materials andassessment programs,

higher technology costs due to the trend toward delivering more educational content in both traditionalprint and digital formats,

rising advances for popular authors and market pressures to maintain competitive retail pricing,

a material increase in product returns or in certain production costs,

regulatory pressure on textbook prices,

market acceptance of new technology products, including online or computer-based learning,

higher education enrollment trends,

changing demographics and preferences of college students and professors that may affect product

offerings and revenues, and

customer consolidation in the retail and wholesale book market.

We cannot assure you that we will be able to successfully implement our business strategy or that, if successfullyimplemented, our strategy will improve our operating results. In addition, we may decide to alter or discontinue aspects ofour business strategy and may adopt alternative or additional strategies due to business or competitive factors or factors notcurrently expected, such as unforeseen costs and expenses or events beyond our control. If we were unable to implement ourbusiness strategy our business, financial position and results of operations could be adversely affected.


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We have made, and may be requir ed to make in the future, substantial in vestments in our technology in frastructure. I f we

do not make such investments or do not effectively make such investments, our business may be adversely aff ected.

The method of delivering our products is subject to technological change. Over the past several years, we have madesignificant investments in technology, including spending on computer hardware, software, electronic systems,telecommunications infrastructure and digitization of our content. We expect our investment in technology to continue atsignificant levels. If we do not make such investments or do not effectively make such investments, our business may be

adversely affected. In addition, we cannot predict whether technological innovations will, in the future, make some of ourproducts, particularly those printed in traditional formats, wholly or partially obsolete. If this were to occur, we mayexperience a loss in sales or not be able to effectively compete or we may be required to invest additional significantresources to further adapt to the changing competitive environment.

Our intell ectual property and proprietary r ights may not be adequately protected under current laws which could harm

our competi tive posit ion and adversely af fect our business, financial posit ion and resul ts of operations.

Our success depends, in part, on our proprietary content. Our products are largely comprised of intellectual propertycontent delivered through a variety of media, including textbooks, digital learning solutions and the Internet. We rely oncopyright, trademark and other intellectual property laws to establish and protect our proprietary rights in these products.However, our proprietary rights may be challenged, invalidated or circumvented. Our intellectual property rights in the U.S.,the primary jurisdiction in which we conduct business, are well-established. However, we also conduct business in othercountries, such as China and India, where the extent of effective legal protection for intellectual property rights is uncertain,

and this uncertainty could affect our current performance and future growth. Moreover, despite copyright and trademarkprotection, third parties may be able to copy, infringe, illegally import or resell or otherwise profit from our proprietary rightswithout our authorization. These unauthorized activities may be more easily facilitated by the Internet. In addition, the lackof Internet-specific legislation relating to intellectual property protection creates an additional challenge for us in protectingour proprietary rights relating to our online business processes and other digital technology rights. The steps taken by us toprotect our proprietary information may not be adequate to prevent misappropriation of our content or technology. Inaddition, our proprietary rights may not be adequately protected because:

people may not be deterred from misappropriating our technologies despite the existence of laws orcontracts prohibiting it,

policing unauthorized use of our intellectual property may be difficult, expensive and time-consuming(which may divert our management from implementing our business strategy), and we may be unable to

determine the extent of any unauthorized use, and

the laws of other countries in which we may market our products may offer little or no protection for ourproprietary technologies.

If we are not able to adequately protect our intellectual property rights and proprietary rights, our competitive positionmay be harmed and our business, financial position and results of operations could be adversely affected.

We may face intellectual pr operty inf r ingement claims that could be time-consumi ng and costly to defend and could resul t

in our loss of signif icant ri ghts.

Litigation regarding copyrights and other intellectual property rights is extensive in the publishing industry. Althoughwe are not currently aware of any parties pursuing or intending to pursue material infringement claims against us, we may be

subject to such claims in the future. Our third-party suppliers may also become subject to infringement claims, which in turncould negatively impact our business.

We may also initiate claims to defend our intellectual property and maintain our intellectual property. Litigation isexpensive and time-consuming and could divert managements attention from our business and could have an adverse effecton our business, financial position or results of operations. If there is a successful claim of infringement against us, ourcustomers or our third-party intellectual property providers, we may be required to pay substantial damages to the partyclaiming infringement, stop selling products or using technology that contains the allegedly infringing intellectual property,or enter into royalty or license agreements that may not be available on acceptable terms, if at all. All of these judgmentscould damage our business. We may have to develop non-infringing technology and our failure in doing so or obtaining


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licenses to the proprietary rights on a reasonable or timely basis could have an adverse effect on our business, results ofoperations and financial position.

