UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Voyager Learning Company

(Exact name of registrant as specified in its charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		36-3580106 (I.R.S. Employer Identification No.)
1800 Valley View Lane, Suite 400, Dallas, Texas (Address of Principal Executive Offices)		75234-8923 (Zip Code)

Registrant’s telephone number, including area code: (214) 932-9500

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 þ No o

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o

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

The number of shares of the registrant’s common stock, $.001 par value, outstanding as of November 30, 2008 was 29,874,145.

 

 

TABLE OF CONTENTS

		Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2008 and September 29, 2007			1
Condensed Consolidated Balance Sheets as of September 30, 2008 and December 29, 2007			2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and September 29, 2007			3
Notes to the Condensed Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures about Market Risk			27
Item 4. Controls and Procedures			27
PART II OTHER INFORMATION
Item 1. Legal Proceedings			28
Item 1A. Risk Factors			30
Item 6. Exhibits			30
SIGNATURE PAGE			31
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Voyager Learning Company and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,				September 29,				September 30,				September 29,
		2008				2007				2008				2007
Net sales		$	27,267			$	31,837			$	76,418			$	88,226
Cost of sales (exclusive of depreciation and amortization shown separately below)			(9,956	)			(9,973	)			(27,837	)			(27,213	)
Gross profit			17,311				21,864				48,581				61,013
Research and development expense			(1,141	)			(1,125	)			(3,743	)			(3,512	)
Sales and marketing expense			(8,005	)			(7,535	)			(25,410	)			(21,308	)
General and administrative expense			(8,077	)			(12,387	)			(24,286	)			(42,944	)
Depreciation and amortization expense			(5,258	)			(5,773	)			(16,083	)			(17,243	)
Lease termination costs			—				—				(11,673	)			—
Loss from continuing operations before interest and income taxes			(5,170	)			(4,956	)			(32,614	)			(23,994	)
Net interest income (expense):
Interest income			136				683				712				2,848
Interest expense			(77	)			(152	)			(231	)			(3,110	)
Net interest income (expense)			59				531				481				(262	)
Sublease income and other			1				1,218				790				3,179
Loss from continuing operations before income taxes			(5,110	)			(3,207	)			(31,343	)			(21,077	)
Income tax benefit			—				1,226				—				8,056
Loss from continuing operations			(5,110	)			(1,981	)			(31,343	)			(13,021	)
Earnings from discontinued operations (less applicable income taxes of $0, $0, $0, and $1,491, respectively)			—				—				—				4,594
Gain on sale of discontinued operations (less applicable income taxes of $0, $0, $0, and $11,160, respectively)			—				—				—				46,572
Net earnings (loss)		$	(5,110	)		$	(1,981	)		$	(31,343	)		$	38,145
Net earnings (loss) per common share:
Basic:
Loss from continuing operations		$	(0.17	)		$	(0.07	)		$	(1.05	)		$	(0.43	)
Earnings from discontinued operations			—				—				—				0.15
Gain on sale of discontinued operations			—				—				—				1.56
Basic net earnings (loss) per common share		$	(0.17	)		$	(0.07	)		$	(1.05	)		$	1.28
Diluted:
Loss from continuing operations		$	(0.17	)		$	(0.07	)		$	(1.05	)		$	(0.43	)
Earnings from discontinued operations			—				—				—				0.15
Gain on sale of discontinued operations			—				—				—				1.56
Diluted net earnings (loss) per common share		$	(0.17	)		$	(0.07	)		$	(1.05	)		$	1.28
Average number of common shares and equivalents outstanding:
Basic			29,871				29,860				29,871				29,855
Diluted			29,871				29,860				29,871				29,855

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

Voyager Learning Company and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

		September 30,				December 29,
		2008				2007
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	23,113			$	53,868
Accounts receivable, net			20,595				9,266
Income tax receivable			64,155				65,600
Inventory			17,673				16,005
Other current assets			25,897				16,489
Total current assets			151,433				161,228
Property, equipment, and software at cost			15,807				23,925
Accumulated depreciation and amortization			(9,043	)			(8,584	)
Net property, equipment, and software			6,764				15,341
Goodwill			142,858				142,858
Acquired curriculum intangibles, net			41,707				51,206
Other intangible assets, net			5,478				6,411
Developed curriculum, net			8,861				9,333
Other assets			1,361				16,350
Total assets		$	358,462			$	402,727
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of capital lease obligations		$	176			$	789
Accounts payable			4,043				4,403
Accrued expenses			35,337				25,315
Deferred revenue			26,828				19,822
Total current liabilities			66,384				50,329
Long-term liabilities:
Capital lease obligations, less current maturities			125				810
Other liabilities			32,451				61,258
Total long-term liabilities			32,576				62,068
Commitments and contingencies (See Note 16)
Shareholders’ equity:
Common stock ($.001 par value, 50,000 shares authorized, 30,550 shares issued and 29,874 shares outstanding at September 30, 2008, and 30,552 shares issued and 29,883 shares outstanding at December 29, 2007)			30				30
Capital surplus			357,523				356,683
Accumulated earnings (deficit)			(79,066	)			(47,723	)
Treasury stock, at cost (676 shares at September 30, 2008 and 669 shares at December 29, 2007)			(16,836	)			(16,742	)
Other comprehensive income (loss):
Pension and postretirement plans, net of tax			(2,108	)			(2,088	)
Net unrealized gain (loss) on securities, net of tax			(41	)			170
Accumulated other comprehensive income (loss)			(2,149	)			(1,918	)
Total shareholders’ equity			259,502				290,330
Total liabilities and shareholders’ equity		$	358,462			$	402,727

