e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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Quarterly Report Pursuant to
Section 13 or 15(d) of the
Securities Exchange Act of 1934
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For the quarterly period ended December 31, 2008
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OR
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o
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Transition Report Pursuant to
Section 13 or 15(d) of the
Securities Exchange Act of 1934
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For the transition period
from to .
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Commission file number:
001-33883
K12 Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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95-4774688
(IRS Employer
Identification No.)
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2300 Corporate Park Drive
Herndon, VA
(Address of principal
executive offices)
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20171
(Zip
Code)
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(703)483-7000
(Registrants telephone number, including area code)
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 the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the close of
business on February 4, 2009.
Common
Stock, $0.0001 par value 28,852,955 shares
K12
Inc.
Form 10-Q
For the Quarterly Period Ended December 31, 2008
Index
1
PART I
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements (Unaudited).
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K12
INC.
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in
thousands, except share and per share data)
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December 31,
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June 30,
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2008
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2008
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ASSETS
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Current assets
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Cash and cash equivalents
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$
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50,372
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$
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71,682
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Accounts receivable, net of allowance of $1,121 and $1,458 at
December 31, 2008 and June 30, 2008, respectively
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83,053
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30,630
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Inventories, net
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12,357
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20,672
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Current portion of deferred tax asset
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10,351
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8,344
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Prepaid expenses and other current assets
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3,946
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3,648
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Total current assets
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160,079
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134,976
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Property and equipment, net
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38,041
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24,536
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Capitalized curriculum development costs, net
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26,592
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21,366
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Deferred tax asset, net of current portion
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8,702
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12,749
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Goodwill
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1,825
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1,754
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Other assets, net
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6,063
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1,943
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Total assets
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$
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241,302
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$
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197,324
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities
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Accounts payable
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$
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8,170
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$
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14,388
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Accrued liabilities
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7,594
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4,684
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Accrued compensation and benefits
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4,653
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10,049
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Deferred revenue
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18,124
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3,114
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Current portion of capital lease obligations
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10,150
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6,107
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Current portion of notes payable
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922
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413
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Total current liabilities
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49,613
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38,755
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Deferred rent, net of current portion
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1,671
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1,640
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Capital lease obligations, net of current portion
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11,620
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6,445
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Notes payable, net of current portion
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2,528
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196
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Total liabilities
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65,432
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47,036
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Commitments and contingencies
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Minority interest
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4,446
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Stockholders equity
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Common stock, par value $0.0001; 100,000,000 shares
authorized; 28,822,198 and 27,944,826 shares issued and
outstanding at December 31, 2008 and June 30, 2008,
respectively
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3
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3
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Additional paid-in capital
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335,323
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323,621
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Accumulated deficit
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(163,902
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)
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(173,336
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)
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Total stockholders equity
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171,424
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150,288
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Total liabilities and stockholders equity
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$
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241,302
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$
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197,324
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See notes to unaudited condensed consolidated financial
statements.
2
K12
INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except share and per share data)
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Three Months Ended December 31,
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Six Months Ended December 31,
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2008
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2007
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2008
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2007
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Revenues
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$
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77,618
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$
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54,391
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$
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166,243
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$
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113,744
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Cost and expenses
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Instructional costs and services
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50,312
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31,980
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104,733
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66,758
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Selling, administrative, and other operating expenses
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18,887
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16,609
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41,722
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32,649
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Product development expenses
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2,405
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2,460
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4,600
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4,987
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Total costs and expenses
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71,604
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51,049
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151,055
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104,394
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Income from operations
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6,014
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3,342
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15,188
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9,350
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Interest expense, net
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(264
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)
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(389
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)
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(157
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)
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(693
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)
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Income before income tax (expense) benefit and minority
interest
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5,750
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2,953
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15,031
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8,657
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Income tax (expense) benefit
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(2,365
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)
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(1,565
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)
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(6,151
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)
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5,553
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Income before minority interest
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3,385
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1,388
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8,880
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14,210
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Minority interest, net of tax
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135
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554
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Net income
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3,520
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1,388
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9,434
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14,210
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Dividends on preferred stock
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(1,395
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)
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(3,066
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)
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Preferred stock accretion
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(5,633
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)
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(12,193
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)
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|
|
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|
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Net income (loss) attributable to common stockholders
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$
|
3,520
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|
$
|
(5,640
|
)
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$
|
9,434
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|
|
$
|
(1,049
|
)
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Net income (loss) attributable to common stockholders per
share:
|
|
|
|
|
|
|
|
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|
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|
|
|
|
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Basic
|
|
$
|
0.12
|
|
|
$
|
(0.98
|
)
|
|
$
|
0.33
|
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Diluted
|
|
$
|
0.12
|
|
|
$
|
(0.98
|
)
|
|
$
|
0.32
|
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
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|
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Weighted average shares used in computing per share amounts
(see page 7):
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|
|
|
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|
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|
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|
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|
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|
Basic
|
|
|
28,749,126
|
|
|
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5,777,767
|
|
|
|
28,567,406
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3,910,676
|
|
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|
|
|
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|
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|
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|
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Diluted
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29,682,250
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5,777,767
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29,653,263
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3,910,676
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|
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See notes to unaudited condensed consolidated financial
statements.
3
K12
INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY
(in
thousands, except share data)
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|
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|
|
|
|
|
|
|
|
|
|
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|
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|
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Additional
|
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|
Common Stock
|
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Paid-in
|
|
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Accumulated
|
|
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|
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Shares
|
|
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Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
Six months ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008
|
|
|
27,944,826
|
|
|
$
|
3
|
|
|
$
|
323,621
|
|
|
$
|
(173,336
|
)
|
|
$
|
150,288
|
|
Exercise of stock options
|
|
|
752,847
|
|
|
|
|
|
|
|
5,419
|
|
|
|
|
|
|
|
5,419
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
529
|
|
|
|
|
|
|
|
529
|
|
Excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
2,194
|
|
|
|
|
|
|
|
2,194
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,914
|
|
|
|
5,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Balance, September 30, 2008
|
|
|
28,697,673
|
|
|
|
3
|
|
|
|
331,763
|
|
|
|
(167,422
|
)
|
|
|
164,344
|
|
Exercise of stock options
|
|
|
124,525
|
|
|
|
|
|
|
|
974
|
|
|
|
|
|
|
|
974
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
734
|
|
|
|
|
|
|
|
734
|
|
Excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,852
|
|
|
|
|
|
|
|
1,852
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,520
|
|
|
|
3,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
28,822,198
|
|
|
$
|
3
|
|
|
$
|
335,323
|
|
|
$
|
(163,902
|
)
|
|
$
|
171,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial
statements.