We may not be will ing or able to maintain the availabil ity of i nformation obtained through l icensing arr angements or the

terms of our li censing arrangements may change, which may reduce our profi t margins or our market share.

We obtain significant information through licensing arrangements with content providers. Some content providers may

seek to increase licensing fees for providing their proprietary content to us. In such case, our profit margins may be reducedif we are unable to pass along such price increases to our customers. If we are unable to renegotiate acceptable licensingarrangements with these content providers or find alternative sources of equivalent content, the quality of our content maydecline and as a result we may experience a reduction in our market share, and our business, financial position and results ofoperations may be adversely affected.

Our business reli es on our hosting f acil it ies and electron ic delivery systems and any fail ures or disrupti ons may adversely

aff ect our abi li ty to serve our customers.

We depend on the capacity, reliability and security of our hosting facilities and electronic delivery systems to provideour online library reference materials and other online products to our customers. Use of our electronic delivery systems andother factors such as loss of service from third parties, operational failures, sabotage, break-ins and similar disruptions fromunauthorized tampering or hacking, human error, national disasters, power loss or computer viruses could cause our systemsto operate slowly or interrupt their availability for periods of time. Although we are working to develop and maintain back-up facilities with respect to our network and hosting facilities, the failure of our electronic delivery systems may result in aninterruption in our operations, harm to our reputation and a loss of revenue. If disruptions, failures or slowdowns of ourelectronic delivery systems occur, our ability to distribute our products and services effectively and to serve our customersmay be adversely affected. We do not currently have a back-up facility for all of our online products, and any disruption toour current hosting facilities could have an adverse effect on our business, financial position and results of operations.

We have and may continue to outsource certain functions to thir d parti es and these arrangements may not be successful ,

thereby resul ting in i ncreased costs, or may adversely af fect service levels and our fi nanci al report ing.

We rely on third party providers of outsourced services to provide services on a timely and effective basis. We do notultimately control the performance of our outsourcing partners and the failure of third-party providers of outsourced servicesto perform as required by contract or to our expectations could result in significant disruptions and costs to our operations,which could adversely affect our business, financial position and results of operations and our ability to report financial

information accurately and in a timely manner.

I f we do not adequately manage and evolve our operational and managerial systems and processes, including the

successful implementation of our enterpr ise resource plann ing software, our abil ity to manage and grow our business

may be harmed.

We need to continue to improve existing and implement new operational and managerial systems to manage ourbusiness effectively. We are currently in the process of expanding and upgrading our enterprise resource planning and othersystems. Any delay in the implementation of, or disruption in the transition to, our new or enhanced systems, couldadversely affect our ability to accurately forecast sales demand, manage our supply chain and achieve accuracy in theconversion of electronic data and records. Failure to properly or adequately address these issues could result in the diversionof managements attention and resourcesand adversely affect our business, financial position and results of operations.

I ncreases in the cost of paper and other operati ng costs could negatively af fect our resul ts.

Paper is the principal raw material used in our business. As a result, our business may be negatively impacted by anincrease in paper prices. The price of paper may fluctuate significantly in the future, and changes in the market supply of ordemand for paper could affect delivery times and prices. Paper suppliers may consolidate and as a result, there may be futureshortfalls in supplies necessary to meet the demands of the entire marketplace. We may need to find alternative sources forpaper from time to time. We may not continue to have access to paper in the necessary amounts or at reasonable prices and amaterial increase in the cost of paper may have an adverse effect on our business, financial position and results of operations.

We also have other significant operating costs, and unanticipated increases in these costs could adversely affect ouroperating margins. Higher energy costs and other factors affecting the cost of publishing, transporting and distributing ourproducts could adversely affect our financial results. Our inability to absorb the impact of increases in paper costs and other


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costs or any strategic determination not to pass on all or a portion of these increases to customers could adversely affect ourbusiness, financial position and results of operations.

Conducti ng and expandi ng our operations outside the U.S. involves special chall enges that we may not be able to meet

and that may adversely af fect our business.