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

Voyager Learning Company and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

		Nine Months Ended
		September 30,				September 29,
		2008				2007
Operating activities:
Net earnings (loss)		$	(31,343	)		$	38,145
Adjustments to reconcile net earnings (loss) to net cash used in operating activities:
Depreciation and amortization			16,083				17,243
Stock-based compensation (benefit)			688				(203	)
Non-cash lease termination costs			673				—
Gain on sale of available for sale securities			(136	)			(508	)
Gain on sale of discontinued operations, net of tax			—				(46,572	)
Deferred income taxes			—				(8,332	)
Earnings from discontinued operations, net of tax			—				(4,594	)
Amortization and write-off of deferred financing costs			—				2,236
Changes in operating assets and liabilities:
Accounts receivable, net			(11,329	)			(60,524	)
Inventory			(1,668	)			(3,669	)
Other current assets			5,875				51,805
Other assets			(11	)			(1,181	)
Accounts payable			(360	)			839
Accrued expenses			(10,004	)			(63,623	)
Deferred revenue			7,593				(283	)
Other long-term liabilities			(1,838	)			(13,298	)
Other, net			53				(15	)
Net cash used in operating activities of continuing operations			(25,724	)			(92,534	)
Investing activities:
Expenditures for property, equipment, curriculum development costs, and software			(5,904	)			(7,037	)
Purchases of equity investments available for sale			(675	)			(7,699	)
Proceeds from sales of equity investments available for sale			1,756				8,674
Proceeds from sale of discontinued operations, net			—				186,342
Net cash provided by (used in) investing activities of continuing operations			(4,823	)			180,280
Financing activities:
Repayment of debt			—				(58,225	)
Principal payments under capital lease obligations			(208	)			(623	)
Debt issuance costs			—				(302	)
Net cash used in financing activities of continuing operations			(208	)			(59,150	)
Increase (decrease) in cash and cash equivalents of continuing operations			(30,755	)			28,596
Net cash used in discontinued operations:
Net cash used in operating activities			—				(19,891	)
Net cash used in investing activities			—				(2,540	)
Net cash used in financing activities			—				(730	)
Net cash used in discontinued operations			—				(23,161	)
Increase (decrease) in cash and cash equivalents			(30,755	)			5,435
Cash and cash equivalents, beginning of period			53,868				39,902
Cash and cash equivalents, end of period		$	23,113			$	45,337

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

Voyager Learning Company and Subsidiaries

Note 1 — Basis of Presentation

The Condensed Consolidated Financial Statements include the accounts of Voyager Learning Company and its subsidiaries and are unaudited. All intercompany transactions are eliminated.

On February 9, 2007, we sold ProQuest Information and Learning (“PQIL”) to Cambridge Scientific Abstracts, LP. The operating results and the gain on sale of PQIL have been segregated from our continuing operations for all periods presented in our Condensed Consolidated Financial Statements and are separately reported as discontinued operations (see Note 6 herein).

As permitted under the Securities and Exchange Commission (“SEC”) requirements for interim reporting, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. We believe that these financial statements include all necessary and recurring adjustments for the fair presentation of the interim period results. These financial statements should be read in conjunction with the Consolidated Financial Statements and related notes included in our annual report on Form 10-K for the fiscal year ended December 29, 2007 (the “2007 10-K”). Due to seasonality, the results of operations for the three and nine months ended September 30, 2008 are not necessarily indicative of the results to be expected for the year ending December 31, 2008.

Certain reclassifications to the 2007 Consolidated Financial Statements have been made to conform to the 2008 presentation. In 2007 cost of sales includes expenses to print, handle and warehouse product and provide services and support to customers. Additionally, in 2007, cost of sales included amortization related to our acquired and developed curriculum and certain other operational assets. All depreciation and amortization for the periods presented herein have been segregated and shown separately.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Subsequent actual results may differ from those estimates.

With the sale of PQIL in February 2007, the Company had business segments that were included in discontinued operations in 2007. Because the Company’s management approach, organizational structure, operating performance measurement and reporting, and operational decision making are performed from a single company perspective, the Company operates as one reportable segment within the United States (“U.S.”) in fiscal 2008 and 2007, which includes all corporate operations.

