AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 3, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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WEEKLY READER
WRC MEDIA INC. CORPORATION
(Exact name of Registrant as specified in (Exact name of Registrant as specified in
its charter) its charter)
DELAWARE DELAWARE
(State or other jurisdiction of (State or other jurisdiction of
incorporation incorporation
or organization) or organization)
2731 2721
(Primary Standard Industrial (Primary Standard Industrial
Classification Number) Classification Number)
13-4066536 13-3603780
(I.R.S. Employer Identification Number) (I.R.S. Employer Identification Number)
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WRC MEDIA INC. WEEKLY READER CORPORATION
1 ROCKEFELLER PLAZA, 32ND FLOOR 1 ROCKEFELLER PLAZA, 32ND FLOOR
NEW YORK, NY 10020 NEW YORK, NY 10020
(212) 582-6700 (212) 582-6700
WRC MEDIA INC. COMPASSLEARNING, INC.
(Exact name of Registrant as specified in (Exact name of Registrant as specified in
its charter) its charter)
DELAWARE DELAWARE
(State or other jurisdiction of (State or other jurisdiction of
incorporation incorporation
or organization) or organization)
2731 7372
(Primary Standard Industrial (Primary Standard Industrial Classification
Classification Number) Number)
13-4066536 13-4066535
(I.R.S. Employer Identification Number) (I.R.S. Employer Identification Number)
---------------- ----------------------------------
WRC MEDIA INC. COMPASSLEARNING, INC.
1 ROCKEFELLER PLAZA, 32ND FLOOR 1 ROCKEFELLER PLAZA, 32ND FLOOR
NEW YORK, NY 10020 NEW YORK, NY 10020
(212) 582-6700 (212) 582-6700
(Address, including zip code, and telephone number, including area code,
of each Registrant's principal executive offices)
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MARTIN E. KENNEY, JR.
CHIEF EXECUTIVE OFFICER, WRC MEDIA INC.
DIRECTOR, WRC MEDIA INC., WEEKLY READER
CORPORATION AND COMPASSLEARNING, INC.
1 ROCKEFELLER PLAZA, 32ND FLOOR
NEW YORK, NY 10020
(212)582-6700
(Address, including zip code, and telephone
number, including area code, of each
Registrant's agent for service)
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COPIES TO:
JULIE T. SPELLMAN, ESQ.
CRAVATH, SWAINE & MOORE
825 EIGHTH AVENUE
NEW YORK, NEW YORK 10019
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NAMES OF ADDITIONAL REGISTRANTS STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER
AS SPECIFIED IN THEIR CHARTERS INCORPORATION OR ORGANIZATION IDENTIFICATION NO.
- ------------------------------- ------------------------------ ------------------
Lifetime Learning Systems, Inc. Delaware 13-3783276
American Guidance Service, Inc. Minnesota 41-0802162
AGS International Sales, Inc. Minnesota 41-0982023
World Almanac Education Group, Inc. Delaware 13-3603781
Funk & Wagnalls Yearbook Corp. Delaware 13-3603787
Gareth Stevens, Inc. Wisconsin 39-1462742
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act of 1933 registration statement number of the
earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. / /
----------------------------------
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED UNIT(2) PRICE(2)(3) REGISTRATION FEE(4)
12 3/4% Senior Subordinated Notes due 2009(1) $152,000,000 100% $152,000,000 $40,128.00
15% Senior Preferred Stock due 2011 $75,000,000 100% $75,000,000 $19,800.00
(1) The note guarantees of Lifetime Learning Systems, Inc., American Guidance
Service, Inc., AGS International Sales, Inc., World Almanac Education
Group, Inc., Funk & Wagnalls Yearbook Corp. and Gareth Stevens, Inc. of the
payment of principal, premium, if any, and interest on the new notes being
registered hereby are also being registered hereby. Pursuant to
Rule 457(n), no registration fee is required with respect to such note
guarantees.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f).
