8-K/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K/A
Amendment No. 1

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported): July 23, 2010

K12 Inc.

(Exact name of registrant as specified in its charter)

Delaware	001-33883	95-4774688
(State or other jurisdiction	(Commission	(I.R.S. Employer
of incorporation)	File Number)	Identification No.)
2300 Corporate Park Drive, Herndon, Virginia		20171
(Address of principal		(Zip Code)
executive offices)

Registrant’s telephone number, including area code: (703) 483-7000

Not Applicable

Former name or former address, if changed since last report

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

þ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

EXPLANATORY NOTE

     This Current Report on Form 8-K/A (this “Amendment”) is being filed to include disclosures that amend and supplement those disclosures made by K12 Inc. (the “Company”) in its Current Report on Form 8-K (the “Original Form 8-K”) filed with the Securities and Exchange Commission on July 26, 2010. The financial statements and pro forma financial information described in Item 9.01 below should be read in conjunction with the Original Form 8-K and this Amendment.

Item 2.01. Completion of Acquisition or Disposition of Assets.

     On July 23, 2010, the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among the Company, Kayleigh Sub Two LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Company (“LLC Merger Sub”), Kayleigh Sub One Corp., a Delaware corporation and a wholly-owned subsidiary of the Company (“Corporate Merger Sub”), KCDL Holdings, LLC, a Delaware limited liability company (“Seller”), and KC Distance Learning, Inc., a Delaware corporation and a wholly-owned subsidiary of Seller (“KCDL”). Pursuant to the terms of the Merger Agreement, (i) KCDL merged with Corporate Merger Sub, with KCDL continuing as the surviving corporation of the merger (the “First Merger”), and (ii) immediately after the First Merger, KCDL (as the surviving corporation of the First Merger) merged with LLC Merger Sub, with LLC Merger Sub continuing as the surviving entity of the merger (the “Second Merger” and together with the First Merger, the “Mergers”). The Mergers were consummated on July 23, 2010 following the execution of the Merger Agreement.

     This Amendment amends the Original Form 8-K filed on July 26, 2010 to provide, as required by Items 9.01(a) and 9.01(b), the audited annual and unaudited interim financial statements of KCDL and the unaudited pro forma condensed consolidated financial information related to the KCDL acquisition.

Item 9.01. Financial Statements and Exhibits.

     (a) Financial Statements of Businesses Acquired.

The following audited financial statements are attached hereto as Exhibit 99.1:

• Report of Deloitte & Touche LLP, Independent Auditors

• The balance sheet of KCDL as of January 2, 2010

• The statement of operations of KCDL for the year ended January 2, 2010

• The statement of stockholders’ equity for the year ended January 2, 2010

• The statement of cash flows for the year ended January 2, 2010

• Notes to financial statements

The following unaudited financial statements are attached hereto as Exhibit 99.2:

• The unaudited balance sheet of KCDL as of July 3, 2010

• The unaudited statement of operations of KCDL for the six months ended July 3, 2010 and the six months ended July 4, 2009

• The unaudited statement of stockholders’ equity for the six months ended July 3, 2010

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• The unaudited statement of cash flows for the six months ended July 3, 2010 and the six months ended July 4, 2009

• Notes to unaudited financial statements

     (b) Pro Forma Financial Information.

The following unaudited pro forma financial information is attached hereto as Exhibit 99.3:

• The unaudited pro forma condensed consolidated balance sheets as of June 30, 2010

• The unaudited pro forma condensed consolidated statements of operations for the year ended June 30, 2010

• Notes to unaudited pro forma condensed consolidated financial statements

     (c) Exhibits.

Exhibit No.		Description
	23.1	Consent of Deloitte & Touche LLP, Independent Auditors
	99.1	Audited Financial Statements of KC Distance Learning, Inc.
	99.2	Unaudited Financial Statements of KC Distance Learning, Inc.
	99.3	Unaudited Pro Forma Financial Information of K12 Inc. giving effect to the acquisition of KC Distance Learning, Inc.

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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 hereunto duly authorized.

	K12 Inc.
October 8, 2010	By:	/s/ Howard D. Polsky
		Name:	Howard D. Polsky
		Title:	General Counsel and Secretary

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Exhibit Index

Exhibit No.		Description
	23.1	Consent of Deloitte & Touche LLP, Independent Auditors
	99.1	Audited Financial Statements of KC Distance Learning, Inc.
	99.2	Unaudited Financial Statements of KC Distance Learning, Inc.
	99.3	Unaudited Pro Forma Financial Information of K12 Inc. giving effect to the acquisition of KC Distance Learning, Inc.

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EX-23.1

Deloitte & Touche LLP
Suite 3900
111 SW Fifth Avenue
Portland, OR 97204-3642
USA

Tel: +1 503 222 1341
Fax: + 503 224 2172
www.deloitte.com

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in Registration Statement No. 333-148436 on Form S-8 of our report dated September 24, 2010, relating to the financial statements of KC Distance Learning, Inc. as appearing in this Current Report on Form 8-K/A of K12 Inc., which is expected to be filed on October 8, 2010.

Portland, Oregon
October 7, 2010

Member of
Deloitte Touche Tohmatsu

EX-99.1

Exhibit 99.1

K C Distance Learning, Inc.
Financial Statements
For the Fiscal Year Ended January 2, 2010
and Independent Auditors’ Report

KC Distance Learning, Inc.
Financial Statements

Contents

Independent Auditors’ Report	3
Balance Sheet as of January 2, 2010	4
Statement of Operations for the fiscal year ended January 2, 2010	5
Statement of Shareholder’s Equity for the fiscal year ended January 2, 2010	6
Statement of Cash Flows for the fiscal year ended January 2, 2010	7
Notes to financial statements	8

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INDEPENDENT AUDITORS’ REPORT

To the Board of Directors of
KC Distance Learning, Inc.
Portland, Oregon

We have audited the accompanying balance sheet of KC Distance Learning, Inc. (the “Company” or “KCDL” ), a wholly owned subsidiary of Knowledge Universe Education, L.P. (“KUELP”) , as of January 2, 2010, and the related statements of operations, shareholder’s equity, and cash flows for the fiscal year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of KC Distance Learning, Inc. as of January 2, 2010, and the results of its operations and its cash flows for the fiscal year then ended, in conformity with accounting principles generally accepted in the United States of America.

Portland, Oregon
September 24, 2010

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KC Distance Learning, Inc.
Balance Sheet
as of January 2, 2010
(In thousands, except per share amount)

ASSETS
Current assets:
Cash	$	54
Accounts receivable, net of allowance for doubtful accounts		9,685
Deferred income taxes		442
Prepaid expenses and other current assets		1,686
Total current assets		11,867
Property and equipment, net		11,848
Goodwill		5,637
Capitalized curriculum, net		1,577
Other intangible assets, net		1,601
Deferred income taxes		2,813
Other assets		151
Total assets	$	35,494
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	18
Related party payables		16,196
Deferred revenue		3,181
Accrued property and other taxes		109
Accrued compensation and related expenses		145
Other accrued liabilities		283
Current portion of related party capital lease obligation		680
Total current liabilities		20,612
Long-term debt to related party		3,300
Related party capital lease obligation		922
Other long-term liabilities		66
Total liabilities		24,900
Shareholder’s equity:
Common stock, 10,000 shares authorized; $0.01 par value; 1,000 issued and outstanding		10
Additional paid-in capital		12,975
Accumulated deficit		(2,391	)
Total shareholder’s equity		10,594
Total liabilities and shareholder’s equity	$	35,494

See accompanying notes to the financial statements

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KC Distance Learning, Inc.
Statement of Operations
For the Fiscal Year Ended January 2, 2010
(In thousands)