Note 2 — Change in Fiscal Year

On December 20, 2007, the Board of Directors of the Company adopted a resolution changing the Company’s fiscal year end from the Saturday nearest to December 31 to a calendar year. This change is effective for the fiscal year ending on December 31, 2008. The Company’s fiscal 2007 year ended on December 29, 2007. The two-day transition period between December 29, 2007 and the 2008 annual fiscal year, which began January 1, 2008, will be included in the Company’s Annual Report on Form 10-K for the year ending December 31, 2008. The Quarterly Report on Form 10-Q for the period ended March 31, 2008 was the first report filed by the Company for the newly adopted fiscal year and included the two-day transition period.

Note 3 — Accounts Receivable

Accounts receivable are stated net of allowances for doubtful accounts and estimated sales returns. The allowance for doubtful accounts and estimated sales returns totaled $0.7 million and $1.3 million at September 30, 2008 and December 29, 2007, respectively. The allowance for doubtful accounts is based on a review of the outstanding accounts receivable balances and historical collection experience. The allowance for sales returns is based on historical rates of return.

Note 4 — Stock-Based Compensation

The total amount of pre-tax expense (benefit) for stock-based compensation recognized in general and administrative expense was $0.2 million and $0.4 million in the quarters ended September 30, 2008 and September 29, 2007, respectively, and $0.7 million and $(0.2) million in the nine month periods ended September 30, 2008 and September 29, 2007, respectively. Additionally, a pre-tax benefit for stock-based compensation of $(0.1) million is recognized in earnings from discontinued operations for the nine month period ended September 29, 2007.

In June 2008 the Company issued 15,714 cash-based restricted stock units to members of the Company’s Board of Directors (2,619 units per board member). Under this grant, the cash based restricted stock units vest after six months. No actual shares will be issued in relation to this grant, but instead, the grant was intended to provide payment to the members of the Board of Directors in a form of compensation that is related to the price of the Company’s stock. As of September 30, 2008, 2,619 awards have been cancelled due to the resignation of one of the board members. All remaining cash settled restricted stock units related to this grant have been classified as liability awards based on their cash settlement provisions. Liability and expense amounts related to this grant are not material at September 30, 2008.

Note 5 — Net Earnings (Loss) per Common Share

Basic net earnings/ (loss) per common share are computed by dividing net earnings/ (loss) by the weighted average number of common shares outstanding during the period. Diluted net earnings/(loss) per common share is computed by dividing net earnings/(loss) by the weighted average number of common shares outstanding during the period, including the potential dilution that could occur if all of the Company’s outstanding stock awards that are in-the-money were exercised, using the treasury stock method. A reconciliation of the weighted average number of common shares and equivalents outstanding used in the calculation of basic and diluted net earnings per common share are shown in the table below for the periods indicated:

		Three Months Ended								Nine Months Ended
		September 30,				September 29,				September 30,				September 29,
(Shares in thousands)		2008				2007				2008				2007
Basic			29,871				29,860				29,871				29,855
Dilutive effect of awards			—				—				—				—
Diluted			29,871				29,860				29,871				29,855

No awards were included in the computation of diluted net earnings (loss) per common share for the three and nine months ended September 30, 2008 and September 29, 2007 because a loss from continuing operations occurred and to include them would be anti-dilutive.

Note 6 — Discontinued Operations

In the second quarter of 2006, the Company determined to sell parts of its operations to raise capital to repay its outstanding debt. The Board authorized the plan of sale and investment bankers were retained to assist the Company in the sales. On February 9, 2007, the Company sold PQIL and all of its remaining foreign subsidiaries to Cambridge Scientific Abstracts, LP. The Company used a portion of the proceeds from that sale to pay down all its remaining debt, excluding capital leases.

The operating results of sold businesses have been segregated from continuing operations. The Condensed Consolidated Statements of Operations separately reflect the earnings of PQIL and the gain on sale of PQIL as discontinued operations. Interest expense of zero and $0.8 million for the three and nine months ended September 29, 2007, respectively, was allocated to discontinued operations based on the ratio of sold assets to total net assets of the consolidated company.

Results from discontinued operations, all of which occurred in the first quarter of 2007 and relate to the PQIL business, are shown below:

(Dollars in thousands)
Net sales from discontinued operations		$	26,062
Earnings from discontinued operations before interest and income taxes			6,932
Interest expense, net			(847	)
Income tax expense			(1,491	)
Earnings from discontinued operations, net of taxes		$	4,594

The gain on sale of discontinued operations recorded in the first quarter of 2007, which relates to the PQIL business, was derived as follows:

(Dollars in thousands)
Sale price		$	195,249
Net assets, related liabilities, and selling costs (1)			(137,517	)
Gain on sale			57,732
Income tax expense			(11,160	)
Gain on sale of discontinued operations, net of tax		$	46,572

Note 7 — Comprehensive Income

Comprehensive income or loss includes net earnings (loss), foreign currency translation adjustments, and net unrealized gain (loss) on available-for-sale securities.