(3) Exclusive of accrued interest, if any.
(4) Calculated pursuant to Rule 457.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED FEBRUARY 3, 2000
PROSPECTUS WRC MEDIA INC.,
WEEKLY READER CORPORATION [LOGO]
AND COMPASSLEARNING, INC.
$152,000,000
EXCHANGE OFFER FOR
12 3/4% SENIOR SUBORDINATED NOTES
DUE 2009
WRC MEDIA INC.
$75,000,000
EXCHANGE OFFER FOR
15% SENIOR PREFERRED STOCK
DUE 2011
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This is an offer to exchange (1) the outstanding, unregistered 12 3/4% Senior
Subordinated Notes due 2009 for substantially identical 12 3/4% Senior
Subordinated Notes due 2009 and (2) the outstanding, unregistered 15% Senior
Preferred Stock due 2011 for substantially identical 15% Senior Preferred Stock
due 2011 that will be free of the transfer restrictions that apply to the old
notes and the old senior preferred stock. This offer will expire at 5:00 p.m.,
New York City time, on , 2000 unless we extend it. Interest on the
notes is payable on November 15 and May 15 of each year, beginning May 15, 2000.
We refer to the old notes and the new notes collectively as the notes. We refer
to the old senior preferred stock and the new senior preferred stock
collectively as the senior preferred stock.
WRC Media Inc., Weekly Reader Corporation and CompassLearning, Inc. may redeem
all or part of the new notes on or after November 15, 2004. Prior to
November 15, 2002, WRC Media Inc., Weekly Reader Corporation and
CompassLearning, Inc. may redeem up to 35% of the new notes from the net cash
proceeds of certain sales of equity at a redemption price equal to 112.75% of
the principal amount. The certain types of equity sales are specified under
"Description of New Notes--Optional Redemption."
The new notes will be unsecured and subordinated to all of our existing and
future senior debt. The new notes will be guaranteed by Lifetime Learning
Systems, Inc., American Guidance Service, Inc., AGS International Sales, Inc.,
World Almanac Education Group, Inc., Funk & Wagnalls Yearbook Corp. and Gareth
Stevens, Inc. and some of our future subsidiaries on a senior subordinated basis
as specified in this prospectus under "Description of New Notes." Each of the
note guarantees also is being registered by the guarantors under the
registration statement of which this prospectus is a part.
On and after the issuance date (but not including from November 17, 2002 to
November 17, 2004), WRC Media Inc. may, at its option, redeem the new senior
preferred stock, in whole but not in part, at a redemption price equal to the
liquidation preference of shares of senior preferred stock, plus a stated
premium, plus any accrued and unpaid cash dividends thereon to the date of
redemption, without interest on such redemption price. Redemption prices are
specified in this prospectus under "Description of New Senior Preferred
Stock--Redemption of Senior Preferred Stock."
SEE "RISK FACTORS" COMMENCING ON PAGE 19 FOR A DISCUSSION OF IMPORTANT FACTORS
THAT HOLDERS OF OLD NOTES AND OLD SENIOR PREFERRED STOCK SHOULD CONSIDER IN
CONNECTION WITH THE EXCHANGE OFFER AND INVESTING IN THE NEW NOTES AND THE NEW
SENIOR PREFERRED STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NEW NOTES OR THE NEW SENIOR
PREFERRED STOCK OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
WE ARE NOT MAKING AN OFFER TO EXCHANGE NOTES OR SENIOR PREFERRED STOCK IN ANY
JURISDICTION WHERE THE OFFER IS NOT PERMITTED.