While our primary markets are in the U.S., we operate globally and have targeted certain markets outside North America

for continued growth. For the year ended June 30, 2011, approximately 86% of our revenues were from the U.S. andapproximately 14% were from markets outside the U.S. International operations and any foreign business expansion we mayundertake present numerous risks, including:

difficulties in penetrating new markets due to established and entrenched competitors,

difficulties in developing products and services that are tailored to the needs of local customers,

customers in certain foreign countries may have longer payment cycles,

limitations in the ability to repatriate funds to the U.S.,

the difficult of enforcing agreements and collecting receivables under certain foreign legal systems,

lack of local acceptance or knowledge of our products and services,

lack of recognition of our brands,

unavailability of joint venture partners or local companies for acquisition,

instability of international economies and governments,

changes in legal, regulatory and tax requirements,

exposure to varying legal standards, including intellectual property protection laws, in other jurisdictions,

general economic and political conditions in the countries where we operate, and

changes in foreign governmental regulations or other governmental actions that would have a direct orindirect adverse impact on our business and market opportunities.

We may not continue to be found to be operating in compliance with applicable currency exchange control regulations,transfer pricing regulations or any other laws or regulations to which we may be subject. Also, these laws may be modified, theresult of which may be to prevent us from transferring sufficient cash to service and repayment of our debt. We are also subject tothe United States Foreign Corrupt Practices Act, which generally prohibits companies and their intermediaries from bribing foreignofficials for the purpose of obtaining or keeping business, and similar requirements in other jurisdictions. While we have

procedures designed to ensure our compliance with such laws, these procedures may fail or may not protect us against liability as aresult of actions that may be taken in the future by our agents and other intermediaries, including those over whom we may havelimited or no control.

Our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated withour operations outside the United States.

Fluctuations between f oreign curr encies and the U.S. dollar could have an unf avorable impact on our f inancial

results.

We derived approximately 14% of our revenues in the year ended June 30, 2011 from our international operations. Thefinancial position and results of operations of our international operations are primarily measured using the foreign currencyin the jurisdiction of operation of such business as the functional currency. As a result, we are exposed to currencyfluctuations both in receiving cash from our international operations and in translating our financial results back into U.S.dollars. Assets and liabilities of our international operations are translated at the exchange rate in effect at each balance sheet


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date. Our income statement accounts are translated at the average rate of exchange. A strengthening of the U.S. dollaragainst the relevant foreign currency reduces the amount of income we recognize from our international operations.

Additionally, certain of our international operations generate revenues in the applicable local currency or in currenciesother than the U.S. dollar, but purchase inventory and incur costs primarily in U.S. dollars or currencies whose exchangerates are mechanically tied to the value of the U.S. Dollar. If we do not effectively hedge such foreign currency exposure, theresults of our international operations will be adversely affected by an increase in the value of the U.S. dollar. In addition, we

may experience hedging and transactional gains or losses because of volatility in foreign currency exchange rates

We cannot predict the effects of further exchange rate fluctuations on our future operating results. As exchange ratesvary, our results of operations and profitability may be adversely impacted. While we may use derivative financialinstruments to manage exposure to market risks arising from changes in foreign currency exchange rates and interest rates,the risks we face in foreign currency transactions and translation may continue to increase as we further develop and expandour international operations, which could adversely affect our business, financial position and results of operations.

I f we are unable to identi fy, complete and successful ly integrate acquisitions, our abi li ty to grow our business may be

limi ted and our business, fi nancial position and resul ts of operati ons may be adversely impacted.

We may not be able to identify, complete and successfully integrate acquisitions in the future and any failure to do somay limit our ability to grow our business. Our acquisition strategy involves a number of risks, including:

our ability to find suitable businesses to acquire at affordable valuations or on other acceptable terms,

competition for acquisition targets may lead to substantial increases in purchase prices or one of ourcompetitors acquiring one of our acquisition targets,

our continued dependence on access to the credit and capital markets to fund acquisitions,

prohibition of any of our proposed acquisitions under U.S. or foreign antitrust laws,

the diversion of managements attention from existing operations to the integration of acquired companies ,

our inability to realize expected cost savings and synergies,

expenses, delays and difficulties of integrating acquired businesses into our existing business structure, and

difficulty in retaining key customers and management personnel.