Revenue, net	$	34,705
Cost of revenue		8,497
Gross margin		26,208
Operating expenses:
General and administrative		23,751
Depreciation		3,811
Amortization		515
Total operating expenses		28,077
Loss from operations		(1,869	)
Interest expense, net		625
Loss before income taxes		(2,494	)
Income tax benefit		(848	)
Net loss	$	(1,646	)

See accompanying notes to the financial statements

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KC Distance Learning, Inc.
Statement of Shareholder’s Equity
For the Fiscal Year Ended January 2, 2010

(In thousands)

	Common Stock				Additional					Total
	Number of				Paid-In		Accumulated			Shareholder's
	Shares		Amount		Capital		Deficit			Equity
Balance at January 3, 2009		1,000	$	10	$	12,975	$	(745	)	$	12,240
Net loss		—		—		—		(1,646	)		(1,646	)
Balance at January 2, 2010		1,000	$	10	$	12,975	$	(2,391	)	$	10,594

See accompanying notes to the financial statements

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KC Distance Learning, Inc.
Statement of Cash Flows
For the Fiscal Year Ended January 2, 2010
(In thousands)

Operating activities:
Net loss	$	(1,646	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation		3,811
Amortization		871
Change in deferred taxes		(1,212	)
Changes in operating assets and liabilities:
Accounts receivable		(3,659	)
Prepaid expenses and other current assets		258
Other assets		(52	)
Accounts payable		16
Accrued expenses and other liabilities		(319	)
Related party payables		5,246
Cash provided by operating activities		3,314
Investing activities:
Purchases of property and equipment		(3,681	)
Cash used in investing activities		(3,681	)
Net change in cash		(367	)
Cash at the beginning of year		421
Cash at the end of year	$	54
Supplemental cash flow information
Cash paid for related party interest	$	394
Cash paid for income taxes		15
Cash refund from income taxes		(10	)
Non-cash activities:
Assets acquired under capital leases	$	1,602
Change in related party payable for capitalized curriculum		(1,495	)

See accompanying notes to the financial statements

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KC Distance Learning, Inc.
Notes to Financial Statements

1.	GENERAL
	KC Distance Learning Inc (“KCDL”) is a wholly-owned subsidiary of Knowledge Universe Education, L.P. (“KUELP”). KCDL is a provider of distance learning programs for middle school and high school students including core, foreign language, honors and advanced placement courses.
	KCDL provides accredited online education directly to families through The Keystone School, an online school for middle school and high school students. KCDL provides solutions directly to schools through Aventa Learning, including credit recovery, individual courses designed to augment existing school curriculum and complete virtual school solutions. KCDL also offers iQ Academies, statewide online schools operated in partnership with public school districts or charter school management organizations to serve the education needs of grade, middle and high school students. iQ Academies are public schools that are tuition-free for in-state residents.
2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
	Basis of Presentation — KCDL’s fiscal year ends on the Saturday closest to December 31 and is comprised of 52 weeks. Accordingly, fiscal year 2009 ended on January 2, 2010. For purposes of these footnotes, the 52 weeks ended January 2, 2010 are referred to as the “fiscal year” or the “year ended.”
	Use of Estimates — KCDL’s financial statements are presented in conformity with accounting principles generally accepted in the United States of America. The preparation thereof requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared based on the most current and best available information and actual results could differ from those estimates. The most significant estimates underlying the financial statements include the period over which revenue is recognized, the allowance for doubtful accounts, the valuation and any resulting impairments of long-lived assets, other intangible assets and goodwill and the need for valuation allowances against deferred tax assets.
	Revenue Recognition — Revenues are principally earned from tuition paid for enrollment in courses and contractual agreements to provide on-line curriculum to schools, school districts or individuals. KCDL generates revenues under contracts that may include multiple elements. These elements include providing access to on-line courses or curriculum licenses for courses, offline supplemental learning materials, the use of a personal computer and technology support services. KCDL has determined that the elements of its contracts are valuable to schools, school districts or individuals in combination, but do not have standalone value. In addition, KCDL has determined that it does not have the objective and reliable evidence of fair value for each element of its contracts. As a result, the elements within its multiple-element contracts do not qualify for treatment as separate units of accounting. Accordingly, KCDL accounts for revenues received under multiple element arrangements as a single unit of accounting.
	The recognition of revenues meets the following criteria: the existence of an arrangement through an agreement, the rendering of services, a specific tuition rate and/or fees and reasonably assured collection. Tuition, fees and other income are recognized as the related services are provided.

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Payments for these types of services may be received in advance of services being rendered, in which case the revenue is deferred and recognized over the appropriate service period.

Cash — Cash consists of cash deposited with financial institutions.

Concentration of Credit Risk — Financial instruments that subject KCDL to credit risk consist primarily of cash and trade receivables. Cash accounts are placed with high credit quality financial institutions. Concentration of credit risk with respect to trade receivables is generally diversified due to the large customer base. KCDL performs ongoing credit evaluations of its customers and maintains an allowance for doubtful accounts. One customer represented 19% of gross accounts receivable as of January 2, 2010.

Accounts Receivable — Accounts receivable are comprised primarily of amounts due from students and schools for tuition and related services, presented at estimated net realizable value. KCDL uses estimates in determining the ability to collect accounts receivable and must rely on its evaluation of historical experience, specific customer issues and current economic trends to arrive at appropriate reserves. Material differences may result in the amount and timing of bad debt expense if actual experience differs significantly from the estimates.

Property and Equipment — Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the useful lives of the assets or, in the case of leasehold improvements, the lesser of the term of the related lease or the useful lives of the improvements. A summary of estimated useful lives follows:

Furniture, fixtures and equipment	5 to 10 years
Building and leasehold improvements	2 to 10 years
Computer hardware and software	3 to 5 years

Maintenance, repairs and minor refurbishments are expensed as incurred.

Capitalized Software — KCDL develops software for internal use. Software development costs incurred during the application development state are capitalized. KCDL amortizes these costs over the estimated useful life of the software that is generally three to five years. Software development costs are recorded on KCDL’s balance sheet as property and equipment.

Goodwill — Goodwill represents the excess of the cost over the fair value of the identifiable net assets of businesses acquired. KCDL tests its goodwill for impairment at the end of each fiscal year, or more frequently, if circumstances indicate reporting unit carrying values exceed their fair values. Fair value is estimated by projecting future discounted cash flows from the reporting unit in addition to other quantitative and qualitative analyses. If the carrying amount of goodwill exceeds the implied estimated fair value, an impairment charge to current operations is recorded to reduce the carrying value to the implied estimated fair value. There was no impairment of goodwill in fiscal year 2009.

Capitalized Curriculum — In conjunction with a related party, KU Online Services, Inc. (“KUOS”), a subsidiary of KUELP, KCDL develops curriculum that is primarily provided as web content and accessed via the Internet, textbooks and other offline materials. KCDL capitalizes curriculum when it is purchased under perpetual license agreements from KUOS and is available for general release to KCDL’s customers. Curriculum is amortized over its estimated useful life, which is generally five years. The capitalized curriculum asset was $1.9 million and accumulated amortization was $0.3 million as of January 2, 2010. Amortization expense related to capitalized curriculum assets reflected in cost of revenue was $0.2 million for the fiscal year ended January 2, 2010.

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Other Intangible Assets — Other intangible assets consist of customer lists, acquired proprietary curricula, trade names and trademarks. Other intangible assets subject to amortization are amortized on a straight-line basis over their estimated useful lives. KCDL reviews and evaluates the remaining useful lives of such assets if events or changes in circumstances require impairment testing and/or a revision to the remaining period of amortization. Any such impairment analysis is based on a comparison of the carrying values to fair values based upon expected future cash flows. Other intangible assets with indefinite useful lives are tested for impairment on an annual basis, or more frequently, if circumstances indicate the carrying values exceed their fair values. If the carrying amount exceeds the implied estimated fair value, an impairment charge to current operations is recorded to reduce the carrying value to the implied estimated fair value. There was no impairment of other intangible assets in fiscal year 2009.