Comprehensive income (loss) is shown in the table below for the periods indicated:

		Three Months Ended								Nine Months Ended
		September 30,				September 29,				September 30,				September 29,
(Dollars in thousands)		2008				2007				2008				2007
Net earnings (loss)		$	(5,110	)		$	(1,981	)		$	(31,343	)		$	38,145
Other comprehensive income (loss):
Foreign currency translation adjustments			—				—				—				(1,313	)
Pension and postretirement plans			(7	)			8				(20	)			23
Unrealized gain (loss) on securities			(11	)			10				(211	)			(434	)
Comprehensive income (loss)		$	(5,128	)		$	(1,963	)		$	(31,574	)		$	36,421

Note 8 — Other Current Assets

Other current assets at September 30, 2008 and December 29, 2007 consisted of the following:

		As of
		September 30,				December 29,
(Dollars in thousands)		2008				2007
Short-term deferred tax asset		$	2,566			$	2,566
Deferred costs			2,024				1,434
Available for sale securities			2,467				3,629
Insurance receivable			15,707				1,217
Other			3,133				7,643
Total		$	25,897			$	16,489

See Note 16 for further description of the legal contingency accrual related to the putative securities class actions and the related receivable from the Company’s insurance providers. This liability and related receivable were classified as long-term as of December 29, 2007.

Note 9 — Other Assets

Other assets at September 30, 2008 and December 29, 2007 consisted of the following:

		As of
		September 30,				December 29,
(Dollars in thousands)		2008				2007
Insurance receivable			—				15,000
Other			1,361				1,350
Total		$	1,361			$	16,350

Note 10 — Accrued Expenses

Accrued expenses at September 30, 2008 and December 29, 2007 consisted of the following:

		As of
		September 30,				December 29,
(Dollars in thousands)		2008				2007
Salaries, bonuses and benefits		$	9,947			$	12,231
Corporate transition costs			1,868				2,466
Legal contingency accrual			20,000				5,400
Other			3,522				5,218
Total		$	35,337			$	25,315

See Note 14 for further description of our corporate transition costs.

See Note 16 for further description of the legal contingency accrual related to the putative securities class actions and the related receivable from the Company’s insurance providers. This liability and related receivable were classified as long-term as of December 29, 2007.

The legal contingency accrual of $5.4 million as of December 29, 2007 is related to an arbitration that was settled and paid in the first quarter of 2008.

Note 11 — Other Liabilities

Other liabilities at September 30, 2008 and December 29, 2007 consisted of the following:

		As of
		September 30,				December 29,
(Dollars in thousands)		2008				2007
Pension benefits, long-term portion		$	18,275			$	18,843
Long-term deferred tax liability			4,453				4,454
Long-term income tax payable			645				777
Legal contingency accrual			—				20,000
Long-term deferred compensation			4,743				5,713
Deferred rent			132				7,639
Long-term deferred revenue			1,905				1,317
Other			2,298				2,515
Total		$	32,451			$	61,258

Note 12 — Pension and Other Postretirement Benefit Plans

Components of net periodic benefit costs are:

		Three Months Ended
		U.S Defined Benefit								Other Postretirement
		Pension Plan								Benefits
		September 30,				September 29,				September 30,				September 29,
(Dollars in thousands)		2008				2007				2008				2007
Service cost		$	—			$	—			$	—			$	—
Interest cost			311				297				1				2
Amortization of prior service cost			—				—				—				—
Recognized net actuarial (gain) loss			18				34				(25	)			(26	)
Net pension and other postretirement benefit cost (income)		$	329			$	331			$	(24	)		$	(24	)

		Nine Months Ended
		U.S Defined Benefit								Other Postretirement
		Pension Plan								Benefits
		September 30,				September 29,				September 30,				September 29,
(Dollars in thousands)		2008				2007				2008				2007
Service cost		$	—			$	—			$	—			$	—
Interest cost			932				891				4				6
Amortization of prior service cost			—				—				—				—
Recognized net actuarial (gain) loss			54				102				(74	)			(78	)
Net pension and other postretirement benefit cost (income)		$	986			$	993			$	(70	)		$	(72	)

Note 13 — Capital Lease Obligations

The following table summarizes our capital lease obligations as of the dates indicated:

		As of
		September 30,				December 29,
(Dollars in thousands)		2008				2007
Capital lease obligations:
Capital lease obligations		$	299			$	1,596
Termination costs			2				3
Total capital lease obligations			301				1,599
Less: current maturities			(176	)			(789	)
Capital lease obligations, less current maturities		$	125			$	810

Upon closing the sale of PQIL on February 9, 2007, the Company paid the remaining balances owed to its lenders and noteholders and the Company was released from all obligations under the 2002 Senior Notes due 10/01/12, 2005 Senior Notes due 01/31/15, and the 2005 Revolving Credit Agreement.