If we are unable to continue to acquire and efficiently integrate suitable acquisition candidates, our ability to increaserevenues and fully implement our business strategy may be adversely impacted, which could affect our business, financialposition and results of operations.

We could be adversely aff ected as a result of general economic and market condit ions.

Our business is global and as such, we are subject to the risks arising from adverse changes in domestic and globaleconomic and political conditions. Economic growth in the U.S. and around the globe continued to be weak through June

2011 following the recession in 2007-2009. If economic growth in the U.S. or other countries continues to be weak ordeclines, or if credit markets experience disruptions, customers may delay or reduce product purchases, the amount ofgovernment and private loans for students as well as the availability of credit already arranged may be adversely impactedand the cost of credit to us in the future may increase. If economic conditions do not improve or they worsen, there could bea reduction in demand by end-users which could negatively affect the cash flow of our distributors and resellers who could,in turn, delay payment on their obligations to us. Continuing or worsening adverse economic conditions could impact ourcash and debt levels, which could result in higher borrowing costs and adversely affect our ability to satisfy the financialcovenants included in our debt documents, including our senior secured credit facility, and government funding forcontinuing education, professional training and library reference may decline, reducing demand for our products.

Conversely, improved economic conditions, together with a decrease in unemployment, could cause a reduction inenrollments as individuals enter or return to the work force rather than enroll in educational programs. Reduced enrollments


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may cause a decrease in demand for our products and services which could adversely impact our revenue growth. Any ofthese events could adversely affect our business, financial position and results of operations.

We could incur asset impairment charges for goodwil l and identi f iable in tangible assets.

At June 30, 2011, we had goodwill of $3,539.6 million and identifiable intangible assets, net, of $2,695.7 millionincluded on our Consolidated Balance Sheets. On an annual basis and on the occurrence of certain events, we are required to

perform impairment tests on our goodwill. We test the carrying value of goodwill for impairment at a reporting unit level,using a two-step approach. In the first step, the fair value of each reporting unit is determined. If the fair value of a reportingunit is less than its carrying value, this is an indicator that the goodwill assigned to that reporting unit may be impaired. Inthis case, the second step is to allocate the fair value of the reporting unit to the assets and liabilities of the reporting unit as ifit had just been acquired in a business combination, and as if the purchase price was equivalent to the fair value of thereporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities isreferred to as the implied fair value of goodwill. The implied fair value of the reporting units goodwill is then compared tothe actual carrying value of goodwill. If the implied fair value is less than the carrying value, we would be required torecognize an impairment loss for that excess.

Additionally, we review the carrying values of long-lived assets for impairment whenever events or changes incircumstances indicate that their carrying amounts may not be recoverable. Our initial test for impairment compares thecarrying amounts with the sum of undiscounted cash flows attributable to the long-lived asset. If the carrying value is greaterthan the undiscounted cash flows of the asset, the asset is required to be written down to its estimated fair value.

If expectations for revenue and cash flows decline or if market conditions deteriorate, we may not be able to realize thecarrying values of our goodwill and long-lived assets and could be required to record future charges for impairment. Inaddition, future acquisitions may not be as successful as originally anticipated and may result in impairment charges, whichcould adversely impact our business, financial position and results of operations.

Consolidati on in the markets in which we operate could place us at a competi tive disadvantage.

Recently, some of the markets in which we operate have experienced significant consolidation. In particular, thecombinations of traditional media content companies and new media distribution companies have resulted in new businessmodels and strategies. Similarly, the consolidation of book retailers has increased our reliance on certain customers. Wecannot predict with certainty the extent to which these types of business combinations may occur or the impact that they mayhave. These combinations could potentially place us at a competitive disadvantage with respect to negotiations, scale,

resources and our ability to develop and exploit new media technologies which could adversely impact our business, financialposition and results of operations.

Our substantial leverage could adversely aff ect our fi nancial health and our abil ity to raise additi onal capital to fund our

operations, limi t our abi li ty to react to changes in the economy or our industry, expose us to interest rate ri sk to the extent

of variable rate debt and prevent us from fu lf il li ng our obligations under our outstanding debt agreements.

As of June 30, 2011, our total indebtedness was $5,690.5 million. We also had an additional $273.4 million availablefor borrowing under our revolving credit facility at that date. Our interest expense for fiscal year 2011 was $481.3. Theterms of the indentures governing our senior notes, senior subordinated discount notes, senior PIK notes and the creditagreement governing our senior credit facilities do not fully prohibit us or our subsidiaries from incurring substantialadditional indebtedness. See Note 10 Long-Term Debt to our Financial Statements.