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The date of this prospectus is , 2000
TABLE OF CONTENTS
PAGE
--------
Where You Can Find More Information... i
Forward-Looking Statements............ iii
Prospectus Summary.................... 1
Risk Factors.......................... 19
The Exchange Offer.................... 34
Transactions.......................... 46
Use of Proceeds....................... 48
Dividend Policy....................... 48
Unaudited Pro Forma Consolidated
Financial Information............... 49
Selected Historical Consolidated
Financial Information for Weekly
Reader Corporation.................. 58
Selected Historical Consolidated
Financial Information for American
Guidance Service, Inc............... 60
Selected Historical Financial
Information for WRC Media Inc. and
its Subsidiary (CompassLearning,
Inc.)............................... 62
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 64
PAGE
--------
Industry.............................. 93
Business.............................. 102
Management............................ 131
Certain Relationships and Related
Transactions........................ 148
Ownership of Stock.................... 151
Description of Senior Credit
Facilities.......................... 160
Description of Capital Stock.......... 162
Equity Sponsors....................... 164
Description of New Notes.............. 165
Description of New Senior Preferred
Stock............................... 206
Book-Entry, Delivery and Form......... 214
Registration Rights................... 217
Certain U.S. Federal Tax
Considerations...................... 223
Plan of Distribution.................. 229
Legal Matters......................... 229
Independent Public Accountants........ 229
Index to Financial Statements......... F-1
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4 under the Securities Act of 1933 relating to the exchange
offer that incorporates important business and financial information about us
that is not included in or delivered with this prospectus. This prospectus does
not contain all of the information included in the registration statement. This
information is available from us without charge to holders of the notes or
senior preferred stock as specified below. Any statement made in this prospectus
concerning the contents of any contract, agreement or other document is
qualified in its entirety by reference to such contract, agreement or document.
If we have filed any of those contracts, agreements or other documents as an
exhibit to the registration statement, you should read the exhibit for a more
complete understanding of the document or matter involved. Following the
exchange offer, we will be required to file periodic reports and other
information with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. In the notes indenture and the senior preferred
stockholders agreement, we have agreed that, whether or not we are required to
do so by the rules and regulations of the Securities and Exchange Commission,
for so long as any of the notes and the senior preferred stock remain
outstanding, we will furnish to the holders of the notes and the senior
preferred stock and file with the Securities and Exchange Commission (unless the
Securities and Exchange Commission will not accept such a filing):
(1) all quarterly and annual financial information that would be required to
be contained in such a filing with the Securities and Exchange Commission
on Forms 10-Q and 10-K if we were required to file such forms, including
a "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and, with respect to the annual information only, a
report thereon by our certified independent public accountants; and
i
(2) all reports that would be required to be filed with the Securities and
Exchange Commission on Form 8-K if we were required to file such reports.
In addition, for so long as any of the notes and the senior preferred stock
remain outstanding, we have agreed to make available to any prospective
purchaser of the notes and the senior preferred stock or beneficial owner of the
notes and the senior preferred stock in connection with any sale thereof, the
information required by Rule 144A(d)(4) under the Securities Act of 1933. We
will also furnish such other reports as we may determine or as the law requires.
Information that we file with the Securities and Exchange Commission after
the date of this prospectus will automatically supersede the information in this
prospectus and any earlier filed incorporated information. We are also
incorporating any future filings made with the Securities and Exchange
Commission under sections 13(a), 13(e), 14, or 15(d) of the Securities Exchange
Act of 1934 until the termination of the exchange offer.
You may read and copy the registration statement, including the attached
exhibits, and any reports, statements or other information that we file at the
Securities and Exchange Commission's public reference room at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the operation of the public reference room. Our Securities and Exchange
Commission filings will also be available to the public from commercial document
retrieval services and at the Securities and Exchange Commission's Internet site
(http:// www.sec.gov).
You may request a copy of any of our filings with the Securities and
Exchange Commission, or any of the agreements or other documents that constitute
exhibits to those filings, at no cost, by writing or telephoning us at the
following address or phone number:
WRC Media Inc.