Long-Lived Assets — KCDL reviews and evaluates its long-lived assets, other than goodwill and other intangible assets, for impairment when events or changes in circumstances indicate that the carrying value of assets may not be recoverable through future undiscounted cash flows. Any impairment is measured as the amount by which the carrying values of such assets exceeds fair value. There was no impairment of long-lived assets in fiscal year 2009.

Income Taxes — KCDL accounts for income taxes under the asset and liability method. Under this method, deferred tax liabilities and assets are recognized for the expected future consequences of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is established to reduce the amount of that deferred tax asset to the amount, more likely than not, to be recognized. Uncertain tax positions and the related interest are recognized in other liabilities and income tax expense.

Fair Value Measurements — Fair value guidance defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Fair value guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels are described as follows:

• Level 1: Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

• Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data.

• Level 3: Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instruments’ valuation.

The carrying values reflected on KCDL’s balance sheet for cash, receivables, accounts payable and related party balances approximate fair values. It is not practicable to estimate fair value of KCDL’s long-term debt due to its related party nature.

Advertising Costs — Advertising costs are expensed as incurred. Total advertising expense, recognized in general and administrative expense, was $5.3 million for the fiscal year ended January 2, 2010.

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	Recent Accounting Pronouncements — In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 157-2, codified under Accounting Standards Codification (“ASC”) 820-10, Fair Value Measurements and Disclosures, which partially delayed the effective date of ASC 820-10 for non-financial assets or liabilities that are not required or permitted to be measured at fair value on a recurring basis. The adoption of this guidance in fiscal year 2009 did not have a material impact on KCDL’s financial position, results of operations or cash flows.
	In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Arrangements, a consensus of the FASB Emerging Issues Task Force (ASC Topic 605) that addresses how to separate deliverables and how to measure and allocate arrangement consideration. This guidance requires vendors to develop the best estimate of selling price for each deliverable and to allocate arrangement consideration using this selling price. The guidance is effective prospectively for revenue arrangements entered into or materially modified in annual periods beginning after June 15, 2010. KCDL is currently evaluating the requirements of ASU 2009-13 and has not yet determined the impact on its fiscal year 2011 financial statements.
3.	ACCOUNTS RECEIVABLE, NET
	Accounts receivable, net, as of January 2, 2010, included the following (in thousands):

Tuition	$	7,726
Licensing and other		2,878
Total accounts receivable		10,604
Allowance for doubtful accounts		(919	)
Accounts receivable, net	$	9,685

4.	PREPAID EXPENSES AND OTHER CURRENT ASSETS
	Prepaid expenses and other current assets, as of January 2, 2010, included the following (in thousands):

Inventory	$	713
Deferred costs		433
Prepaid computer maintenance		222
Prepaid income taxes		149
Prepaid insurance		114
Other		55
Total prepaid expenses and other current assets	$	1,686

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5.	PROPERTY AND EQUIPMENT, NET
	Property and equipment, net, as of January 2, 2010, included the following (in thousands):

Computer software	$	7,581
Equipment		5,824
Computer hardware		4,081
Buildings and leasehold improvements		294
Furniture and fixtures		124
Total property and equipment		17,904
Accumulated depreciation		(6,056	)
Property and equipment, net	$	11,848

	Depreciation expense of $3.8 million was recorded for the fiscal year ended January 2, 2010. Amortization expense related to capital lease assets reflected in cost of revenue was $0.2 million for the fiscal year ended January 2, 2010.
6.	GOODWILL AND OTHER INTANGIBLE ASSETS, NET
	The carrying amount of goodwill was $5.6 million as of January 2, 2010, and there were no changes during the fiscal year ended January 2, 2010.
	The gross carrying amount and accumulated amortization of other intangible assets, as of January 2, 2010, was as follows (in thousands):

	Amortization
	Period
Amortizable intangible assets:
Customer lists		2 to 7 years	$	3,795
Acquired proprietary curricula	5 years			2,010
Covenants not-to-compete		3 to 8 years		50
Gross carrying amount				5,855
Accumulated amortization				(5,054	)
Net intangible assets subject to amortization				801
Intangible assets not subject to amortization:
Trade names and trademarks				800
Total intangible assets, net			$	1,601

	Amortization expense for other intangible assets was $0.5 million for the fiscal year ended January 2, 2010. The amortization expense will change in future periods as intangible assets are acquired, existing intangibles are disposed of, estimated useful lives change or impairments are recognized.
7.	LONG-TERM DEBT
	KCDL has a $3.3 million unsecured Promissory Note (the “Note”) with KUELP, dated March 3, 2008. The Note bears interest at an annual rate of 12%, payable on March 3 of each year. The Note is due and payable in full on March 2, 2011.

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8.	SHAREHOLDER’S EQUITY
	KCDL has authorized ten million shares of Common Stock, of which one million shares are issued and outstanding. All outstanding shares of common stock are held by KUELP as of January 2, 2010.
9.	INCOME TAXES
	The provision for income taxes from operations, for the fiscal year ended January 2, 2010, is comprised of the following (in thousands):

Current:
Federal	$	43
State		9
Total current		52
Deferred:
Federal		(887	)
State		(13	)
Total deferred		(900	)
Total income tax benefit	$	(848	)

The reconciliation between KCDL’s effective tax rate and the federal statutory rate, for the fiscal year ended January 2, 2010, is as follows (in thousands):

Income tax provision at federal statutory rate	$	(873	)
State and local income taxes		(99	)
Nondeductible expenses		21
Provisions for tax uncertainties		11
Adjustments to prior year estimates and other		92
Income tax provision	$	(848	)

Deferred tax assets and liabilities, as of January 2, 2010, consist of the following (in thousands):

Deferred tax assets:
Goodwill and intangibles	$	1,805
Net operating loss carryforwards		1,731
Allowance for bad debt		417
Other		214
Total deferred tax assets		4,167
Deferred tax liabilities:
Property, equipment and curriculum		(912	)
Total deferred tax liabilities		(912	)
Net deferred tax assets	$	3,255

No valuation allowance has been recorded on KCDL’s deferred tax asset for net operating losses as of January 2, 2010 because KCDL believes it is more likely than not that such losses will be utilized. As of January 2, 2010, KCDL had $4.4 million of federal net operating loss carryforwards and $4.3 million of state net operating loss carryforwards for tax purposes. The state and federal net operating loss carryforwards expire commencing in 2014 and 2028, respectively.