4
K12
INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,434
|
|
|
$
|
14,210
|
|
Adjustments to reconcile net income to net cash (used in)
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
8,973
|
|
|
|
5,180
|
|
Stock based compensation expense
|
|
|
1,263
|
|
|
|
657
|
|
Excess tax benefit from stock-based compensation
|
|
|
(4,046
|
)
|
|
|
|
|
Deferred income taxes
|
|
|
6,086
|
|
|
|
(5,615
|
)
|
Provision for (reduction of) doubtful accounts
|
|
|
(337
|
)
|
|
|
141
|
|
Provision for inventory obsolescence
|
|
|
64
|
|
|
|
31
|
|
Provision for student computer shrinkage and obsolescence
|
|
|
30
|
|
|
|
149
|
|
Minority interest, net of tax
|
|
|
(554
|
)
|
|
|
|
|
Changes in assets and liabilities, net of assets and liabilities
acquired:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(52,086
|
)
|
|
|
(29,948
|
)
|
Inventories
|
|
|
8,251
|
|
|
|
5,131
|
|
Prepaid expenses and other current assets
|
|
|
(290
|
)
|
|
|
(411
|
)
|
Other assets
|
|
|
(2,859
|
)
|
|
|
77
|
|
Deposits and other assets
|
|
|
(1,180
|
)
|
|
|
(146
|
)
|
Accounts payable
|
|
|
(6,219
|
)
|
|
|
560
|
|
Accrued liabilities
|
|
|
2,909
|
|
|
|
1,158
|
|
Accrued compensation and benefits
|
|
|
(5,396
|
)
|
|
|
(743
|
)
|
Deferred revenue
|
|
|
15,011
|
|
|
|
8,963
|
|
Deferred rent
|
|
|
24
|
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(20,922
|
)
|
|
|
(794
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(7,744
|
)
|
|
|
(3,167
|
)
|
Purchase of domain name
|
|
|
(16
|
)
|
|
|
(250
|
)
|
Cash paid in the acquisition of Power-Glide
|
|
|
|
|
|
|
(119
|
)
|
Capitalized curriculum development costs
|
|
|
(6,992
|
)
|
|
|
(3,914
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(14,752
|
)
|
|
|
(7,450
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Cash received from issuance of common stock, net of underwriters
commission
|
|
|
|
|
|
|
74,493
|
|
Cash received from issuance of common stock
Regulation S transaction
|
|
|
|
|
|
|
15,000
|
|
Deferred initial public offering costs
|
|
|
|
|
|
|
(2,755
|
)
|
Net borrowings from revolving credit facility
|
|
|
|
|
|
|
(1,500
|
)
|
Repayments for capital lease obligations
|
|
|
(3,837
|
)
|
|
|
(1,934
|
)
|
Proceeds from notes payable
|
|
|
3,130
|
|
|
|
|
|
Payments on notes payable
|
|
|
(297
|
)
|
|
|
(88
|
)
|
Proceeds from exercise of stock options
|
|
|
6,322
|
|
|
|
74
|
|
Proceeds from minority interest contribution
|
|
|
5,000
|
|
|
|
|
|
Excess tax benefit from stock-based compensation
|
|
|
4,046
|
|
|
|
|
|
Payment of cash dividend
|
|
|
|
|
|
|
(6,406
|
)
|
Repayment of bank overdraft
|
|
|
|
|
|
|
(1,577
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
14,364
|
|
|
|
75,307
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(21,310
|
)
|
|
|
67,063
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
71,682
|
|
|
|
1,660
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
50,372
|
|
|
$
|
68,723
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial
statements.
5
K12
Inc.
Notes to
Unaudited Condensed Consolidated Financial Statements
|
|
1.
|
Description
of the Business
|
K12 Inc. and its subsidiaries (K12 or the Company) sell online
curriculum and educational books and materials designed for
students in grades K-12 and provide management and technology
services to virtual public schools. The K12 proprietary
curriculum is research-based and combines content with
innovative technology to allow students to receive an
outstanding education regardless of geographic location. In
contracting with a virtual public school, the Company typically
provides students with access to the K12 on-line curriculum,
offline learning kits, and use of a personal computer. As of
December 31, 2008, the Company served schools in
21 states and the District of Columbia, providing
curriculum for kindergarten through twelfth grades. The Company
expanded into four new states in fiscal year 2009: Hawaii,
Indiana, Oregon and South Carolina. In addition, the Company
sells access to its on-line curriculum and offline learning kits
directly to individual consumers.
The accompanying condensed consolidated balance sheet as of
December 31, 2008, the condensed consolidated statements of
operations for the three and six months ended December 31,
2008 and 2007, the condensed consolidated statements of cash
flows for the six months ended December 31, 2008 and 2007,
and the condensed consolidated statement stockholders
equity for the six months ended December 31, 2008 are
unaudited. The unaudited interim financial statements have been
prepared on the same basis as the annual financial statements
and in the opinion of management, reflect all adjustments, which
include only normal recurring adjustments, necessary to present
fairly the Companys financial position as of
December 31, 2008, the results of operations for the three
and six months ended December 31, 2008 and 2007, the
results of cash flows for the six months ended December 31,
2008 and 2007 and the stockholders equity for the six
months ended December 31, 2008. The results of the three
and six month periods ended December 31, 2008 are not
necessarily indicative of the results to be expected for the
year ended June 30, 2009 or for any other interim period or
for any other future fiscal year. The consolidated balance sheet
as of June 30, 2008 has been derived from the audited
consolidated financial statements at that date.
The accompanying unaudited condensed consolidated financial
statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of
America for interim financial information and with the
instructions to
Form 10-Q
and
Rule 10-01
of
Regulation S-X
of the Securities Exchange Act of 1934, as amended (Exchange
Act). Accordingly, they do not include all of the information
and footnotes required by accounting principles generally
accepted in the United States of America for complete financial
statements. In the opinion of management, these statements
include all adjustments (consisting of normal recurring
adjustments) considered necessary to present a fair statement of
our consolidated results of operations, financial position and
cash flows. Preparation of the Companys financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
in the financial statements and footnotes. Actual results could
differ from those estimates. This quarterly report on
Form 10-Q
should be read in conjunction with the financial statements and
the notes thereto included in the companys latest annual
report on
Form 10-K
filed on September 26, 2008, which contains the
Companys audited financial statements for the fiscal year
ended June 30, 2008.
6
K12
Inc.
Notes to
Unaudited Condensed Consolidated Financial
Statements (Continued)
|
|
3.
|
Summary
of Significant Accounting Policies
|
Consolidation
The condensed consolidated financial statements include the
accounts of the Company, its wholly-owned subsidiaries and
affiliated companies in which the Company owns, directly or
indirectly, or otherwise controls 50% or more of the outstanding
voting interests. Under the consolidation method, an affiliated
companys results of operations are reflected within the
consolidated statements of operations. Earnings or losses
attributable to other stockholders of a consolidated affiliated
company are classified as minority interest in the
Companys consolidated statements of operations. Minority
interest adjusts the Companys consolidated net results of
operations to reflect only its share of the after-tax earnings
or losses of an affiliated company. Income taxes attributable to
minority interest are determined using the applicable statutory
tax rates in the jurisdictions where such operations are
conducted. These rates vary from country to country. All
significant intercompany transactions and balances have been
eliminated in consolidation.
Net
Income (Loss) Per Common Share
Basic earnings (loss) per share is computed by dividing net
income (loss) available to common stockholders by the weighted
average number of shares of common stock outstanding during the
period. Diluted earnings (loss) per share reflects the potential
dilution that could occur assuming conversion or exercise of all
dilutive unexercised stock options and warrants. The dilutive
effect of stock options was determined using the treasury stock
method. Under the treasury stock method, the proceeds received
from the exercise of stock options, the amount of compensation
cost for future service not yet recognized by the Company, and
the amount of tax benefits that would be recorded in additional
paid-in capital when the stock options become deductible for
income tax purposes are all assumed to be used to repurchase
shares of the Companys common stock. Stock options are not
included in the computation of diluted earnings per share when
they are antidilutive.