1 Rockefeller Plaza, 32nd Floor
New York, NY 10020
(212) 582-6700
Attention: Charles L. Laurey
TO OBTAIN TIMELY DELIVERY OF ANY OF OUR FILINGS, AGREEMENTS OR OTHER
DOCUMENTS, YOU MUST MAKE YOUR REQUEST TO US NO LATER THAN FIVE BUSINESS DAYS
BEFORE THE EXPIRATION DATE OF THE EXCHANGE OFFER. THE EXCHANGE OFFER WILL EXPIRE
ON 5:00 P.M., NEW YORK CITY TIME ON , 2000 (30 DAYS FOLLOWING THE
COMMENCEMENT OF THE EXCHANGE OFFER) UNLESS EXTENDED BY US IN OUR SOLE
DISCRETION. SEE "THE EXCHANGE OFFER."
You should rely only on the information provided in this prospectus. No
person has been authorized to provide you with different information. The
information in this prospectus is accurate as of the date on the front cover.
You should not assume that the information contained in this prospectus is
accurate as of any other date.
ii
FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" within the meaning of
section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934, as amended. In particular, the statements about our plans,
strategies and prospects under the headings "Prospectus Summary," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," and in the unaudited pro forma consolidated financial statements
included in this prospectus and the related notes thereto are forward-looking
statements. Although we believe that our plans, intentions and expectations
reflected in or suggested by such forward-looking statements are reasonable, we
can not assure you that such plans, intentions or expectations will be achieved.
These forward-looking statements are subject to risks, uncertainties and
assumptions about us. Important factors that could cause actual results to
differ materially from the forward-looking statements we make in this prospectus
are described in this prospectus, including under the headings:
- "Risk Factors;"
- "Management's Discussion and Analysis of Financial Condition and Results
of Operations;" and
- "Business."
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the cautionary statements
and risk factors contained throughout this prospectus.
------------------------
INTERNET WEB SITES
This offering memorandum includes references to certain Internet web sites
that we maintain. None of these web sites, or their content, are incorporated by
reference in this offering memorandum.
iii
PROSPECTUS SUMMARY
This summary highlights some of the information described in greater detail
in other parts of this prospectus and may not contain all of the information
that is important to you. Before making an investment decision, you should read
this entire prospectus, including "Risk Factors" and the financial statements
(including the related notes to the financial statements) that we have included.
Unless the context otherwise requires, the terms "we," "our" and "us" refer
to WRC Media Inc. ("WRC Media") and its subsidiaries and their predecessor
companies after giving effect to the transactions described under
"Transactions." As of January 25, 2000, we changed the name of JLC Learning
Corporation, one of WRC Media's subsidiaries and a registrant, to
CompassLearning, Inc. On December 23, 1999, we changed the name of PRIMEDIA
Reference Inc., one of WRC Media's subsidiaries and a guarantor of the notes, to
World Almanac Education Group, Inc. When we refer to Weekly Reader Corporation
("Weekly Reader"), American Guidance Service, Inc. ("American Guidance"),
CompassLearning, Inc. ("CompassLearning") and World Almanac Education
Group, Inc. ("World Almanac"), each of their predecessor companies are included.
When we refer to the financial information of Weekly Reader, unless otherwise
specified, we include the results of operations of Weekly Reader and its
subsidiaries, including American Guidance and World Almanac. When we refer to
"pro forma" financial results, we mean the financial results of WRC Media and
its subsidiaries on a consolidated basis as if the transactions described under
"Transactions" had occurred at the beginning of the relevant time period. See
"Unaudited Pro Forma Consolidated Financial Information."
THE COMPANY
We are a leading publisher of supplemental education materials for the
pre-kindergarten to twelfth grade ("Pre K-12") market. Our portfolio of products
includes a broad range of print and electronic supplemental instructional
materials, testing and assessment products and library materials. Our products
have well-known brand names and we believe they are recognized by our customers
for their effectiveness and consistent, high quality educational content. Our
strong brand names, several of which have been published for over 40 years,
include:
- WEEKLY READER;
- TEEN NEWSWEEK;
- the PEABODY PICTURE VOCABULARY TEST;
- TOMORROW'S PROMISE;
- THE WORLD ALMANAC AND BOOK OF FACTS; and
- FACTS ON FILE WORLD NEWS DIGEST.