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	KCDL’s liability resulting from unrecognized tax benefits and related interest aggregated to less than $0.1 million as of January 2, 2010.
10.	LEASE OBLIGATIONS
	KCDL leases certain office facilities under operating leases. Many of these operating leases contain renewal options and escalation clauses. For scheduled rent escalation clauses during the lease terms, KCDL records minimum rental expenses on a straight-line basis over the terms of the leases on the income statement. The following represents future minimum fixed payments under operating and capital leases, not including unexercised renewal options, real estate taxes, insurance and maintenance costs (in thousands):

	Related Party			Operating		Total
	Capital Leases			Leases		Leases
2010	$	779		$	367	$	1,146
2011		584			309		893
2012		389			317		706
2013		—			327		327
2014		—			336		336
Thereafter		—			38		38
Total minimum payments		1,752		$	1,694	$	3,446
Less amounts representing interest		(150	)
Present value of minimum related party capital lease obligations		1,602
Less current portion of related party capital lease obligation		(680	)
Long-term related party capital lease obligation	$	922

	In most cases, KCDL expects that substantially all of the leases will be renewed or replaced by other leases as part of the normal course of business. Rent expense included in general and administrative expense on the statement of operations was $0.3 million for the fiscal year ended January 2, 2010.
11.	EMPLOYEE BENEFIT PLANS
	401(k) Plan — Certain employees are eligible to enroll in the Knowledge Learning Corporation (“KLC”) Savings and Investment Plan (the “401(k) Plan”) on January 1st, April 1st, July 1st or October 1st following their date of hire and can contribute between 1% and 100% of pay up to the IRS maximum allowable. KCDL will match participants one dollar for each dollar contributed on the first 3% of compensation and 50 cents for each dollar contributed on the next 2% up to a maximum of 5% of compensation.
	Non-Qualified Deferred Compensation Plan —Highly compensated employees who are excluded from participating in the 401(k) Plan have the ability to participate in the Knowledge Learning Corporation Non-Qualified Deferred Compensation Plan. This plan allows employees to defer between 1% and 100% of base and bonus compensation. KCDL will also match 40 cents for each dollar contributed up to a maximum of 5% of compensation.
	Employer matching contribution expense for the 401(k) Plan and the Deferred Compensation Plan totaled $0.1 million in fiscal year 2009.

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12.	RELATED PARTY TRANSACTIONS
	The following describes the transactions of KCDL with its related parties.
	Long-Term Debt — KCDL has a $3.3 million unsecured Note with KUE due March 2, 2011.
	Services Agreements — KCDL entered into a Shared Service Agreement with KLC, effective as of April 28, 2007, pursuant to which KLC will provide a variety of accounting, treasury and other administrative services to KCDL.
	KCDL performs various services for KUOS under a Master Services Agreement (“the Agreement”) effective as of January 1, 2009. The Agreement is effective for a period of one year and, unless otherwise terminated, shall be automatically treated as renewed for successive periods of one year each thereafter. For these services, KUOS agrees to pay KCDL cost plus 5% related to operating expenses.
	KCDL entered into a License Agreement with KUOS, effective as of January 1, 2009, that provides for KCDL to license certain proprietary curriculum. The term of the agreement is perpetual, unless terminated in accordance with the License Agreement. Under the Licensing Agreement, KCDL agreed to pay a licensing fee for the development cost for specific projects plus 5% of the development cost.
	Equipment Lease — KCDL entered into an Equipment Lease (“the Lease”) with KUOS, effective as of January 1, 2009, for laptops. The Lease is effective for the rental term of three years and rent payments are payable in equal monthly installments in advance.
	Information Technology — KCDL contracted for information technology (“IT”) services with Knowledge Universe Holdings Coöperatief U.A. (“KUHC”), a subsidiary of KUELP, effective July 28, 2008. This contract was subsequently assigned by KUHC to an affiliate, Knowledge Universe Pte. Ltd. (“KUPL”).
	Other Payables to Affiliates — KCDL owes Knowledge Schools, Inc. (“KSI”) for various expenses paid on KCDL’s behalf.
	Other — KCDL contracted with KUE Digital, an affiliate of KUE, to develop certain curriculum platforms for KCDL. KCDL capitalized the software, which is recorded in property and equipment.

15

The tables below detail KCDL’s balances and transactions with related parties (in thousands):

	As of
	January 2, 2010
Net amounts due to related parties:
KLC	$	12,067
KUELP		3,634
KSI		2,090
KUOS		1,663
KUPL		42
	$	19,496
Capital leases with KUOS	$	1,602

	For the Fiscal
	Years Ended
	January 2, 2010
Purchases included in property and equipment:
KUOS	$	1,912
KUE Digital		618
KUPL		339
	$	2,869
Purchases included in curriculum
KUOS	$	1,495
Revenue from related party:
KUOS development revenue	$	1,494
Expenses to related parties:
KLC administrative services	$	935
KUE interest expense		395
KUPL IT service expense		384
KLC interest expense		204
KUOS interest expense		24
KUE Digital professional expense		15
KSI interest expense		3
	$	1,960

13.	COMMITMENTS AND CONTINGENCIES
	KCDL is subject to claims and litigation arising in the ordinary course of business. KCDL believes that none of the claims or litigation of which it is aware will materially affect its financial statements, although assurance cannot be given with respect to the ultimate outcome of any such actions.

16

14.	SUBSEQUENT EVENTS
	On March 29, 2010, all of the outstanding shares of KCDL’s common stock were contributed from KUELP to KCDL Holdings LLC, a wholly-owned subsidiary of KUELP.
	On July 26, 2010, K12 Inc., the nation’s largest provider of proprietary curriculum and online school programs for students in kindergarten through high school, announced the acquisition of KCDL. KCDL had no other subsequent events to report as evaluated through September 24, 2010, the date the financial statements were available to be issued.

17

EX-99.2

Exhibit 99.2

K C   D i s t a n c e   L e a r n i n g ,   I n c .
Unaudited Financial Statements
For the Six Months Ended July 3, 2010 and July 4, 2009

KC Distance Learning, Inc.
Unaudited Financial Statements

Contents

Unaudited Balance Sheet as of July 3, 2010	3
Unaudited Statements of Operations for the six months ended July 3, 2010 and July 4, 2009	4
Unaudited Statement of Shareholder’s Equity for the six months ended July 3, 2010	5
Unaudited Statements of Cash Flows for the six months ended July 3, 2010 and July 4, 2009	6
Notes to unaudited financial statements	7

2

KC Distance Learning, Inc.
Unaudited Balance Sheet
as of July 3, 2010
(In thousands, except per share amount)

ASSETS
Current assets:
Cash	$	1,112
Accounts receivable, net of allowance for doubtful accounts		7,283
Related party receivable		112
Deferred income taxes		263
Prepaid expenses and other current assets		2,557
Total current assets		11,327
Property and equipment, net		10,663
Goodwill		5,637
Capitalized curriculum, net		1,384
Other intangible assets, net		1,401
Deferred income taxes		2,993
Other assets		68
Total assets	$	33,473
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	641
Related party payables		15,042
Current debt to related party		3,300
Deferred revenue		4,262
Accrued property and other taxes		75
Accrued compensation and related expenses		8
Other accrued liabilities		223
Current portion of related party capital lease obligation		525
Total current liabilities		24,076
Related party capital lease obligation		655
Other long-term liabilities		72
Total liabilities		24,803
Shareholder’s equity:
Common stock, 10,000 shares authorized; $0.01 par value; 1,000 issued and outstanding		10
Additional paid-in capital		12,975
Accumulated deficit		(4,315	)
Total shareholder’s equity		8,670
Total liabilities and shareholder’s equity	$	33,473

See accompanying notes to unaudited financial statements

3

KC Distance Learning, Inc.
Unaudited Statements of Operations
(In thousands)

	For the Six Months Ended
	July 3, 2010			July 4, 2009
Revenue, net	$	16,408		$	14,594
Cost of revenue		5,586			4,574
Gross margin		10,822			10,020
Operating expenses:
General and administrative		11,587			10,280
Depreciation		1,672			1,866
Amortization		200			308
Total operating expenses		13,459			12,454
Loss from operations		(2,637	)		(2,434	)
Interest expense, net		439			351
Loss before income taxes		(3,076	)		(2,785	)
Income tax benefit		(1,152	)		(1,103	)
Net loss	$	(1,924	)	$	(1,682	)

See accompanying notes to unaudited financial statements

4

KC Distance Learning, Inc.
Unaudited Statement of Shareholder’s Equity
(In thousands)