The following schedule presents the calculation of basic and
diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share and per share data)
|
|
|
(In thousands, except share and per share data)
|
|
|
Net income (loss) available to common shareholders
basic and diluted
|
|
$
|
3,520
|
|
|
$
|
(5,640
|
)
|
|
$
|
9,434
|
|
|
$
|
(1,049
|
)
|
Weighted average common shares outstanding basic
|
|
|
28,749,126
|
|
|
|
5,777,767
|
|
|
|
28,567,406
|
|
|
|
3,910,676
|
|
Weighted average common shares outstanding diluted
|
|
|
29,682,250
|
|
|
|
5,777,767
|
|
|
|
29,653,263
|
|
|
|
3,910,676
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
|
$
|
(0.98
|
)
|
|
$
|
0.33
|
|
|
$
|
(0.27
|
)
|
Diluted
|
|
$
|
0.12
|
|
|
$
|
(0.98
|
)
|
|
$
|
0.32
|
|
|
$
|
(0.27
|
)
|
7
K12
Inc.
Notes to
Unaudited Condensed Consolidated Financial
Statements (Continued)
Recently
Adopted Financial Accounting Pronouncements
The Company adopted the provisions of Financial Accounting
Standards Board (FASB) Statement No. 157 (FAS 157), Fair
Value Measurements, on July 1, 2008. FAS 157 defines
fair value, establishes a framework for measuring fair value
under Generally Accepted Accounting Principles (GAAP), and
expands disclosures about fair value measurements. The
implementation of this Statement was not material to the
Companys consolidated financial position or results of
operations. Please refer to Note 8, Fair Value
Measurements, for additional information.
Capital
Leases
As of December 31, 2008, computer equipment and software
under capital leases are recorded at a cost of
$31.5 million and accumulated depreciation of
$11.8 million. The Company has an equipment lease line of
credit that expires on August 31, 2009 for new purchases on
the line of credit. The interest rate on new purchases under the
equipment lease line typically is set quarterly. Borrowings
under the equipment lease line have interest rates ranging from
6.4% to 8.8% and include a
36-month
payment term with a $1 purchase option at the end of the term.
The Company has pledged the assets financed with the equipment
lease line to secure the amounts outstanding. The Company
entered into a guaranty agreement with the lessor to guarantee
the obligations under this equipment lease and financing
agreement.
Notes
Payable
The Company has purchased computer software licenses and
maintenance services through notes payable arrangements with
various vendors at interest rates ranging up to 6.1% and payment
terms ranging from eighteen months to three years. The balance
of notes payable at December 31, 2008 is $3.4 million.
The following is a summary as of December 31, 2008 of the
present value of the net minimum payments on capital leases and
notes payable under the Companys commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Notes
|
|
|
|
|
December 31,
|
|
Leases
|
|
|
Payable
|
|
|
Total
|
|
|
2009
|
|
$
|
11,414
|
|
|
$
|
965
|
|
|
$
|
12,379
|
|
2010
|
|
|
8,323
|
|
|
|
1,364
|
|
|
|
9,687
|
|
2011
|
|
|
3,971
|
|
|
|
1,339
|
|
|
|
5,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum payments
|
|
|
23,708
|
|
|
|
3,668
|
|
|
|
27,376
|
|
Less amount representing interest (imputed interest rate of 7.6)%
|
|
|
(1,938
|
)
|
|
|
(218
|
)
|
|
|
(2,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net minimum payments
|
|
|
21,770
|
|
|
|
3,450
|
|
|
|
25,220
|
|
Less current portion
|
|
|
(10,150
|
)
|
|
|
(922
|
)
|
|
|
(11,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum payments, less current portion
|
|
$
|
11,620
|
|
|
$
|
2,528
|
|
|
$
|
14,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
K12
Inc.
Notes to
Unaudited Condensed Consolidated Financial
Statements (Continued)
Stock option activity during the six months ended
December 31, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
|
Outstanding, June 30, 2008
|
|
|
4,766,849
|
|
|
$
|
11.20
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
572,550
|
|
|
|
23.47
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(877,372
|
)
|
|
|
7.21
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(87,040
|
)
|
|
|
14.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2008
|
|
|
4,374,987
|
|
|
$
|
13.54
|
|
|
|
5.01
|
|
|
$
|
22,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercisable at December 31, 2008
|
|
|
2,124,523
|
|
|
$
|
8.73
|
|
|
|
4.29
|
|
|
$
|
21,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the three
months ended December 31, 2008 was $12.7 million.
The following table summarizes the option grant activity for the
six months ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Options
|
|
|
Weighted-Average
|
|
|
Grant-Date
|
|
|
Intrinsic
|
|
Grant date
|
|
Granted
|
|
|
Exercise Price
|
|
|
Fair Value
|
|
|
Value
|
|
|
July 2008
|
|
|
15,700
|
|
|
$
|
21.94
|
|
|
$
|
9.81
|
|
|
$
|
|
|
August 2008
|
|
|
489,000
|
|
|
$
|
23.45
|
|
|
$
|
10.47
|
|
|
$
|
|
|
November 2008
|
|
|
67,850
|
|
|
$
|
23.94
|
|
|
$
|
10.50
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
572,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, there was $7.5 million of
total unrecognized compensation expense related to unvested
stock options granted. The cost is expected to be recognized
over a weighted average period of 3.3 years. The total fair
value of shares vested during the six months ended
December 31, 2008 was $7.6 million. During the six
months ended December 31, 2008, the Company recognized
$1.3 million of stock based compensation.
|
|
6.
|
Commitments
and Contingencies
|
Litigation
In the ordinary conduct of business, the Company is subject to
lawsuits, arbitrations and administrative proceedings from time
to time. The Company is currently involved in a lawsuit brought
by a teachers union seeking the closure of the virtual
public school the Company serves in Illinois.
Illinois v.
Chicago Virtual Charter School
On October 4, 2006, the Chicago Teachers Union and
individual taxpayers (CTU or plaintiffs) filed a
citizen taxpayers lawsuit in the Circuit Court of Cook
County challenging the decision of the Illinois State
9
K12
Inc.
Notes to
Unaudited Condensed Consolidated Financial
Statements (Continued)
Board of Education to certify the Chicago Virtual Charter School
(CVCS) and to enjoin the disbursement of state funds to the
Chicago Board of Education under its contract with the CVCS.
Specifically, the CTU alleges that the Illinois charter school
law prohibits any home-based charter schools and
that CVCS does not provide sufficient direct
instruction by certified teachers of at least five clock
hours per day to qualify for funding. K12 Inc. and K12 Illinois
LLC were also named as defendants. On May 16, 2007, the
Court dismissed K12 Inc. and K12 Illinois LLC from the case.
After three dismissals of their complaint on procedural grounds,
the Court granted the plaintiffs Fourth Amended Citizen
Complaint on May 20, 2008. CVCS and the Board of Education
of the City of Chicago jointly filed a Motion to Reconsider,
which was denied by Memorandum Opinion and Order dated
August 8, 2008. The case is now in the discovery stage. On
December 30, 2008, CVCS filed a Motion for Summary
Judgment. In an order entered on January 14, 2009, the
court allowed for limited additional discovery and scheduled
oral argument on the Motion for Summary Judgment on May 7,
2009. The Company continues to participate in the defense of
CVCS under an indemnity obligation in our service agreement with
that school, which requires the Company to indemnify CVCS
against certain liabilities arising out of the performance of
the service agreement, and certain other claims and liabilities,
including liabilities arising out of challenges to the validity
of the virtual school charter. The Company is not able to
estimate the range of potential loss if the plaintiff were to
prevail and a claim was made against the Company for
indemnification. In fiscal year 2008 and for the six months
ended December 31, 2008, average enrollments in CVCS were
407 and 575 respectively, and we derived 1.3% and 1.0%,
respectively of our revenues from CVCS.