Utilizing sophisticated sales and marketing methods, which include the use
of proprietary databases, we have established long standing customer
relationships and an extensive network with direct distribution channels. Our
targeted customers are:
- teachers;
- school and school district-level administrators;
- librarians;
- other educational professionals; and
- parents.
One or more of our products are used in over 90% of the school districts and
over 80,000, or approximately 75%, of the elementary, middle and secondary
schools in the United States.
1
We sell our products and services in the rapidly growing supplemental
education materials segment of the education materials market. We estimate this
segment had approximately $3.6 billion in sales in 1998, representing 58% of the
overall Pre K-12 education materials market. The supplemental education
materials segment consists of:
- print and electronic instructional materials;
- testing and assessment products; and
- materials for school libraries.
Growth in the education materials market has been, and is expected to continue
to be, driven by several factors, including:
- increasing Pre K-12 student enrollment;
- a rise in the number of Pre K-12 teachers;
- additional educational spending fueled by public concern over the quality
of education in the United States; and
- the growing installed base of personal computers in libraries, labs,
classrooms and homes.
In addition to the growth factors that affect the overall education materials
market, growth in the supplemental education materials segment is driven by:
- increasingly diverse sources of education funding;
- teachers and school and school district-level administrators using a
greater amount of supplemental education materials to improve student
performance, as they are increasingly held accountable for student
achievement; and
- a growing acceptance among teachers of theories of teaching that support
the use of different instructional methods to accommodate the many ways in
which students learn.
Together, Simba Information Inc.'s Print Publishing for the School Market,
1999-2000 and Simba Information Inc.'s Print Publishing for the School Market,
1997-1998 show that the supplemental education materials segment (excluding the
materials described immediately below) has grown at a compound annual growth
rate of 10.7% during the five-year period ending December 31, 1998. Simba
Information Inc. does not report statistics for some supplemental education
materials included in this segment, consisting primarily of some testing and
assessment products and library materials, which we estimate accounted for
approximately $1.3 billion in sales during 1998.
Our operations are conducted primarily through four operating subsidiaries
listed below, each of which is a market leader in its product categories:
- Weekly Reader;
- American Guidance;
- CompassLearning; and
- World Almanac.
------------------------
The principal executive offices of WRC Media, Weekly Reader, CompassLearning
and each of the guarantors of the notes are each located at 1 Rockefeller Plaza,
32nd Floor, New York, New York 10020 and the telephone number for that location
is (212) 582-6700.
2
CORPORATE STRUCTURE
The following chart shows our corporate structure and ownership of the
common stock of WRC Media's four primary operating subsidiaries following the
consummation of the transactions described under "Transactions."
[CHART]
(1) Issuers of the units issued in connection with the financing of the
transactions described under "Transactions."
(2) WRC Media is:
- the issuer of $75.0 million of old senior preferred stock issued in
connection with the financing of the transactions described under
"Transactions;" and
- the guarantor of the senior credit facilities.
(3) Co-borrowers under the senior credit facilities and issuers of the warrants
issued to the senior preferred stockholders in connection with the financing
of the transactions described under "Transactions."
(4) Together with each of their respective subsidiaries and Lifetime Learning
Systems, Inc., the only other direct subsidiary of Weekly Reader, guarantors
of the notes and the senior credit facilities.
(5) Assumes that the warrants to purchase common stock of Weekly Reader and
CompassLearning issued to the senior preferred stockholders have not been
exercised.