Our leverage could have important consequences, which could adversely impact our business, financial position andresults of operations, including:

requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principaland interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations,capital expenditures and future business opportunities,

increasing our vulnerability to general economic and industry conditions,

exposing us to the risk of increased interest rates on certain of our borrowings with variable interest rates,

making it more difficult for us to make payments and satisfy our debt obligations,


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limiting our ability to make strategic acquisitions,

limiting our ability to obtain additional financing for working capital, capital expenditures, productdevelopment, acquisitions and general corporate purposes, and

limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantagecompared to our competitors.

Our debt agreements contain restr ictions that limit our fl exibi li ty in operating our business.

Our debt agreements contain various covenants that limit our ability to engage in specified types of transactions. Thesecovenants limit us and our restricted subsidiaries ability to, among other things:

incur additional indebtedness, make guarantees and enter into hedging arrangements,

create liens on assets,

engage in mergers or consolidations,

sell assets,

make investments, loans and advances, including acquisitions,

repay the senior subordinated discount notes or the PIK notes,

engage in certain transactions with affiliates, and

amend material agreements governing the senior subordinated discount notes.

In addition, under the agreement governing the secured credit facilities, we are required to satisfy and maintain a seniorsecured leverage test. Our ability to meet such test can be affected by events beyond our control, and we may not be able tomeet such test.

A breach of any of these covenants could result in a default under our debt agreements if not cured under the applicableagreements. Upon the occurrence of an event of default under our secured credit facilities, the lenders could elect to declareall amounts outstanding under our secured credit facilities to be immediately due and payable and terminate all commitmentsto extend further credit. If we were unable to repay those amounts, the lenders under the secured credit facilities couldproceed against the collateral granted to them to secure that indebtedness. If the lenders under our secured credit facilitiesaccelerate the repayment of borrowings, we may not have sufficient assets to repay our indebtedness. Accordingly, we maynot have sufficient assets remaining to satisfy the obligations under our outstanding notes. The acceleration of ourindebtedness under one agreement would permit acceleration of indebtedness under other agreements that contain cross-default or cross-acceleration provisions. If our indebtedness is accelerated, we may not be able to repay our indebtedness orborrow sufficient funds to refinance such indebtedness. Even if we were able to obtain new financing, it may not be oncommercially reasonable terms or on terms that are acceptable to us.

Changes in our credit ratings or macroeconomic conditions may aff ect our li quidity, i ncreasing bor rowing costs and

lim iting our fi nancing options.

Our long-term debt is currently rated below investment grade by Standard & Poors and Moodys Investors Service.Standard & Poors recently lowered their outlook on Cengage Learning from stable to negative. If our credit ratings remainbelow investment grade or are lowered further, borrowing costs for future long-term debt or short -term borrowing facilitiesmay increase and our financing options may be more limited. We may also be subject to additional restrictive covenants thatmay reduce our flexibility. In addition, macroeconomic conditions, such as continued or increased volatility or disruption inthe credit markets, may adversely affect our ability to refinance our existing debt or obtain additional financing to supportoperations or to fund new acquisitions or capital-intensive internal initiatives.


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Changes to laws and regulations may have an adverse effect on our business.

Our business and customersbusinesses are subject to U.S. federal, state and local laws and regulations including lawsand regulations relating to intellectual property, libel, privacy, accessibility, product offerings and financial aid eligibility andlaws and regulations applicable generally to businesses. New laws and regulations and changes to existing laws andregulations applicable to us and our customers may restrict or require a change to how we and our customers conductbusiness and could have an adverse effect on our business.

In June 2011, the U.S. Department of Education finalized new rules that define gainful employment as it relates toTitle IV financial aid requirements affecting most for-profit school programs and certificate programs at nonprofit and publicinstitutions that prepare students for gainful employment in a recognized occupation. The Department of Educationpreviously established new rules relating to Title IV student aid programs that modified standards relating to the payment ofincentive compensation for student recruitment and enrollment by institutions of higher education. The new rules couldadversely affect enrollments in, and the number of programs offered by institutions of higher education, including for -profitschools, by limiting such institutions ability to recruit students and making some for profit school programs ineligible forFederal financial aid funding. Reductions in enrollment in institutions of higher education and the number of programsoffered by for-profit schools could cause us to experience a loss in sales as there would be lower demand for our products andservices.