The Company expenses legal costs as incurred.
On August 14, 2008, a subsidiary of the Company entered
into an agreement to establish a joint venture with a Middle
East partner. The purpose of the joint venture is to develop and
manage the distribution of the Companys learning system in
the Gulf Cooperating Countries. The Companys investment
into this joint venture consists of $1 million in cash and
contributed assets in return for a 66.7% ownership interest. The
Companys Middle East partner contributed $5 million
in cash in return for a 33.3% ownership interest. The Company
accounts for this joint venture under the consolidated method of
accounting.
|
|
8.
|
Fair
Value Measurements
|
The following table summarizes certain fair value information at
December 31, 2008 for assets and liabilities measured at
fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
17,965
|
|
|
$
|
17,965
|
|
|
$
|
|
|
|
$
|
|
|
Money market deposit accounts
|
|
$
|
1,361
|
|
|
$
|
1,361
|
|
|
$
|
|
|
|
$
|
|
|
Money market U.S. Treasury securities
|
|
$
|
31,046
|
|
|
$
|
31,046
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,732
|
|
|
$
|
50,732
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
K12
Inc.
Notes to
Unaudited Condensed Consolidated Financial
Statements (Continued)
|
|
9.
|
Supplemental
Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash paid for interest
|
|
$
|
585
|
|
|
$
|
697
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
41
|
|
|
$
|
151
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
New capital lease obligations
|
|
$
|
13,054
|
|
|
$
|
9,157
|
|
|
|
|
|
|
|
|
|
|
Business Combination:
|
|
|
|
|
|
|
|
|
Net working capital
|
|
$
|
|
|
|
$
|
(190
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
Capitalized curriculum development costs
|
|
$
|
|
|
|
$
|
2,263
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
|
|
|
$
|
189
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
$
|
|
|
|
$
|
(936
|
)
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
|
|
|
$
|
2,551
|
|
|
|
|
|
|
|
|
|
|
Assumed liabilities
|
|
$
|
|
|
|
$
|
1,271
|
|
|
|
|
|
|
|
|
|
|
Issuance of the Companys common stock
|
|
$
|
|
|
|
$
|
2,520
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock to common stock upon initial
public offering
|
|
$
|
|
|
|
$
|
238,408
|
|
|
|
|
|
|
|
|
|
|
Purchase of perpetual license agreement/accrued liabilities
|
|
$
|
|
|
|
$
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Recent
Accounting Pronouncements
|
In December 2007, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 141R (revised
2007), Business Combinations, which replaces SFAS No
141. The statement retains the purchase method of accounting for
acquisitions, but requires a number of changes, including
changes in the way assets and liabilities are recognized in the
purchase accounting. It also changes the recognition of assets
acquired and liabilities assumed arising from contingencies,
requires the capitalization of in-process research and
development at fair value, and requires the expensing of
acquisition-related costs as incurred. SFAS No. 141R
is effective for the Company beginning July 1, 2009 and
will apply prospectively to business combinations completed on
or after that date.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB 51, which changes the
accounting and reporting for minority interests. Minority
interests will be recharacterized as noncontrolling interests
and will be reported as a component of equity separate from the
parents equity, and purchases or sales of equity interests
that do not result in a change in control will be accounted for
as equity transactions. In addition, net income attributable to
the noncontrolling interest will be included in consolidated net
income on the face of the income statement and, upon a loss of
control, the interest sold, as well as any interest retained,
will be recorded at fair value with any
11
K12
Inc.
Notes to
Unaudited Condensed Consolidated Financial
Statements (Continued)
gain or loss recognized in earnings. SFAS No. 160 is
effective for the Company beginning July 1, 2009 and will
apply prospectively, except for the presentation and disclosure
requirements, which will apply retrospectively. The Company does
not believe that the provisions of this statement will have a
material effect on its financial condition, results of
operations and disclosures.
In March 2008, the FASB issued SFAS No. 161,
Disclosures About Derivative Instruments and Hedging
Activities amendment of FASB Statement
No. 133 (SFAS No. 161). SFAS No. 161
changes the disclosure requirements for derivative instruments
and hedging activities. SFAS No. 161 is effective for
financial statements issued for fiscal years beginning after
November 15, 2008. As SFAS No. 161 relates only to
disclosure, the Company anticipates that the adoption of
SFAS No. 161 will not have a material effect on its
consolidated financial statements.
12
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
This Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) is intended to
assist in understanding and assessing the trends and significant
changes in our results of operations and financial condition. As
used in this MD&A, the words, we,
our and us refer to K12 Inc. and its
consolidated subsidiaries. This MD&A should be read in
conjunction with our condensed consolidated financial statements
and related notes included in this report, as well as the
consolidated financial statements and MD&A of our Annual
Report on
Form 10-K
for the fiscal year ended June 30, 2008. The following
overview provides a summary of the sections included in our
MD&A:
|
|
|
|
|
Forward-Looking Statements cautionary information
about forward-looking statements and a description of certain
risks and uncertainties that could cause our actual results to
differ materially from our historical results or our current
expectations or projections.
|
|
|
|
Executive Summary a general description of our
business and key highlights of the three and six months ended
December 31, 2008.
|
|
|
|
Critical Accounting Policies and Estimates a
discussion of critical accounting policies requiring critical
judgments and estimates.
|
|
|
|
Results of Operations an analysis of our results of
operations in our consolidated financial statements.
|
|
|
|
Liquidity and Capital Resources an analysis of cash
flows, sources and uses of cash, commitments and contingencies,
seasonality in the results of our operations, the impact of
inflation, and quantitative and qualitative disclosures about
market risk.
|
Forward-Looking
Statements
This MD&A contains certain forward-looking statements
within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Historical results may not
indicate future performance. Our forward-looking statements
reflect our current views about future events, are based on
assumptions and are subject to known and unknown risks and
uncertainties that could cause actual results to differ
materially from those contemplated by these statements. Factors
that may cause differences between actual results and those
contemplated by forward-looking statements include, but are not
limited to, those discussed in Risk Factors in
Part I, Item 1A, of our Annual Report on
Form 10-K
for the fiscal year ended June 30, 2008, including any
updates found in Part II, Item 1A, Risk
Factors, of this quarterly report. We undertake no
obligation to publicly update or revise any forward-looking
statements, including any changes that might result from any
facts, events, or circumstances after the date hereof that may
bear upon forward-looking statements. Furthermore, we cannot
guarantee future results, events, levels of activity,
performance, or achievements.
Executive
Summary
We are a technology-based education company. We offer
proprietary curriculum and educational services created for
online delivery to students in kindergarten through
12th grade, or K-12. Our mission is to maximize a
childs potential by providing access to an engaging and
effective education, regardless of geographic location or
socio-economic background. Since our inception, we have invested
more than $135 million to develop curriculum and an online
learning platform that promotes mastery of core concepts and
skills for students of all abilities. This learning system
combines a cognitive research-based curriculum with an
individualized learning approach well-suited for virtual schools
and other educational applications.