Interest expense for the nine month period ending September 29, 2007 includes $2.2 million for amortization and the write-off of unamortized deferred financing fees related to the extinguished debt balances.

Note 14 — Corporate Transition and Lease Termination Costs

On February 12, 2007, after the sale of ProQuest Business Solutions (“PQBS”) and PQIL, the Company’s Board of Directors approved and announced to employees the closing of the corporate office in Ann Arbor, Michigan. The transition plan, which was completed by year-end 2008, included the elimination of redundant positions and transitioning the performance of certain operational activities to Dallas, Texas. The Company expects to incur approximately $4.4 million in severance and retention expense related to the transition plan, all of which has been accrued as of September 30, 2008. Related costs are included in general and administrative expense. The change in the accruals for corporate transition costs related to severance and retention payments for the nine month period ended September 30, 2008 is as follows:

(Dollars in thousands)
Balance as of January 1, 2007		$	—
Accruals			4,338
Payments made			(1,372	)
Balance as of December 29, 2007		$	2,966
Accruals			103
Payments made			(442	)
Balance as of September 30, 2008		$	2,627
Current portion		$	1,868
Long-term portion		$	759

On January 1, 2008, the Company entered into an agreement with one of its lessors, Relational, LLC f/k/a Relational Funding Corporation (“Relational”) and ProQuest LLC (formerly known as ProQuest-CSA LLC) (“CSA”) relating to certain obligations regarding the capital and operating leases for certain property and equipment used at its facilities at 777 Eisenhower Parkway (the “777 Facility”) and 789 Eisenhower Parkway (the “789 Facility”) in Ann Arbor, Michigan. The aforementioned leases originated as early as fiscal year 2005 with up to five year terms. Effective January 1, 2008, the Company conveyed, assigned, transferred and delivered to CSA all of its right, title and interest and benefit of certain property and equipment. The Company was released from any and all obligations relating to these leases and Relational, as lessor, consented to such assignments and releases. Due to these assignments, the write off of certain assets and liabilities under capital leases, such as office furniture, phone and power supply systems, and video equipment, totaled a net charge of $0.1 million in the first quarter of 2008.

On January 25, 2008, the Company entered into a series of agreements with its current landlord, Transwestern Great Lakes, LP (“Transwestern”) and CSA relating to certain obligations regarding the long term leases for the facilities in Ann Arbor, Michigan. On March 4, 2008, the Company paid CSA $11.0 million, a portion of which was distributed to Transwestern for termination of the lease relating to office space at the 777 Facility. Upon the Closing Date of March 7, 2008, the Company was released from any and all obligations relating to the 15 year lease the Company previously entered into for the 777 Facility. Through assignment, the Company was also released from any and all obligations relating to the 15 year lease the Company previously entered into for office space at the 789 Facility. The Company assigned all of its rights under the lease for the 789 Facility to CSA and CSA assumed the obligations of tenant under such lease, as amended. Transwestern, as landlord, consented to such assignment. In connection with the termination and assignment of these long term facility leases, certain leasehold improvements and deferred rent were written off, which totaled a net charge of $0.6 million in the first quarter of 2008. The Company recorded a total charge to expense in the first quarter of 2008 of $11.7 million for all lease termination costs.

Note 15 — Uncertain Tax Positions

There were no material changes in the Company’s uncertain tax positions during the quarter or year to date period.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various U.S. state jurisdictions. The Company is currently under examination by the IRS for 2006 and 2007.

Note 16 — Contingent Liabilities

Putative Securities Class Actions

Between February and April 2006, four putative securities class actions, consolidated and designated In re ProQuest Company Securities Litigation, were filed in the U.S. District Court for the Eastern District of Michigan (the “Court”) against the Company and certain of its former and then-current officers and directors. Each of these substantially similar lawsuits alleged that the Company and certain officers and directors (“the Defendants”) violated Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as the associated Rule 10b-5, in connection with the Company’s proposed restatement.

On May 2, 2006, the Court ordered the four cases consolidated and appointed lead plaintiffs and lead plaintiffs’ counsel. By stipulation of the parties, the consolidated lawsuit was stayed pending restatement of the Company’s financial statements. On January 24, 2007, lead plaintiffs filed their amended consolidated complaint, which Defendants moved to dismiss on March 15, 2007. The Court denied Defendants’ motion to dismiss on November 6, 2007.

On July 22, 2008, the Company reached an agreement in principle to settle the consolidated shareholder securities class action lawsuit filed against it and certain officers and directors in the U.S. District Court for the Eastern District of Michigan for $20 million. The settlement will be funded largely by insurance. Under the terms of the agreement, the Company would pay approximately $4.5 million in fees and settlement amounts to settle all claims related to the financial statements with remaining amounts to be paid by insurers. A Stipulation and Agreement of Settlement was signed by the parties and the Court granted preliminary approval of such agreement. The Company paid $4.0 million into an escrow account on January 9, 2009. The final settlement is subject to final Court approval and the participation of a sufficient percentage of the putative class. There is no assurance that a final Court approval will be obtained or putative class member participation will be sufficient. If the settlement arrangement is not finalized, the Company intends to defend itself vigorously.