	Common Stock							Additional		Total
	Number of				Paid-In		Accumulated			Shareholder’s
	Shares		Amount		Capital		Deficit			Equity
Balance at January 2, 2010		1,000	$	10	$	12,975	$	(2,391	)	$	10,594
Net loss		—		—		—		(1,924	)		(1,924	)
Balance at July 3, 2010		1,000	$	10	$	12,975	$	(4,315	)	$	8,670

See accompanying notes to unaudited financial statements

5

KC Distance Learning, Inc.
Unaudited
Statements of Cash Flows
(In thousands)

	For the Six Months Ended
	July 3, 2010			July 4, 2009
Operating activities:
Net loss	$	(1,924	)	$	(1,682	)
Adjustments to reconcile net loss to cash
provided by operating activities:
Depreciation		1,672			1,866
Amortization		688			308
Change in deferred taxes		(1	)		(1	)
Changes in operating assets and liabilities:
Accounts receivable		2,402			(250	)
Prepaid expenses and other current assets		(871	)		(906	)
Other assets		83			(29	)
Accounts payable		623			(2	)
Accrued expenses and other liabilities		856			(809	)
Related party receivable and payables		229			2,906
Cash provided by operating activities		3,757			1,401
Investing activities:
Purchases of property and equipment		(754	)		(1,137	)
Purchases of curriculum development		(1,523	)		—
Cash used in investing activities		(2,277	)		(1,137	)
Financing activities:
Payments on related party capital leases		(422	)		—
Cash used in financing activities		(422	)		—
Net change in cash		1,058			264
Cash at the beginning of period		54			421
Cash at the end of period	$	1,112		$	685
Supplemental cash flow information
Cash paid for related party interest	$	395		$	394
Cash paid for income taxes		10			10
Cash refund from income taxes		(1	)		—
Non-cash investing activities:
Change in related party payable for capitalized curriculum	$	1,495			—

See accompanying notes to unaudited financial statements

6

KC Distance Learning, Inc.
Notes to Unaudited Financial Statements

1.	GENERAL
	KC Distance Learning Inc (“KCDL”) is a wholly-owned subsidiary of KCDL Holdings LLC as of July 3, 2010 and was a wholly-owned subsidiary of Knowledge Universe Education, L.P. (“KUELP”) as of July 4, 2009. KCDL is a provider of distance learning programs for middle school and high school students including core, foreign language, honors and advanced placement courses.
	KCDL provides accredited online education directly to families through The Keystone School, an online school for middle school and high school students. KCDL provides solutions directly to schools through Aventa Learning, including credit recovery, individual courses designed to augment existing school curriculum and complete virtual school solutions. KCDL also offers iQ Academies, statewide online schools operated in partnership with public school districts or charter school management organizations to serve the education needs of grade, middle and high school students. iQ Academies are public schools that are tuition-free for in-state residents.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
	Basis of Presentation — KCDL utilizes a financial reporting schedule comprised of 13-week quarters. The six month period discussed below is comprised of 26 weeks. KCDL’s fiscal year ends on the Saturday closest to December 31.
	The financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. The unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended January 2, 2010.
	Use of Estimates — KCDL’s financial statements are presented in conformity with accounting principles generally accepted in the United States of America. The preparation thereof requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared based on the most current and best available information and actual results could differ from those estimates. The most significant estimates underlying the financial statements include the period over which revenue is recognized, the allowance for doubtful accounts, the valuation and any resulting impairments for long-lived assets, other intangible assets and goodwill and the need for valuation allowances against deferred tax assets.
	Concentration of Credit Risk — Financial instruments that subject KCDL to credit risk consist primarily of cash and trade receivables. Cash accounts are placed with high credit quality financial institutions. Concentration of credit risk with respect to trade receivables is generally diversified due to the large customer base. KCDL performs ongoing credit evaluations of its customers and maintains an allowance for doubtful accounts. Two customers represented 41% of gross accounts receivable as of July 3, 2010.
	Accounts Receivable — Accounts receivable are comprised primarily of amounts due from students and schools for tuition and related services, presented at estimated net realizable value. KCDL uses estimates in determining the ability to collect accounts receivable and must rely on its evaluation of historical experience, specific customer issues and current economic trends to arrive at appropriate

7

reserves. Material differences may result in the amount and timing of bad debt expense if actual experience differs significantly from the estimates. The allowance for doubtful accounts was $0.5 million as of July 3, 2010.

Capitalized Curriculum — In conjunction with a related party, KU Online Services, Inc. (“KUOS”), a subsidiary of KUELP, KCDL develops curriculum that is primarily provided as web content and accessed via the Internet, textbooks and other offline materials. KCDL capitalizes curriculum when it is purchased under perpetual license agreements from KUOS and is available for general release to KCDL’s customers. Curriculum is amortized over its estimated useful life, which is generally five years. The capitalized curriculum asset was $1.9 million and accumulated amortization was $0.5 million as of July 3, 2010. Amortization expense related to capitalized curriculum assets reflected in cost of revenue was $0.2 million for the six months ended July 3, 2010. There was no amortization expense related to capitalized curriculum assets reflected in cost of revenue for the six months ended July 4, 2009.

Fair Value Measurements — Fair value guidance defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Fair value guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels are described as follows:

• Level 1: Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

• Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data.

• Level 3: Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instruments’ valuation.

The carrying values reflected on KCDL’s balance sheet for cash, receivables, accounts payable and related party balances approximate fair values. It is not practicable to estimate fair value of KCDL’s debt due to its related party nature.

Recent Accounting Pronouncement — In October 2009, the Financial Accounting Standards Board (“FASB”) issued ASU 2009-13, Multiple-Deliverable Arrangements, a consensus of the FASB Emerging Issues Task Force (ASC Topic 605) that addresses how to separate deliverables and how to measure and allocate arrangement consideration. This guidance requires vendors to develop the best estimate of selling price for each deliverable and to allocate arrangement consideration using this selling price. The guidance is effective prospectively for revenue arrangements entered into or materially modified in annual periods beginning after June 15, 2010. KCDL is currently evaluating the requirements of ASU 2009-13 and has not yet determined the impact on its fiscal year 2011 financial statements.

8

3.	PROPERTY AND EQUIPMENT, NET
	Property and equipment, net, as of July 3, 2010, included the following (in thousands):

Property and equipment	$	18,563
Accumulated depreciation		(7,900	)
Property and equipment, net	$	10,663

Depreciation expense of $1.7 million and $1.9 million were recorded for the six months ended July 3, 2010 and July 4, 2009, respectively. Amortization expense related to capital lease assets reflected in cost of revenue was $0.3 million for the six months ended July 3, 2010. There was no amortization expense related to capital lease assets reflected in cost of revenue for the six months ended July 4, 2009.

4.	GOODWILL AND OTHER INTANGIBLE ASSETS, NET
	The carrying amount of goodwill was $5.6 million as of July 3, 2010, and there were no changes during the six months ended July 3, 2010.
	The gross carrying amount and accumulated amortization of other intangible assets, as of July 3, 2010, was as follows (in thousands):

	Amortization
	Period
Amortizable intangible assets:
Customer lists		2 to 7 years	$	3,795
Acquired proprietary curricular	5 years			2,010
Covenants not-to-compete		3 to 8 years		50
Gross carrying amount				5,855
Accumulated amortization				(5,254	)
Net intangible assets subject to amortization				601
Intangible assets not subject to amortization:
Trade names and trademarks				800
Total intangible assets, net			$	1,401

Amortization expense for other intangible assets was $0.2 million and $0.3 million for the six months ended July 3, 2010 and July 4, 2009, respectively. The amortization expense may change in future periods as intangible assets are acquired, existing intangibles are disposed of, estimated useful lives change or impairments are recognized.