13
We deliver our learning system to students primarily through
virtual public schools. We offer virtual schools our proprietary
curriculum, online learning platform and academic and management
services, under long-term contracts. Academic and management
services can range from targeted programs to complete turnkey
solutions. As of December 31, 2008, substantially all of
our enrollments were served through 32 virtual public
schools to which we provide full turnkey solutions and seven
virtual public schools to which we provide limited management
services, located in 21 states and the District of
Columbia. For the second quarter of fiscal year 2009 versus the
same period in the prior year, we increased average enrollments
in the virtual public schools we serve to approximately 55,076
students from 40,675 students, an increase of 35.4%, and
increased revenues to $77.6 million from
$54.4 million, an increase of 42.7%.
For the three months ended December 31, 2008, approximately
85.3% of our enrollments were associated with virtual public
schools to which we provide turnkey management services as
compared to 81.5% for the same period in the prior year. We are
responsible for the complete management of these schools and
therefore, we recognize as revenues the funds received by the
schools, up to the level of costs incurred. These costs are
substantial, as they include the cost of teacher compensation
and other ancillary school expenses. Accordingly, enrollments in
these schools generate substantially more revenues than
enrollments in other schools where we provide limited or no
management services. In these situations, our revenues are
limited to direct invoices and are independent of the total
funds received by the school from a state or district.
Parents can also purchase our curriculum and online learning
platform directly to facilitate or supplement their
childrens education. Additionally, we have piloted
portions of our curriculum in brick and mortar classrooms with
promising academic results. We recently launched the K12
International Academy, an online private school which serves
students in the U.S. and throughout the world. The school
utilizes the same K12 curriculum, systems, and teaching
practices as the virtual public schools we serve. The school is
accredited by the Commission on International and Trans-Regional
Accreditation (CITA), the Southern Association of Colleges and
Schools (SACS), and is recognized by the State of Virginia as a
degree granting institution of secondary learning.
Formation
of Joint Venture
On August 14, 2008, a subsidiary of the Company entered
into an agreement to establish a joint venture with a Middle
East partner. The purpose of the joint venture is to develop and
manage the distribution of our learning system in the Gulf
Cooperating Countries. The K12 International Academy has a
branch facility in Dubai, operated under this joint venture. Our
investment into this joint venture consists of $1 million
in cash and contributed assets in return for a 66.7% ownership
interest. Our Middle East partner contributed $5 million in
cash in return for a 33.3% ownership interest. Our condensed
consolidated financial statements reflect the results of
operations of this joint venture. Earnings or losses
attributable to our partner are classified as minority
interest in our consolidated statements of operations.
Minority interest adjusts our consolidated net results of
operations to reflect only our share of the after-tax earnings
or losses of an affiliated company. Income taxes attributable to
minority interest are determined using the applicable statutory
tax rates in the jurisdictions where such operations are
conducted.
Discussion
of Seasonality
Our revenues and operating results normally fluctuate as a
result of seasonal variations in our business, principally due
to the number of months that our virtual public school are fully
operational and changes in the number of enrollments. While
school administrative offices are generally open year round, a
school typically serves students during a 10 month academic
year. A schools academic year will typically start in
August or September, our first fiscal quarter, and finish in May
or June, our fourth fiscal quarter. Consequently, our first and
fourth fiscal quarters may have fewer than three months of full
operations when compared to the second
14
and third fiscal quarters. In addition, we experience a seasonal
increase in enrollments in August and September, although
students will enroll to a lesser extent during the school year.
In the first fiscal quarter, we ship and recognize revenues for
materials to students for the beginning of the school year. This
generally results in higher materials revenues and margin in the
first quarter versus other quarters. In the first and fourth
fiscal quarters, online curriculum and computer revenues are
generally lower as these revenues are primarily earned during
the school academic year which may provide for only one or two
months of these revenues in these quarters versus the second and
third fiscal quarters. The combined effect of these factors
results in higher revenues in the first fiscal quarter than in
the subsequent quarters.
Operating expenses are also seasonal. Instructional costs and
services expenses increase in the first fiscal quarter primarily
due to the costs incurred to ship student materials at the
beginning of the school year. Instructional costs may increase
significantly quarter-to-quarter as school operating expenses
increase. For example, enrollment growth will require additional
teaching staff, thereby increasing salary and benefits expense.
School events may be seasonal, (e.g. professional development,
proctored exam related expenses, and community events,)
impacting the quarterly change in instructional costs. The
majority of our recruiting and selling expenses are incurred in
the first and fourth fiscal quarters, as our primary enrollment
season is July through September. A significant portion of our
overhead expenses does not vary with the school year or
enrollment season.
In addition to these seasonal variations, funding for the
virtual public schools we serve is dependent on the relevant
states budgetary process. While this normally occurs on an
annual or bi-annual basis, the current economic recession has
caused a departure from the normal process. As we monitor these
developments, we are aware of legislative and administrative
proposals involving funding reductions for public education that
may affect some of the virtual public schools we serve. These
reductions are under consideration in several states where K12
now operates. Funding reductions made to date have been
immaterial. However, the timing, amounts and budget categories
associated with other proposals remain largely in flux at this
time. Payments at current funding levels may also be delayed. If
funding reductions or delays are enacted that are material, we
have the flexibility to mitigate their impact. However, we
cannot be certain that our actions would fully mitigate the
impact on our results of operations and cash flows.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with
United States of America generally accepted accounting
principles requires us to make estimates and assumptions about
future events that affect the amounts reported in our
consolidated financial statements and accompanying notes. Future
events and their effects cannot be determined with certainty.
Therefore, the determination of estimates requires the exercise
of judgment. Actual results could differ from those estimates,
and any such differences may be material to our consolidated
financial statements. Critical accounting policies are disclosed
in our fiscal year 2008 audited consolidated financial
statements, which are included our Annual Report filed on
Form 10-K
for the fiscal year ended June 30, 2008. Other than
described in the condensed consolidated financials, there have
been no significant updates to our critical accounting policies
from those disclosed in the Annual Report.