3
THE EXCHANGE OFFER
The Exchange Offer.............................. We are offering to exchange pursuant to the
exchange offer an aggregate principal amount of up
to $152,000,000 of the new notes for a like
principal amount of the old notes. We are also
offering to exchange pursuant to the exchange offer
up to 3,000,000 shares of new senior preferred
stock for a like number of old senior preferred
stock. We will issue the new notes and the new
senior preferred stock on or promptly after the
exchange date. As of the date of this prospectus,
$152,000,000 aggregate principal amount of the old
notes and 3,000,000 shares of old senior preferred
stock are outstanding.
The new notes will have terms substantially
identical to the terms of the old notes. The new
notes will not contain terms with respect to
transfer restrictions and will not require us to
consummate a registered exchange offer. Except as
described in the previous sentence, the new notes
will evidence the same debt as the old notes and
will be entitled to the same benefits under the
notes indenture as the old notes.
The new senior preferred stock will have terms
substantially identical to the terms of the old
senior preferred stock. The new senior preferred
stock will not contain terms with respect to
transfer restrictions and will not require us to
consummate a registered exchange offer. Except as
described in the previous sentence, the new senior
preferred stock will evidence the same rights and
obligations as the old senior preferred stock and
will be entitled to the same benefits under the
preferred stockholders agreement and the
certificate of designations relating to the senior
preferred stock as the old senior preferred stock.
The issuance of the new notes and the new senior
preferred stock and the exchange offer are intended
to satisfy our obligations under the registration
rights agreement and the senior preferred
stockholders agreement to commence and consummate a
registered exchange offer. See "The Exchange Offer"
and "Registration Rights."
Expiration Date................................. The exchange offer will expire at 5:00 p.m., New
York City time on , 2000 (30 days
following the commencement of the exchange offer)
unless extended by us in our sole discretion. See
"The Exchange Offer--Expiration Date; Extensions;
Amendments."
4
Exchange Date................................... The date of acceptance for exchange of the old
notes and the old senior preferred stock and the
consummation of the exchange offer will be the
first business day following the expiration date
unless extended. See "The Exchange Offer--Terms of
the Exchange--Tender and Acceptance."
Withdrawal Rights............................... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the expiration date;
otherwise, all tenders will be irrevocable. See
"The Exchange Offer--Withdrawal of Tenders."
Procedures for Tendering Old Notes and Old
Senior Preferred Stock.......................... See "The Exchange Offer--Procedures for Tendering."
Taxation........................................ The exchange of the old notes for the new notes and
the exchange of the old senior preferred stock for
the new senior preferred stock pursuant to the
exchange offer will not result in any income, gain
or loss to holders who participate in the exchange
offer or to us for U.S. Federal income tax
purposes. See "Certain U.S. Federal Tax
Considerations."
Resale.......................................... We are making the exchange offer in reliance on the
position of the staff of the Securities and
Exchange Commission as described in previous
no-action letters. However, we have not sought our
own no-action letter.
Based upon this position, we believe that a holder
who exchanges the old notes for the new notes or
the old senior preferred stock for the new senior
preferred stock in the exchange offer generally may
offer for resale, sell and otherwise transfer the
new notes or the new senior preferred stock without
further registration under the Securities Act of
1933 and without delivery of a prospectus that
satisfies the requirements of section 10 of the
Securities Act of 1933 if the conditions listed in
the next sentence are satisfied. A holder who
wishes to participate in the exchange offer, as
represented to us in the applicable letter of
transmittal, must:
- not be an "affiliate" of ours, as that term is
defined in Rule 405 of the Securities Act of 1933;
- acquire the new notes or the new senior preferred
stock in the ordinary course of business; and
- not participate, not intend to participate and
have no arrangement or understanding with any
person to participate in a distribution of the
new notes or the new senior preferred stock.
5
Any holder who fails to satisfy the above
conditions may not rely on the position of the
Securities and Exchange Commission as described in
these no-action letters and would have to comply
with the registration and prospectus delivery
requirements of the Securities Act of 1933 and the
applicable state securities laws in connection with
any secondary resale transaction in the absence of
an exemption from such requirements.