5.	CURRENT DEBT
	KCDL has a $3.3 million unsecured Promissory Note (the “Note”) with KUELP, dated March 3, 2008. The Note bears interest at an annual rate of 12%, payable on March 3 of each year. The Note is due and payable in full on March 2, 2011.

9

6.	RELATED PARTY TRANSACTIONS
	The tables below detail KCDL’s balances and transactions with related parties (in thousands):

	As of
	July 3, 2010
Net amount due from KUOS	$	112
Net amounts due to related parties:
Knowledge Learning Corporation (“KLC”)	$	13,210
KUELP		3,437
Knowledge Schools, Inc. (“KSI”)		1,600
Knowledge Universe Pte. Ltd. (“KUPL”)		95
	$	18,342
Capital leases with KUOS	$	1,180

	For the Six Months Ended
	July 3, 2010		July 4, 2009
Purchases included in property and equipment:
KUE Digital	$	17	$	535
KUOS		8		—
	$	25	$	535
Purchases included in curriculum
KUOS	$	20	$	—
Revenue from related party:
KUOS development revenue	$	456	$	1,760
Expenses to related parties:
KLC administrative services	$	521	$	467
KUPL IT service expense		504		180
KUE interest expense		197		197
KLC interest expense		194		150
KUOS interest expense		48		—
KSI interest expense		—		3
	$	1,464	$	997

7.	COMMITMENTS AND CONTINGENCIES
	KCDL is subject to claims and litigation arising in the ordinary course of business. KCDL believes that none of the claims or litigation of which it is aware will materially affect its financial statements, although assurance cannot be given with respect to the ultimate outcome of any such actions.

10

8.	SUBSEQUENT EVENTS
	On July 26, 2010, K12 Inc., the nation’s largest provider of proprietary curriculum and online school programs for students in kindergarten through high school, announced the acquisition of KCDL. KCDL had no other subsequent events to report as evaluated through October 7, 2010, the date the financial statements were available to be issued.

11

EX-99.3

Exhibit 99.3

K12 INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma condensed consolidated financial statements are based on the historical financial statements of K12 Inc. (the “Company” or “K12”) and KC Distance Learning, Inc. (“KCDL”) after giving effect to our acquisition (“Acquisition”) of KCDL and the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed consolidated financial statements. We acquired all of the stock of KCDL on July 23, 2010.

The unaudited pro forma condensed consolidated balance sheet of K12 and KCDL as of June 30, 2010 is presented as if the Acquisition had occurred on June 30, 2010. The unaudited pro forma condensed consolidated statement of operations of K12 and KCDL for the year ended June 30, 2010 is presented as if the Acquisition had taken place on July 1, 2009.

The unaudited pro forma condensed consolidated financial information does not purport to represent what the Company’s results of operations actually would have been if the acquisition of KCDL had occurred on July 1, 2009 or what such results will be for any future periods or what the consolidated balance sheet would have been if the acquisition had occurred on June 30, 2010. The actual results in the periods following the acquisition may differ significantly from that reflected in the unaudited pro forma condensed consolidated financial information for a number of reasons including, but not limited to, differences between the assumptions used to prepare the unaudited pro forma condensed consolidated financial information and the actual amounts and the completion of a final valuation of the acquisition. In addition, no adjustments have been made for non-recurring integration plans or operational efficiencies that may have been achieved if the acquisition had occurred on July 1, 2009.

The unaudited pro forma condensed consolidated financial information has been prepared giving effect to the acquisition, which is accounted for as a business combination in accordance with the Financial Accounting Standards Board Accounting Standards Codification 805, “Business Combinations.” The unaudited pro forma adjustments are based on management’s preliminary estimates of the values of the tangible and intangible assets and liabilities acquired. As a result, the actual adjustments may differ materially from those presented in the unaudited pro forma condensed consolidated financial statements. A change in the unaudited pro forma adjustments of the purchase price for the acquisition would primarily result in a reallocation affecting the value assigned to tangible and intangible assets. The income statement effect of these changes will depend on the nature and amount of the assets or liabilities adjusted.

KCDL’s fiscal year ends on the Saturday closest to December 31 and is comprised of 52 weeks. Accordingly, KCDL’s fiscal year 2009 ended on January 2, 2010. Because K12 and KCDL had different fiscal year end dates, the unaudited pro forma condensed consolidated financial statements are prepared based on a comparable period. The unaudited pro forma condensed consolidated balance sheet as of June 30, 2010 is presented based on K12’s balance sheet as of June 30, 2010 and KCDL’s balance sheet as of July 3, 2010. The unaudited pro forma condensed consolidated statement of operations for the year ended June 30, 2010 is presented based on K12’s year ended June 30, 2010 and KCDL’s 52-week period ended July 3, 2010. KCDL’s 52-week period ended July 3, 2010 financial statements were derived by combining the 26-week period ended January 2, 2010 results and the 26-week period ended July 3, 2010 results.

These unaudited pro forma condensed consolidated financial statements, including the notes hereto, should be read in conjunction with (i) the historical consolidated financial statements for K12 included in its Annual Report on Form 10-K for the year ended June 30, 2010; and (ii) the historical audited and unaudited financial statements of KCDL included as Exhibit 99.1 and Exhibit 99.2, respectively to K12’s Form 8-K/A dated October 8, 2010 (amending K12’s Form 8-K dated July 23, 2010 and filed on July 26, 2010).

1

K12 INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2010
(In thousands)

	K12 Inc.			KCDL			Reclass			Pro forma				Pro forma
	06/30/10			07/03/10			Adjustments			Adjustments			Note		K12 Inc.
				(Note 1)			(Note 4A)
ASSETS
Current assets
Cash and cash equivalents	$	81,751		$	1,112		$	—		$	(1,112	)	4(B)	$	81,751
Restricted cash and cash equivalents		3,343			—			—			—				3,343
Accounts receivable, net		71,185			7,283			—			—				78,468
Related party receivable		—			112			—			—				112
Inventories, net		26,192			677			—			—				26,869
Current portion of deferred tax asset		4,672			263			—			—				4,935
Prepaid expenses		8,849			1,880			—			(280	)	4(C)		10,449
Other current assets		7,286			—			—			—				7,286
Total current assets		203,278			11,327			—			(1,392	)			213,213
Property and equipment, net		40,713			10,663			(2,495	)		—				48,881
Capitalized curriculum development costs, net		39,860			1,384			3,096			(480	)	4(C)		43,860
Deferred tax asset, net of current portion		5,912			2,993			—			—				8,905
Intangible assets, net		14,081			1,401			(601	)		15,200		4(C)		30,081
Goodwill		1,825			5,637			—			31,763		4(D)		39,225
Deposits and other assets		2,213			68			—			—				2,281
Total assets	$	307,882		$	33,473		$	—		$	45,091			$	386,446
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY
Current liabilities
Accounts payable	$	12,691		$	641		$	—		$	—			$	13,332
Related party payable		—			15,042			—			(10,976	)	4(B)		4,066
Accrued liabilities		8,840			298			—			782		5(D)		9,920
Accrued compensation and benefits		10,563			8			—			—				10,571
Deferred revenue		9,593			4,262			—			(423	)	4(C)		13,432
Current portion of capital lease obligations		10,996			—			—			—				10,996
Current portion of capital lease obligations — related party		—			525			—			—				525
Current portion of notes payable		1,251			—			—			—				1,251
Current debt to related party		—			3,300			—			(3,300	)	4(B)		—
Total current liabilities		53,934			24,076			—			(13,917	)			64,093
Deferred rent, net of current portion		2,217			38			—			—				2,255
Capital lease obligations, net of current portion		7,710			—			—			—				7,710
Capital lease obligations, net of current portion — related party		—			655			—			—				655
Notes payable, net of current portion		655			—			—			—				655
Deferred tax liability and other liabilities		—			34			—			5,348		4(C)		5,382
Total liabilities		64,516			24,803			—			(8,569	)			80,750
Commitments and contingencies
Redeemable noncontrolling interest		17,374			—			—			—				17,374
Equity:
Series A Special Stock								—			63,112		4(F)		63,112
Common stock		3			10			—			(10	)	4(E)		3
Additional paid-in capital		361,344			12,975			—			(12,975	)	4(E)		361,344
Accumulated deficit		(139,496	)		(4,315	)		—			3,533		4(E) & 5(D)		(140,278	)
Total stockholders’ equity		221,851			8,670			—			53,660				284,181
Noncontrolling Interest		4,141			—			—			—				4,141
Total equity		225,992			8,670			—			53,660				288,322
Total liabilities, redeemable noncontrolling interest and equity	$	307,882		$	33,473		$	—		$	45,091			$	386,446