15
Results
of Operations
The following table sets forth average enrollment data for each
of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Total Enrollments
|
|
|
55,076
|
|
|
|
40,675
|
|
|
|
55,366
|
|
|
|
40,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Enrollments as percentage of total enrollments
|
|
|
85.3
|
%
|
|
|
81.5
|
%
|
|
|
85.3
|
%
|
|
|
81.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High School enrollments as a percentage of total enrollments
|
|
|
18.6
|
%
|
|
|
13.5
|
%
|
|
|
19.2
|
%
|
|
|
13.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth statements of operations data for
each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Revenues
|
|
$
|
77,618
|
|
|
$
|
54,391
|
|
|
$
|
166,243
|
|
|
$
|
113,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
50,312
|
|
|
|
31,980
|
|
|
|
104,733
|
|
|
|
66,758
|
|
Selling, administrative, and other operating expenses
|
|
|
18,887
|
|
|
|
16,609
|
|
|
|
41,722
|
|
|
|
32,649
|
|
Product development expenses
|
|
|
2,405
|
|
|
|
2,460
|
|
|
|
4,600
|
|
|
|
4,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
71,604
|
|
|
|
51,049
|
|
|
|
151,055
|
|
|
|
104,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6,014
|
|
|
|
3,342
|
|
|
|
15,188
|
|
|
|
9,350
|
|
Interest expense, net
|
|
|
(264
|
)
|
|
|
(389
|
)
|
|
|
(157
|
)
|
|
|
(693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax (expense) benefit and minority
interest
|
|
|
5,750
|
|
|
|
2,953
|
|
|
|
15,031
|
|
|
|
8,657
|
|
Income tax benefit (expense)
|
|
|
(2,365
|
)
|
|
|
(1,565
|
)
|
|
|
(6,151
|
)
|
|
|
5,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
3,385
|
|
|
|
1,388
|
|
|
|
8,880
|
|
|
|
14,210
|
|
Minority interest, net of tax
|
|
|
135
|
|
|
|
|
|
|
|
554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,520
|
|
|
$
|
1,388
|
|
|
$
|
9,434
|
|
|
$
|
14,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
The following table sets forth statements of operations data as
a percentage of revenues for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
64.8
|
|
|
|
58.8
|
|
|
|
63.0
|
|
|
|
58.7
|
|
Selling, administrative, and other operating expenses
|
|
|
24.4
|
|
|
|
30.5
|
|
|
|
25.1
|
|
|
|
28.7
|
|
Product development expenses
|
|
|
3.1
|
|
|
|
4.5
|
|
|
|
2.8
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
92.3
|
|
|
|
93.8
|
|
|
|
90.9
|
|
|
|
91.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
7.7
|
|
|
|
6.2
|
|
|
|
9.1
|
|
|
|
8.2
|
|
Interest expense, net
|
|
|
(0.3
|
)
|
|
|
(0.7
|
)
|
|
|
(0.1
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax (expense) benefit and minority
interest
|
|
|
7.4
|
|
|
|
5.5
|
|
|
|
9.0
|
|
|
|
7.6
|
|
Income tax benefit (expense)
|
|
|
(3.1
|
)
|
|
|
(2.9
|
)
|
|
|
(3.7
|
)
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
4.3
|
|
|
|
2.6
|
|
|
|
5.3
|
|
|
|
12.5
|
|
Minority interest, net of tax
|
|
|
0.2
|
|
|
|
0.0
|
|
|
|
0.4
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4.5
|
%
|
|
|
2.6
|
%
|
|
|
5.7
|
%
|
|
|
12.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have included below a discussion of our operating results and
significant items which explain the material changes in our
operating results during the last three and six months versus
the prior year.
Comparison
of the Three Months Ended December 31, 2008 and Three
Months Ended December 31, 2007
Revenues. Our revenues for the three months ended
December 31, 2008 were $77.6 million, representing an
increase of $23.2 million, or 42.7%, as compared to
revenues of $54.4 million for the three months ended
December 31, 2007. Average enrollments increased 35.4% to
55,076 for the three months ended December 31, 2008 from
40,675 for the three months ended December 31, 2007. The
increase in average enrollments was primarily attributable to
30.6% enrollment growth in existing states. New school openings
in Hawaii, Indiana, Oregon, and South Carolina contributed
approximately 4.8% to enrollment growth. In new and existing
states combined, high school enrollments contributed
approximately 11.8% to enrollment growth. High school
enrollments increased 88.6% and constituted approximately 18.6%
of our enrollments for the three months ended December 31,
2008 as compared to 13.5% in the same period prior year. Also
contributing to the growth in revenues was the increase in the
percentage of enrollments associated with managed schools, which
generate higher revenue per enrollment than non-managed school
enrollments. The percentage of enrollments associated with
managed schools increased to 85.3% for the three months ended
December 31, 2008 from 81.5% for the three months
December 31, 2007.
Instructional Costs and Services
Expenses. Instructional costs and services expenses for
the three months ended December 31, 2008 were
$50.3 million, representing an increase of
$18.3 million, or 57.3% as compared to instructional costs
and services of $32.0 million for the three months ended
December 31, 2007. This increase was primarily attributable
to a $13.8 million increase in expenses to operate and
manage the schools and a $4.5 million increase in costs to
supply books, educational materials and computers to students,
including depreciation and amortization. As a percentage of
revenues, instructional costs increased to 64.8% for the three
months ended December 31, 2008, as compared to 58.8% for
the three months ended December 31, 2007. This increase as
a percentage of revenues is primarily attributable to three
factors: 1) an
17
increase in the percentage of managed school enrollments
relative to total enrollments from 81.5% to 85.3%. Managed
school enrollments generate more revenue than those associated
with non-managed schools, but have higher instructional costs as
a percentage of revenues; 2) an increase in the percentage
of high school enrollments relative to total enrollments from
13.5% to 18.6%. High school enrollments have higher costs as a
percentage of revenues due to increased teacher and related
services costs; and
3) start-up
costs associated with the commencement of school operations in
four new states and the addition of managed schools in two
existing states.
Selling, Administrative, and Other Operating
Expenses. Selling, administrative, and other operating
expenses for three months ended December 31, 2008 were
$18.9 million, representing an increase of
$2.3 million, or 13.7%, as compared to selling,
administrative and other operating expenses of
$16.6 million for the three months ended December 31,
2007. This increase is primarily attributable to a
$2.0 million increase in student recruiting costs in
addition to a $0.3 million increase in other expenses. As a
percentage of revenues, selling, administrative, and other
operating expenses decreased to 24.4% for the three months ended
December 31, 2008 as compared to 30.5% for the three months
ended December 31, 2007 primarily due to greater leverage
on our corporate overhead and fixed selling resources. Partially
offsetting this leverage were increased investments in demand
generating activities and our international expansion efforts.
Product Development Expenses. Product development
expenses for the three months ended December 31, 2008 were
$2.4 million, representing a decrease of $0.1 million,
or 2.3%, as compared to product development expenses of
$2.5 million for the three months ended December 31,
2007. Employee compensation as well as contract labor costs
increased, but were offset by greater utilization of these
resources to develop curriculum assets. As a percentage of
revenues, product development expenses decreased to 3.1% for the
three months ended December 31, 2008 as compared to 4.5%
for the three months ended December 31, 2007 as we were
able to leverage these costs over a larger revenue base.
Interest expense, net. Net interest expense for the
three months ended December 31, 2008 was $0.3 million,
as compared to a net interest expense of $0.4 million for
the three months ended December 31, 2007. The decline is
due to reduced borrowings under our revolving line of credit
offset by increased capital lease obligations. In addition,
although our average cash balances were substantially higher for
the three months ended December 31, 2008, the significant
decline in interest rates resulted in lower interest income.
Income Taxes. Income tax expense for the three
months ended December 31, 2008 was $2.4 million, or
41.1% of income before income taxes, as compared to an income
tax expense of $1.6 million, or 53.0% of income before
taxes, for the three months ended December 31, 2007.
Minority interest. Minority interest for the three
months ended December 31, 2008 was $0.1 million,
reflecting losses attributable to shareholders in our joint
venture. There was no minority interest for the three months
ended December 31, 2007.