Shareholder Derivative Lawsuits

On April 18, 2006 and December 19, 2006, respectively, two shareholder derivative lawsuits were filed in the U.S. District Court for the Eastern District of Michigan (the “Court”), purportedly on behalf of the Company against certain current and former officers and directors of the Company by certain of the Company’s shareholders. Both cases were assigned to Honorable Avern Cohn, who entered a stipulated order staying the litigation pending completion of the Company’s restatement and a special committee investigation into the restatement.

On January 29, 2008, the Court entered an order consolidating the two cases and approving co-lead and co-liaison counsel representing plaintiffs. Pursuant to a stipulated scheduling order entered on February 15, 2008, plaintiffs filed a consolidated amended complaint on March 20, 2008. The consolidated amended complaint purports to state claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, rescission, imposition of a constructive trust, violations of the Sarbanes-Oxley Act of 2002 and violations of the Securities Exchange Act of 1934 against current and former officers or directors of the Company and one of its subsidiaries. On December 3, 2008, the Company reached an agreement in principle to settle the shareholder derivative litigation lawsuit filed against it and certain officers and directors in the U.S. District Court for the Eastern District of Michigan. Under the terms of the agreement, the Company and its insurers would pay an amount not to exceed $650,000 in attorneys’ fees and agree to maintain or adopt additional corporate governance standards. The Company’s portion of this amount is equal to $500,000. The settlement is subject to completion of a Stipulation of Settlement to be signed by the parties, preliminary and final court approval and the provision of notice to shareholders. There is no assurance that a final Stipulation of Settlement will be completed, court approval will be obtained or putative class member participation will be sufficient. If the derivative litigation settlement arrangement is not finalized, the Company intends to defend itself vigorously.

Securities and Exchange Commission Investigation

In February 2006, the Division of Enforcement of the SEC commenced an informal inquiry regarding the Company’s announcement of a possible restatement. In April 2006, the Division of Enforcement of the SEC commenced a formal, non-public investigation in connection with the Company’s restatement. On July 22, 2008, the SEC (“Commission”) filed a settled enforcement action against the Company in the U.S. District Court for the Eastern District of Michigan. Pursuant to that settlement, the terms of which were disclosed previously by the Company, without admitting or denying the allegations in the Complaint, the Company consented to the filing by the Commission of a Complaint, and to the imposition by the Court of a final judgment of permanent injunction against the Company. The Complaint alleges civil violations of the reporting, books and records and internal controls provisions of the Securities Exchange Act of 1934. The final judgment was signed by the Court on July 28, 2008 and permanently enjoins the Company from future violations of those provisions. No monetary penalty was imposed. The settlement resolved fully the previously disclosed SEC investigation of the Company’s restatement.

Data Driven Software Corporation vs. Voyager Expanded Learning et al.

Voyager Expanded Learning (“VEL”) was a defendant in an arbitration styled: D2 Data Driven Software Corporation f/k/a EdSoft Software Corporation (“EdSoft”) v. Voyager Expanded Learning, Inc., et al., before the American Arbitration Association, No. 71 117 Y 00238 06.

Effective on or about January 24, 2008, VEL, the individual respondents and EdSoft executed a mutual release and settlement agreement. VEL subsequently paid EdSoft $5.4 million in connection with that settlement. In addition to providing mutual releases between EdSoft, on one hand, and VEL and the individual respondents, on the other hand, the parties agreed to dismiss all lawsuits with prejudice. EdSoft also executed a release of arbitration award. The Company accrued $5.4 million related to this settlement as of year end of 2006.

Other Contingent Liabilities

We are also involved in various legal proceedings incidental to our business. Management believes that the outcome of these proceedings will not have a material adverse effect upon our consolidated operations or financial condition and we believe we have recognized appropriate reserves as necessary based on facts and circumstances known to management.

We have letters of credit in the amount of $1.1 million outstanding as of September 30, 2008 to support workers’ compensation insurance coverage as well as collateral for the Company’s credit card and Automated Clearinghouse (ACH) programs.

Note 17 — Retirement Plans (Subsequent Event)

During the fourth quarter of 2008, the Company provided an opportunity for participants in its replacement benefit plan (“RBP”) and its defined benefit pension plan to receive a discounted lump sum distribution to settle retirement obligations. The RBP, which represented a liability of $5.5 million as of September 30, 2008, includes a small number of terminated and retired executives and one current executive. The defined benefit pension plan, which represented a liability of $20.3 million as of September 30, 2008, covers certain terminated and retired former domestic employees. Prior to the distribution opportunity, both plans were frozen, with no participants entitled to make additional contributions or earn additional service years. Based on the responses received, the Company expects that it will pay cash out of approximately $7.9 million in January 2009 related to these lump sum payments. The Company is still assessing the impact of the partial settlement on its financial statements, but currently expects to record a gain of approximately $3 to $5 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section should be read in conjunction with the Consolidated Financial Statements of Voyager Learning Company and Subsidiaries (collectively the “Company”) and the notes thereto included in the annual report on Form 10-K for the year ended December 29, 2007 (the “2007 Form 10-K”), as well as the accompanying interim financial statements for the three and nine month period ending September 30, 2008.