We may not be able to attract or retain key employees.

Our future success depends on the continued services of key employees and our ability to attract and retain newemployees with the experience and capabilities necessary to support our needs. The loss of any of the key employees or thefailure to attract and retain suitably skilled new employees could adversely affect our business, financial position and ourresults of operations.

Apax control s us and may have conf l icts of in terest with us.

Investment funds associated with or designated by Apax control us. Apax is able to appoint a majority of our board ofdirectors and determine our corporate strategy, management and policies. In addition, Apax has control over our decisions toenter into any corporate transaction and has the ability to prevent any transaction that requires the approval of shareholdersregardless of whether we believe that any such transactions are in our best interests. For example, Apax could cause us tomake acquisitions that increase the amount of our indebtedness, including our secured indebtedness or our seniorindebtedness or to sell assets, which may impair our ability to make payments under existing debt obligations.

Additionally, Apax is in the business of making investments in companies and may from time to time acquire and holdinterests in businesses that compete directly or indirectly with us. Apax may also pursue acquisition opportunities that maybe complementary to our business and, as a result, those acquisition opportunities may not be available to us. So long asinvestment funds associated with or designated by Apax collectively continue to own a significant amount of our equity, evenif such amount is less than 50%, Apax will continue to be able to strongly influence or effectively control our decisions. Theinterests of Apax may not coincide with our interests and as a result, actions taken by Apax could adversely affect ourbusiness, financial position and results of operations.

We are not subject to the Sarbanes-Oxley Act of 2002.

Since we are not a public company, we are not subject to the Sarbanes-Oxley Act of 2002, which requires publiccompanies to have and maintain effective disclosure controls and procedures to ensure timely disclosure of material

information, and have management review the effectiveness of those controls on a quarterly basis. The Sarbanes-Oxley Actalso requires public companies to have and maintain effective internal controls over financial reporting to provide reasonableassurance regarding the reliability of financial reporting and preparation of financial statements, and have managementreview the effectiveness of those controls on an annual basis (and have the independent auditor attest to the effectiveness ofsuch internal controls). We are not required to comply with these requirements and therefore we may not have comparableprocedures in place as compared to public companies.


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PROPERTIES

Our principal executive office is located at 200 First Stamford Place, Suite 400, Stamford, CT. The following tabledescribes the approximate space, principal uses and the years of expiration of owned and leased premises for our significantoperating properties as of June 30, 2011 (defined as properties with a minimum of 3,000 square feet). We believe that theseproperties are suitable and adequate for our present and anticipated business needs, satisfactory for the uses to which each isput, and, in general, fully utilized.

Owned or Leased

(Expiration Date

Location of Leases) Principal Use of Space Segment

Andover, England 4/20/2091 160,000 Mixed Use International

Ann Arbor, Michigan 1/31/2013 4,723 Office Domestic

Atlanta, Georgia 12/31/2016 6,675 Office Domestic

Bangkok, Thailand 8/31/2012 3,940 Office International

Beijing, China 8/31/2012 5,921 Mixed Use International

Belmont, California 12/31/2013 84,344 Office Domestic

Bogota, Colombia 8/23/2012 3,358 Mixed Use International

Boston, Massachusetts 11/30/2019 141,482 Office Domestic

Chicago, Illinois 8/31/2020 21,646 Office Domestic

Clifton Park, New York 12/31/2011 127,932 Office DomesticEagan, Minnesota 7/15/2016 3,500 Office Domestic

Farmington Hills, Michigan Owned 158,364 Office Domestic

Fort Worth, Texas 11/30/2012 4,863 Office Domestic

Houston, Texas 12/31/2011 6,000 Office Domestic

Independence, Kentucky 2/29/2012 835,000 Mixed Use Domestic

Knoxville, Tennessee 4/30/2012 11,453 Office Domestic

Kowloon, Hong Kong 3/31/2013 3,842 Office International

Lower Hutt, New Zealand 12/31/2014 4,478 Office Internatio

Cengage 2011 Annual Report

Documents

Transcript of Cengage 2011 Annual Report