See notes to unaudited pro forma condensed consolidated financial statements

2

K12 INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2010
(In thousands except share and per share data)

	K12 Inc.			KCDL			Reclass			Pro forma				Pro forma
	06/30/10			07/03/10			Adjustments			Adjustments			Note	K12 Inc.
				(Note 1)			(Note 5A)
Revenues	$	384,470		$	36,520		$	—		$	129		5(E)	$	421,119
Cost and expenses
Instructional costs and services		222,029			9,509			3,895			(653	)	5(C)		234,780
Selling, administrative, and other operating expenses		117,398			29,082			(6,042	)		335		5(B) & 5(D)		140,773
Product development expenses		9,576						2,147			—				11,723
Total costs and expenses		349,003			38,591			—			(318	)			387,276
Income (loss) from operations		35,467			(2,071	)		—			447				33,843
Interest (expense) income, net		(1,331	)		(713	)		—			—				(2,044	)
Income (loss) before income tax expense (benefit) and noncontrolling interest		34,136			(2,784	)		—			447				31,799
Income tax (expense) benefit		(13,249	)		896			—			(167	)	5(F)		(12,520	)
Net income (loss)		20,887			(1,888	)		—			280				19,279
Add net loss attributable to noncontrolling interest		638			—			—			—				638
Net income (loss) — K12 Inc.	$	21,525		$	(1,888	)	$	—		$	280			$	19,917
Net income attributable to common stockholders per share:
Basic	$	0.72												$	0.61
Diluted	$	0.71												$	0.60
Weighted average shares used in computing per share amounts:
Basic		29,791,973													29,791,973
Diluted		30,248,683													30,248,683

See notes to unaudited pro forma condensed consolidated financial statements

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K12 INC.

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

On July 23, 2010, the Company acquired all of the stock of KCDL, a provider of online curriculum and public and private virtual education, by issuing to its parent company, KCDL Holdings LLC, 2,750,000 shares of a new class of stock designated as Series A Special Stock, which had a value at closing of $63.1 million. KCDL Holdings, Inc. is an affiliate of the Learning Group, LLC, a related party. The KCDL businesses include: Aventa Learning (online curriculum and instruction), the iQ Academies (statewide virtual public charter schools for middle and high school); and The Keystone School (international online private school).

The unaudited pro forma condensed consolidated statement of operations are based on the historical statements of K12 and KCDL after giving effect to the acquisition of KCDL as if it occurred on July 1, 2009 and for the unaudited condensed consolidated balance sheet on June 30, 2010. The historical consolidated financial information has been adjusted in the accompanying unaudited pro forma condensed consolidated financial statements to give effect to pro forma events that are (1) directly attributable to the transaction, (2) factually supportable and, (3) with respect to the unaudited pro forma condensed consolidated statements of operations, expected to have a continuing impact on the consolidated results and excluding nonrecurring charges directly attributable to the transaction.

KCDL’s fiscal year ends on the Saturday closest to December 31 and is comprised of 52 weeks. Accordingly, KCDL’s fiscal year 2009 ended on January 2, 2010. Because K12 and KCDL had different fiscal year end dates, the unaudited pro forma condensed consolidated financial statements are prepared based on a comparable period. The unaudited pro forma condensed consolidated balance sheet as of June 30, 2010 is presented based on K12’s balance sheet as of June 30, 2010 and KCDL’s balance sheet as of July 3, 2010. The unaudited pro forma condensed consolidated statement of operations for the year ended June 30, 2010 is presented based on K12’s year ended June 30, 2010 and KCDL’s 52-week period ended July 3, 2010. KCDL’s 52-week period ended July 3, 2010 unaudited historical financial statements were derived by combining the 26-week period ended January 2, 2010 results and the 26-week period ended July 3, 2010 results.

The unaudited pro forma financial information is not intended to reflect the financial position and results of operations which would have actually resulted had the KCDL acquisition been effected on the dates indicated above. Further, the pro forma results of operations are not necessarily indicative of the results of operations that may be obtained in the future. The actual results in the periods following the acquisition may differ significantly from that reflected in the unaudited pro forma condensed consolidated financial information for a number of reasons including, but not limited to, differences between the assumptions used to prepare the unaudited pro forma condensed consolidated financial information and the actual amounts and the completion of a final valuation of the acquisition. In addition, no adjustments have been made for non-recurring integration plans or operational efficiencies that may have been achieved if the acquisition had occurred on July 1, 2009.

2. Preliminary Purchase Price

The total purchase price for the shares of outstanding common stock of KCDL is estimated to be $63.1 million. The Company acquired all of the stock of KCDL by issuing to its parent company KCDL Holdings LLC, 2,750,000 shares of a new class of stock designated as Series A Special Stock. The holders of the Series A Shares initially have no voting rights and no rights of conversion with respect to the Series A Shares; however, the holders of Series A Shares have participating rights in all dividends and distributions declared or paid on or with respects to common stock of the Company. The Company has agreed to convene a meeting of its stockholders to obtain their approval to permit conversion of the Series A Shares into common stock on a one-for-one basis and for the right to vote on all matters presented to K12 shareholders, other than for the election and removal of directors, for which holders of the Series A Shares shall have no voting rights. In the event that the K12 stockholders do not approve the voting rights and permit conversion of the Series A Shares by the first anniversary of the closing of the acquisition, the Series A Shares will be redeemable at the option of the holder or K12 at a price per share of the greater of $22.95 or the price per share of the K12 common stock at the date of redemption. Learning Group LLC and certain of its affiliates have agreed to vote their shares of K12 common stock (representing approximately 17% of our common stock) in favor of the rights of conversion and voting rights of Series A Shares pursuant to a voting agreement. The aggregate redemption liability (if fully exercised) will not be less than $63.1 million of cash.

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3. Purchase Price Allocation

The total fair value of the assets acquired (including goodwill) and liabilities assumed were $78.6 million and $15.5 million, respectively. The allocation of the estimated consideration to the identifiable tangible and intangible assets and liabilities assumed based on their estimated fair values as of the acquisition date is summarized in the following table (in thousands):

	Amount
Current assets	$	9,935
Property and equipment, net		8,168
Capitalized curriculum development costs, net		4,000
Intangible assets, net		16,000
Goodwill		37,400
Other noncurrent assets		3,061
Current liabilities		(5,538	)
Deferred tax liability		(5,348	)
Deferred revenue		(3,839	)
Other noncurrent liabilities		(727	)
Purchase price paid	$	63,112

Except as noted below, the carrying value of assets and liabilities in KCDL’s financial statements represents fair value of those assets and liabilities. As this allocation is based on preliminary estimates, additional adjustments to record the fair value of all assets and liabilities may be required.