Comparison
of the Six Months Ended December 31, 2008 and Six Months
Ended December 31, 2007
Revenues. Our revenues for the six months ended
December 31, 2008 were $166.2 million, representing an
increase of $52.5 million, or 46.2%, as compared to
revenues of $113.7 million for the six months ended
December 31, 2007. Average enrollments increased 37.1% to
55,366 for the six months ended December 31, 2008 from
40,380 for the six months ended December 31, 2007. The
increase in average enrollments was primarily attributable to
32.3% enrollment growth in existing states. New school openings
in Hawaii, Indiana, Oregon, and South Carolina contributed
approximately 4.8% to enrollment growth. In new and existing
states combined, high school enrollments contributed
approximately 12.6% to enrollment growth. High school
enrollments increased 92.2% and constituted approximately 19.2%
of our enrollments for the six months ended December 31,
2008 as compared to 13.7% in the same period prior year. Also
contributing to the growth in revenues was the increase in the
percentage of enrollments associated with managed schools, which
18
generate higher revenue per enrollment than non-managed school
enrollments. The percentage of enrollments associated with
managed schools increased to 85.3% for the six months ended
December 31, 2008 from 81.3% for the six months
December 31, 2007.
Instructional Costs and Services
Expenses. Instructional costs and services expenses for
the six months ended December 31, 2008 were
$104.7 million, representing an increase of
$37.9 million, or 56.9% as compared to instructional costs
and services of $66.8 million for the six months ended
December 31, 2007. This increase was primarily attributable
to a $26.2 million increase in expenses to operate and
manage the schools and a $11.8 million increase in costs to
supply books, educational materials and computers to students,
including depreciation and amortization. As a percentage of
revenues, instructional costs increased to 63.0% for the six
months ended December 31, 2008, as compared to 58.7% for
the six months ended December 31, 2007. This increase as a
percentage of revenues is primarily attributable to four
factors: 1) an increase in the percentage of managed school
enrollments relative to total enrollments from 81.3% to 85.3%.
Managed school enrollments generate more revenue than those
associated with non-managed schools, but have higher
instructional costs as a percentage of revenues; 2) an
increase in the percentage of high school enrollments relative
to total enrollments from 13.7% to 19.2%. High school
enrollments have higher costs as a percentage of revenues due to
increased teacher and related services costs;
3) incremental freight charges due to expedited student
materials shipments and fuel surcharges, partially offset by
reduced costs of student materials and computers; and
4) start-up
costs associated with the commencement of school operations in
four new states and the addition of managed schools in two
existing states.
Selling, Administrative, and Other Operating
Expenses. Selling, administrative, and other operating
expenses for six months ended December 31, 2008 were
$41.7 million, representing an increase of
$9.1 million, or 27.8%, as compared to selling,
administrative and other operating expenses of
$32.6 million for the six months ended December 31,
2007. This increase is primarily attributable to a
$4.3 million increase in student recruiting costs in
addition to a $4.8 million increase in other expenses. As a
percentage of revenues, selling, administrative, and other
operating expenses decreased to 25.1% for the six months ended
December 31, 2008 as compared to 28.7% for the six months
ended December 31, 2007 primarily due to greater leverage
on our corporate overhead and fixed selling resources. Partially
offsetting this leverage were increased investments in demand
generating activities and our international expansion efforts.
Product Development Expenses. Product development
expenses for the six months ended December 31, 2008 were
$4.6 million, representing a decrease of $0.4 million,
or 7.8%, as compared to product development expenses of
$5.0 million for the six months ended December 31,
2007. Employee compensation as well as contract labor costs
increased, but were offset by greater utilization of these
resources to develop curriculum assets. As a percentage of
revenues, product development expenses decreased to 2.8% for the
six months ended December 31, 2008 as compared to 4.4% for
the six months ended December 31, 2007 as we were able to
leverage these costs over a larger revenue base generated from
the growth in enrollments.
Interest expense, net. Net interest expense for the
six months ended December 31, 2008 was $0.2 million,
as compared to a net interest expense of $0.7 million for
the six months ended December 31, 2007. The decline is due
to reduced borrowings under our revolving line of credit offset
by increased capital lease obligations. In addition, although
our average cash balances were substantially higher for the six
months ended December 31, 2008, the significant decline in
interest rates resulted in lower interest income.
Income Taxes. Income tax expense for the six months
ended December 31, 2008 was $6.2 million, or 40.9% of
income before income taxes, as compared to an income tax benefit
of $5.6 million for the six months ended December 31,
2007. The income tax benefit for the six months ended
December 31, 2007 reflects a $9.7 million tax benefit
as we were able to reverse the valuation allowance on net
deferred tax assets generated by our net operating losses that
were fully reserved in prior periods. Had that reversal not
occurred, we would have recorded an income tax expense of
$4.1 million, or 47.1% of income before income taxes.
19
Minority interest. Minority interest for the six
months ended December 31, 2008 was $0.6 million,
reflecting losses attributable to shareholders in our joint
venture. There was no minority interest for the six months ended
December 31, 2007.
Liquidity
and Capital Resources
As of December 31, 2008 and June 30, 2008, we had cash
and cash equivalents of $50.4 million and
$71.7 million, respectively. We financed our operating
activities and capital expenditures during the six months ended
December 31, 2008 primarily through the use of cash on hand
and capital lease financing.
Our cash requirements consist primarily of day-to-day operating
expenses, capital expenditures and contractual obligations with
respect to facility leases, capital equipment leases and other
operating leases. We expect capital expenditures for additional
courses, new releases of existing courses and internal systems
enhancements to remain relatively stable for the next two years
and expenditures for computers to support virtual school
enrollments to increase with enrollment growth. In total, we
expect that our capital expenditures in the 12 months ended
December 31, 2009 will be approximately $35 million to
$45 million for student computers, curriculum development
and related systems. We expect to be able to fund these capital
expenditures with cash on hand, cash generated from operations
and capital lease financing. We lease all of our office
facilities. We expect to make future payments on existing leases
from cash generated from operations. Based on our current
operating and capital expenditure forecasts, we believe that the
combination of funds currently available and funds to be
generated from operations will be adequate to finance our
ongoing operations for at least the next twelve months.
Operating
Activities
Net cash used in operating activities for the six months ended
December 31, 2008 and 2007 was $20.9 million and
$0.8 million, respectively.
The overall increase of $20.1 million was primarily due to
a decrease in net income of $4.8 million, a
$22.1 million increase in the amount of cash used to
finance accounts receivable, a $6.8 million increase in the
use of cash for accounts payable, a $4.7 million increase
in the use of cash for accrued compensation and benefits, a
$2.9 million increase in the use of cash in other assets,
and a $4.0 million adjustment for the excess tax benefit
from stock compensation expense. These amounts were partially
offset by an $11.7 million change in adjustments for
deferred income taxes, a $6.0 million increase in the
change in deferred revenues, a $3.8 million increase in
depreciation, a $3.1 million increase in the change in
inventories, and amortization and $0.8 million increase in
changes in other assets and liabilities.
The increase in accounts receivable is primarily attributable to
the growth in revenues as well as slower initial payments from
new schools and growth in schools with slower payment trends.
Accounts receivable balances tend to be at the highest levels in
the first quarter as we begin billing for students and many of
our billing arrangements include upfront fees. Deferred revenues
are primarily a result of invoicing upfront fees, not cash
payments. Deferred revenue balances tend to be highest in the
first quarter, when the majority of students enroll, and are
generally amortized over the course of the fiscal year. The
decrease in accounts payable is primarily due to payment of
greater seasonal amounts outstanding at year-end. The cash used
in accrued compensation is primarily due to lower accrued
compensation partially offset by an increase in liabilities
related to stock option exercises. The change in inventories is
primarily due to increased shipments to support enrollment
growth.