Safe Harbor for Forward-looking Statements

Except for the historical information and discussions contained herein, statements contained in this document may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors, which could cause actual results to differ materially. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue”, “projects”, “intends”, “prospects”, “priorities”, or the negative of such terms or similar terminology. These factors may cause our actual results to differ from any forward-looking statements. We undertake no obligation to update any of our forward-looking statements.

Results of Continuing Operations

Learning A-Z was acquired in 2004 and Voyager Expanded Learning and ExploreLearning were both acquired in 2005. These operations together are Voyager Education (“VED”) and comprise our single reporting segment. The continuing operations presented below include the operational activities for VED and the activities based in Ann Arbor, Michigan required to finalize the restatement efforts and transition the corporate office to Dallas, Texas.

We determined to sell ProQuest Business Solutions (“PQBS”) and ProQuest Information and Learning (“PQIL”) in the second quarter of 2006. PQBS was sold on November 28, 2000 and PQIL was sold on February 9, 2007 and therefore, its results were classified as discontinued operations and are excluded from the following discussion.

Adverse developments in the education funding environment, including the reductions in Reading First funding effective 2008 and reductions in available state and local funds as property taxes decline, have impacted our operations during the current year and may continue to have an impact on our future sales, profits, cash flows and carrying value of assets.

Third Quarter of Fiscal 2008 Compared to the Third Quarter of Fiscal 2007

		Three Months Ended
		September 30, 2008								September 29, 2007								Year Over Year Change
						% of								% of				Favorable / (Unfavorable)
(Dollars in millions)		Amount				sales				Amount				sales				$				%
Net sales		$	27.3				100.0			$	31.8				100.0			$	(4.5	)			(14.2	)
Cost of sales (exclusive of depreciation and amortization shown separately below)			(10.0	)			(36.6	)			(9.9	)			(31.1	)			(0.1	)			(1.0	)
Gross profit			17.3				63.4				21.9				68.9				(4.6	)			(21.0	)
Research and development expense			(1.1	)			(4.0	)			(1.1	)			(3.5	)			—				—
Sales and marketing expense			(8.0	)			(29.3	)			(7.6	)			(23.9	)			(0.4	)			(5.3	)
General and administrative expense			(8.1	)			(29.7	)			(12.4	)			(39.0	)			4.3				34.7
Depreciation and amortization expense			(5.3	)			(19.4	)			(5.8	)			(18.2	)			0.5				8.6
Loss from continuing operations before interest and income taxes			(5.2	)			(19.0	)			(5.0	)			(15.7	)			(0.2	)			(4.0	)
Net interest income			0.1				0.3				0.5				1.5				(0.4	)			(80.0	)
Sublease income and other			—				—				1.2				3.8				(1.2	)			(100.0	)
Income tax benefit			—				—				1.3				4.1				(1.3	)			(100.0	)
Loss from continuing operations		$	(5.1	)			(18.7	)		$	(2.0	)			(6.3	)		$	(3.1	)			(155.0	)

Net Sales.

Our total net sales from continuing operations decreased $4.5 million, or 14.2%, to $27.3 million in the third quarter of 2008. The decrease was primarily driven by lower order volume and higher revenue deferral rates in fiscal 2008 compared to fiscal 2007. We experienced weakness in markets and products that have heavy reliance on federal, state and local funding sources. Our reading intervention for middle school students and its online offerings continue to grow, but growth was not enough to offset declines in products with heavy reliance on federal funding. In 2008, we deferred a larger percentage of sales compared to 2007 as we continue the trend of including more service and technology in our products. On-line access and service elements are delivered over time rather than immediately shipped to customers like printed materials. We defer the revenue associated with those services and on-line access and recognize the revenue over the period they are delivered.

Gross Profit.

Cost of sales includes expenses to print, purchase, handle and warehouse product and to provide services and support to customers. Our gross profit percentage for the third quarter of 2008 decreased 5.5 percentage points to 63.4% compared to 68.9% for the third quarter of 2007. The decrease is primarily due to the deferral of a larger percentage of sales in 2008 versus 2007, which reduced net sales but did not have an offsetting and corresponding decrease in cost of sales.

Research and Development.

Research and development expenditures include costs to research, evaluate and develop educational products, net of capitalization. Research and development expense for the third quarter of 2008 remained flat at $1.1 million compared to the third quarter of fiscal 2007.

Sales and Marketing.