• The intangible assets of KCDL have been increased $15.2 million to a total value of $16.0 million to reflect our preliminary estimate of the fair value of intangible assets, including trade name/trademarks and customer relationships.

• The capitalized curriculum development costs have decreased by $0.5 million to a value of $4.0 million.

• KCDL defers and expenses material costs over the period which revenue is recognized. K12 expenses material cost when materials are shipped. KCDL’s deferred material costs as of July 3, 2010 were reduced by $0.3 million to a value of $0.

• Deferred revenue represents advance payments from customers for education services. The fair value was estimated based on a cost build-up approach. The cost build-up approach determines fair value by estimating the costs related to supporting the obligation plus an assumed profit which approximates, in theory, the amount that would be required to pay a third party to assume the obligation. As a result, the deferred revenues of KCDL have been decreased $0.4 million to $3.8 million, which represents the estimated fair value of the contractual obligations assumed.

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• Deferred tax liabilities represent the estimated impact of purchase accounting adjustments for identifiable intangible assets. The estimate of the deferred tax liabilities was determined based on the excess book basis over tax basis resulting from the fair value adjustments using a statutory tax rate of 37.3%.

4. Unaudited Pro Forma Condensed Consolidated Balance Sheet Adjustments

(A)	Certain balance sheet accounts of KCDL as of July 3, 2010 have been reclassified to conform to K12’s classification.
(B)	Net assets acquired by K12 do not include cash on-hand and certain liabilities of KCDL. This pro forma adjustment eliminates these balances at their historical amounts.
(C)	The assets acquired and liabilities assumed of KCDL have been adjusted to their estimated fair values as of the acquisition date. Refer to Note 3 for further information.
(D)	Goodwill is calculated as the difference between the fair value of the consideration expected to be transferred and the values assigned to the identifiable tangible and intangible assets acquired and liabilities assumed. The acquired goodwill presented in the above table reflects the estimated goodwill from the preliminary purchase price allocation of $37.4 million.
(E)	KCDL’s historical stockholder’s equity was reversed.
(F)	This pro forma adjustment represents the issuance of Series A Special Stock which had a preliminary value of $63.1 million at closing. Refer to Note 2 for further information.

5. Unaudited Pro Forma Condensed Consolidated Statement of Operations Adjustments

(A)	Certain cost and expenses of KCDL for the year ended July 3, 2010 have been reclassified to conform to K12’s classification. The reclassification of such costs and expenses did not impact operating income or net income.
(B)	Trade name and Customer relationships — Amortization expense (included in “Selling, Administrative and Other Operating Expenses”). Estimated lives are preliminary and subject to change upon final valuation.

The pro forma adjustment represents the difference in amortization expense for the intangible assets acquired in connection with the KCDL acquisition as if the acquisition occurred on July 1, 2009. Details are presented in the following table (in thousands):

	Preliminary Fair Value		Estimated Life
Trade name	$	9,000	15 years
Customer relationships		7,000	15 years
Total intangible assets	$	16,000

Trade name and customer relationship intangibles are amortized using the straight-line method and the related amortization expense is included in “Selling, Administrative and Other Operating Expenses ”. The annual amortization expense based on the fair value is $1.1 million. The historical amortization expense recognized by KCDL for the year ended July 3, 2010 was $0. Therefore, we recorded a pro forma adjustment in the amount of $1.1 million.

(C) Capitalized curriculum development costs — Amortization expense (included in “Instructional Costs and Services”)

The pro forma adjustment represents the difference in amortization expense for the capitalized curriculum development costs acquired in connection with the KCDL acquisition as if the acquisition occurred on July 1, 2009. Capitalized curriculum development costs had a preliminary fair value of $4.0 million with an average useful life of 4 years. Capitalized curriculum development costs are amortized using the straight-line method and the related amortization expense is included in “Instructional Costs and Services”. The annual amortization expense based on the fair value is $1.0 million. The historical amortization expense recognized by KCDL for the year ended July 3, 2010 was $1.7 million. Therefore, we recorded a pro forma adjustment in the amount of $0.7 million.

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(D) Transaction costs (included in “Selling, Administrative and Other Operating Expenses”)

We have estimated that total acquisition related costs will be approximately $1.5 million. Of these costs approximately $0.8 million was accrued as a pro forma adjustment in “Accrued Liabilities” in the unaudited pro forma condensed consolidated balance sheet at June 30, 2010. The remaining transaction costs are reflected in the historical unaudited condensed consolidated balance sheets of K12 at June 30, 2010. Because we are required to expense these costs as they are incurred, we have charged the pro forma adjustment to retained earnings as of June 30, 2010. The unaudited pro forma condensed consolidated statement of operations for the year ended June 30, 2010 was adjusted by $0.7 million to eliminate the transaction costs reflected in “Selling, Administrative and Other Operating Expenses” which were incurred and expensed for that period as they are non-recurring.

(E) Revenue recognition

KCDL recognizes revenues associated with certain subscription services over seven months whereas K12 recognizes these revenues over ten months. This adjustment is made to conform KCDL revenue recognition policy to K12’s revenue recognition policy. Using K12’s revenue recognition method, the additional amount of KCDL revenue deferred as of 6/30/09 and 6/30/10 was $986K and $857K, respectively which resulted in $129K adjustment to revenue in the unaudited pro forma condensed consolidated statement of operations.

(F) Income taxes

This pro forma adjustment represents income tax impact on pro forma adjustments based on an average statutory tax rate of approximately 37.3% for the year ended June 30, 2010. The pro forma provision for income taxes does not reflect the amounts that would have resulted had K12 and KCDL filed consolidated income tax returns during the periods presented.

6. Adjustment to Common Shares and Equivalents Outstanding

Pro forma earnings per common share basic and diluted for the year ended June 30, 2010 have been calculated based on the estimated weighted average number of common shares outstanding on a pro forma basis, as described below.

The unaudited pro forma condensed consolidated financial information does not purport to represent what the Company’s results of operations including earnings per share actually would have been if the acquisition of KCDL had occurred on July 1, 2009 or what such results will be for any future periods or what the consolidated balance sheet would have been if the acquisition had occurred on June 30, 2010. The actual results in the periods following the acquisition including earnings per share may differ significantly from that reflected in the unaudited pro forma condensed consolidated financial information for a number of reasons including, but not limited to, differences between the assumptions used to prepare the unaudited pro forma condensed consolidated financial information and the actual amounts and the completion of a final valuation of the acquisition. In addition, no adjustments have been made for non-recurring integration plans or operational efficiencies that may have been achieved if the acquisition had occurred on July 1, 2009.

The following table sets forth the computation of pro forma basic and diluted earnings per share for the year ended June 30, 2010 (in thousands, except share and per share data):

	For the Year Ended
	June 30, 2010
	Historical		Pro forma
Basic earnings per share computation:
Net income	$	21,525	$	19,917
Amount allocated to participating Series A stockholders	$	—	$	1,683
Income available to common stockholders — basic (A)	$	—	$	18,235
Weighted average common shares—basic historical (B)		29,791,973		29,791,973
Basic net income per share (A/B)	$	0.72	$	0.61

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	For the Year Ended
	June 30, 2010
	Historical		Pro forma
Diluted earnings per share computation:
Net income	$	21,525	$	19,917
Amount allocated to participating Series A stockholders	$	—	$	1,683
Income available to common stockholders — diluted (A)	$	—	$	18,235
Shares computation:
Weighted average common shares—basic historical		29,791,973		29,791,973
Effect of dilutive stock options		456,710		456,710
Weighted average common shares—diluted (C)		30,248,683		30,248,683
Diluted net income per share (A/C)	$	0.71	$	0.60

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