20
Investing
Activities
Net cash used in investing activities for the six months ended
December 31, 2008 and 2007 was $14.8 million and
$7.5 million, respectively.
Net cash used in investing activities for the six months ended
December 31, 2008 was primarily due to investment in
capitalized curriculum of $7.0 million, primarily related
to the production of high school courses and elementary school
math courses and $7.7 million in property and equipment,
including internally developed and purchased software. In
addition, we financed purchases of $13.1 million of
computers and software, primarily for use by students, through
capital leases.
Net cash used in investing activities for the six months ended
December 31, 2007 was attributable to investment in
capitalized curriculum of $3.9 million, primarily related
to the development of high school courses and $3.2 million
in property and equipment, including internally developed
software. In addition, we financed purchases of
$9.2 million of computers and software, primarily for use
by students, through capital leases.
Financing
Activities
Net cash provided by financing activities for the six months
ended December 31, 2008 and 2007 was $14.4 million and
$75.3 million, respectively.
For the six months ended December 31, 2008, net cash
provided by financing activities was primarily due to the
proceeds from the exercise of stock options of
$6.3 million, proceeds received from the minority interest
contribution of $5.0 million, proceeds from notes payable
of $3.1 million and the excess tax benefit from stock
compensation expense of $4.0 million offset by payments on
capital leases and notes payable totaling $4.1 million. As
of December 31, 2008, there were no borrowings outstanding
on our $20 million line of credit.
For the six months ended December 31, 2007, net cash used
for the repayment of short term debt was $1.5 million and
cash used for the repayment of capital leases was
$1.9 million. In December, 2007, we completed the initial
public offering (IPO) of our common stock in which we raised
approximately $71.0 million in net proceeds after deducting
underwriting discounts and commissions and other offering costs.
Concurrently with the closing of the IPO, we sold shares of
common stock at the initial public offering price for an
aggregate purchase price of $15.0 million to a
non-U.S. person,
in a private placement transaction outside the United States in
reliance upon Regulation S under the Securities Act. Also
concurrently with the closing of the IPO, the holders of
Redeemable, Convertible Series C Preferred stock were paid
a cash dividend of $6.4 million.
Off
Balance Sheet Arrangements, Contractual Obligations and
Commitments
There were no substantial changes to our guarantee and
indemnification obligations in the six months ended
December 31, 2008.
Our contractual obligations consist primarily of leases for
office space, capital leases for equipment and other operating
leases. The total amount due under contractual obligations
increased during the six months ended December 31, 2008
primarily due to approximately $13.1 million for capital
leases related to student computers and $3.1 million for notes
payable for software licenses and maintenance services.
21
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
Rate Risk
At December 31, 2008 and June 30, 2008, we had cash
and cash equivalents totaling $50.4 million and
$71.7 million. Our excess cash has been invested primarily
in U.S. treasury money market funds although we may also
invest in money market accounts, government securities,
corporate debt securities and similar investments. Future
interest and investment income is subject to the impact of
interest rate changes and we may be subject to changes in the
fair value of our investment portfolio as a result of changes in
interest rates.
Our short-term debt obligations under our revolving credit
facility are subject to interest rate exposure, however as we
had no outstanding balance on this facility during the three
months ended December 31, 2008, fluctuations in interest
rates had no impact on our interest expense.
Foreign
Currency Exchange Risk
We currently operate in a foreign country, but we do not
transact a material amount of business in a foreign currency and
therefore fluctuations in exchange rates will not have a
material impact on our financial statements. However, we
continue to pursue opportunities in international markets. If we
enter into any material transactions in a foreign currency or
establish or acquire any subsidiaries that measure and record
their financial condition and results of operation in a foreign
currency, we will be exposed to currency transaction risk
and/or
currency translation risk. Exchange rates between
U.S. dollars and many foreign currencies have fluctuated
significantly over the last few years and may continue to do so
in the future. Accordingly, we may decide in the future to
undertake hedging strategies to minimize the effect of currency
fluctuations on our financial condition and results of
operations.
|
|
Item 4T.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in
Exchange Act
Rule 13a-15(f))
that are designed to ensure that information required to be
disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms and that such information is
accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management necessarily was required to
apply its judgment in evaluating the cost benefit relationship
of possible controls and procedures.
We carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as required by
Rules 13a-15(e)
and
15d-15(e) of
the Exchange Act. Based on this review, our Chief Executive
Officer and Chief Financial Officer concluded that these
disclosure controls and procedures were effective as of
December 31, 2008 at the reasonable assurance level.
22
Changes
in Internal Control Over Financial Reporting
During the quarter ended December 31, 2008, there were no
changes in our internal control over financial reporting that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Part II.
Other Information
|
|
Item 1.
|
Legal
Proceedings.
|
In the ordinary conduct of our business, we are subject to
lawsuits and other adjudicative proceedings from time to time,
including but not limited to, employment and contractual
disputes. In addition, a lawsuit has been brought by the
teachers union that seeks the closure of the virtual
public school we serve in Illinois. This lawsuit is described in
Footnote 6 to our unaudited condensed consolidated
financial statements set forth in Part I, Item 1 of
this quarterly report.
There have been no material changes to the risk factors
disclosed in Risk Factors in Part I,
Item 1A, of our Annual Report on
Form 10-K
for the fiscal year ended June 30, 2008.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
None.
|
|
Item 3.
|
Defaults
Upon Senior Securities.
|
None.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
The Annual Meeting of Shareholders of the Company was held
November 21, 2008 in New York, New York. At the Annual
Meeting, seven directors were reelected for terms of one year to
the Board of Directors with the following votes cast: Guillermo
Bron received 24,775,760 votes for and 7,335 votes were
withheld; Steven B. Fink received 24,720,218 votes for and
62,877 votes were withheld; Mary H. Futrell received 24,410,081
votes for and 373,014 votes were withheld; Ronald J. Packard
received 24,775,441 votes for and 7,654 votes were withheld;
Jane M. Swift received 24,410,187 votes for and 372,908 votes
were withheld; Andrew H. Tisch received 24,354,645 votes for and
428,450 votes were withheld; and Thomas J. Wilford received
24,775,760 votes for and 7,335 votes were withheld.
In addition, at the Annual Meeting of Shareholders, the
selection of BDO Seidman, LLP as the Companys independent
registered public accounting firm for the fiscal year ending
June 30, 2009 was ratified with 24,772,385 votes for, 3,234
votes against, and 7,476 votes abstained.
23
|
|
Item 5.
|
Other
Information.
|
None.
(a) Exhibits.
The exhibits listed on the accompanying Exhibit Index are filed
as part of this report and such Exhibit Index is
incorporated herein by reference.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
K12 INC.
Date: February 9, 2009
Ronald J. Packard
Chief Executive Officer
(Principal Executive Officer and Authorized
Signatory)
John F. Baule
Chief Operating Officer and Chief Financial Officer
(Principal Financial Officer and Authorized
Signatory)
25
EXHIBIT INDEX
|
|
|
|
|
Number
|
|
Description
|
|
|
31
|
.1*
|
|
Certification of Principal Executive Officer Required Under Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.
|
|
31
|
.2*
|
|
Certification of Principal Financial Officer Required Under Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.
|
|
32
|
*
|
|
Certification of Principal Executive Officer and Principal
Financial Officer Required Under Rule 13a-14(b) of the
Securities Exchange Act of 1934, as amended, and 18 U.S.C.
Section 1350.
|
26