Sales and marketing expenditures include all costs related to selling efforts and marketing. Sales and marketing expense for the third quarter of 2008 increased $0.4 million to $8.0 million compared to the third quarter of 2007, as we sought to maintain sales volumes in an increasingly challenging market and due to costs associated with our participation in several 2008 state adoptions.

General and Administrative.

		Three Months Ended								Year Over Year Change
		September 30,				September 29,				Favorable / (Unfavorable)
(Dollars in millions)		2008				2007				$				%
VED		$	2.9			$	3.8			$	0.9				23.7
Corporate			5.2				8.6				3.4				39.5
Total		$	8.1			$	12.4			$	4.3				34.7

General and administrative expenses decreased $4.3 million, or 34.7%, to $8.1 million compared to the third quarter of fiscal 2007. General and administrative activities include $5.2 million in the third quarter of 2008 and $8.6 million in the third quarter of 2007 related to activities based in Ann Arbor, Michigan required to finalize the restatement efforts and transition the corporate office to Dallas, Texas. These corporate expenses decreased $3.4 million, or 39.5%, as a result of lower professional fees incurred in fiscal 2008 related to the restatement efforts as these activities were brought closer to conclusion.

Excluding the corporate costs, general and administrative expenses decreased $0.9 million, or 23.7%, year over year, and represented 10.6% and 11.9% as a percentage of net sales for the third quarter of fiscal 2008 and 2007, respectively. The decrease is primarily due to reduced costs incurred in 2008 as a result of winding down the restatement and the effort to transition the Ann Arbor activities.

Net Interest Income.

		Three Months Ended								Year Over Year Change
		September 30,				September 29,				Favorable / (Unfavorable)
(Dollars in millions)		2008				2007				$				%
Interest income		$	0.1			$	0.7				(0.6	)			85.7
Interest expense			—				(0.2	)			0.2				100.0
Total		$	0.1			$	0.5			$	(0.4	)			80.0

Net interest income totaled $0.1 million in the third quarter of fiscal 2008 versus $0.5 million in the third quarter of fiscal 2007. On February 9, 2007, we sold PQIL and all of our remaining foreign subsidiaries to Cambridge Scientific Abstracts, LP. We used a portion of the proceeds from that sale to pay down all remaining debt, excluding capital leases. The result of this activity was to eliminate interest expense associated with long-term debt other than capital leases effective February 2007. Additionally, lower cash balances and a change in the mix of investments and related interest rates during 2008 relative to 2007 decreased interest earned on cash balances and investments.

Sublease Income and Other.

The Company announced plans after the sale of PQBS and PQIL to transition all of our corporate functions from the Ann Arbor headquarters to Dallas during 2007 and 2008. From the date of the sale of PQIL in February 2007, the Company subleased substantial space to the buyer of PQIL through March 2008 resulting in sublease income totaling $1.2 million for the third quarter of fiscal 2007.

Income Tax Benefit.

For the third quarter of 2008, the Company recorded no income tax benefit or expense for the loss from continuing operations as we cannot assume future taxable income. For the third quarter of fiscal 2007, the Company attributed an income tax benefit to continuing operations of $1.2 million, which represents an effective tax rate of 38.2%.

Results of Operations

Nine Month Period ended September 30, 2008 Compared to the Nine Month Period ended September 29, 2007

		Nine Months Ended
		September 30, 2008								September 29, 2007								Year Over Year Change
						% of								% of				Favorable / (Unfavorable)
(Dollars in millions)		Amount				sales				Amount				sales				$				%
Net sales		$	76.4				100.0			$	88.2				100.0			$	(11.8	)			(13.4	)
Cost of sales (exclusive of depreciation and amortization shown separately below)			(27.8	)			(36.4	)			(27.2	)			(30.8	)			(0.6	)			(2.2	)
Gross profit			48.6				63.6				61.0				69.2				(12.4	)			(20.3	)
Research and development expense			(3.7	)			(4.9	)			(3.5	)			(4.1	)			(0.2	)			(5.7	)
Sales and marketing expense			(25.4	)			(33.2	)			(21.3	)			(24.1	)			(4.1	)			(19.2	)
General and administrative expense			(24.3	)			(31.8	)			(42.9	)			(48.6	)			18.6				43.4
Depreciation and amortization expense			(16.1	)			(21.1	)			(17.3	)			(19.6	)			1.2				6.9
Lease termination costs			(11.7	)			(15.3	)			—				—				(11.7	)			(100.0	)
Loss from continuing operations before interest and income taxes			(32.6	)			(42.7	)			(24.0	)			(27.2	)			(8.6	)			(35.8	)
Net interest income (expense)			0.5				0.7				(0.3	)			(0.3	)			0.8				266.7
Sublease income and other			0.8				1.0				3.2				3.6				(2.4	)			(75.0	)
Income tax benefit			—				—				8.1				9.2				(8.1	)			(100.0	)
Loss from continuing operations		$	(31.3	)			(41.0	)		$	(13.0	)			(14.7	)			(18.3	)			(140.8	)