Any holder of the old notes or the old senior
preferred stock using the exchange offer to
participate in a distribution of the new notes or
the new senior preferred stock cannot rely on the
no-action letters referred to above. This includes
a broker-dealer that acquired the old notes or the
old senior preferred stock directly from us, but
not as a result of market-making activities or
other trading activities.
Each broker-dealer that receives new notes or new
senior preferred stock for its own account in
exchange for old notes or old senior preferred
stock, as a result of market-making activities or
other trading activities must represent and
acknowledge pursuant to the applicable letter of
transmittal that it will deliver a prospectus in
connection with any resale of such new notes or new
senior preferred stock. This prospectus, as it may
be amended or supplemented from time to time, may
be used by a broker-dealer in connection with
resales of new notes or new senior preferred stock
received in exchange for old notes or old senior
preferred stock where such old notes or old senior
preferred stock were acquired by such broker-dealer
as a result of market-making activities or other
trading activities. The applicable letter of
transmittal states that by acknowledging that it
will deliver and by delivering a prospectus in
connection with any resale of new notes or new
senior preferred stock, a broker-dealer will not be
considered to admit that it is an "underwriter"
within the meaning of the Securities Act of 1933.
We have agreed that for a period of one year after
the expiration date, we will make this prospectus
available to broker-dealer for use in connection
with any such resale. See "Plan of Distribution."
Except as described above, this prospectus may not
be used for an offer to resell, resale or other
retransfer of new notes or new senior preferred
stock.
6
The exchange offer is not being made to, nor will
we accept tenders for exchange from, holders of old
notes or old senior preferred stock in any
jurisdiction in which the exchange offer or the
acceptance of it would not be in compliance with
the securities or blue sky laws of such
jurisdiction.
Remaining Old Notes and Old Senior Preferred
Stock........................................... If you do not tender your old notes or old senior
preferred stock in the exchange offer or if your
old notes or old senior preferred stock are not
accepted for exchange you will continue to hold
such old notes and old senior preferred stock.
In general, we will not accept for exchange old
notes or old senior preferred stock which has been
tendered if:
- the notes or the senior preferred stock were not
validly tendered pursuant to the procedures for
tendering; see "The Exchange Offer--Procedures
for Tendering;"
- we determine in our reasonable discretion, that
any of the conditions to the exchange offer have
not been satisfied; see "The Exchange
Offer--Conditions to the Exchange Offer;"
- a holder has validly withdrawn a tender of old
notes or old senior preferred stock as described
under "The Exchange Offer--Withdrawal of
Tenders;" or
- we have, in our reasonable judgment, delayed or
terminated the exchange offer; see "The Exchange
Offer--Expiration Date; Extension; Amendments."
All untendered and tendered but unaccepted old
notes and all untendered and tendered but
unaccepted old senior preferred stock will continue
to bear legends restricting their transfer. In
general, you may not offer or sell the old notes or
the old senior preferred stock, unless such old
notes and old senior preferred stock are registered
under the Securities Act of 1933, except pursuant
to an exemption from, or in a transaction not
subject to, the Securities Act of 1933 and
applicable state securities laws. To the extent
that the exchange offer is effected, the trading
market, if any, for remaining old notes and
remaining old senior preferred stock could be
adversely affected. See "Risk Factors--Failure to
Exchange Your Old Notes or Old Senior Preferred
Stock" and "The Exchange Offer--Terms of the
Exchange."
7
The old notes which are not tendered for exchange
or are tendered but not accepted in connection with
the exchange offer will remain outstanding and be
entitled to the benefits of the notes indenture,
but will not be entitled to any future registered
exchange offer under the registration rights
agreement. Holders of any old notes after
expiration of the exchange offer may be entitled to
shelf registration rights under the circumstances
described under "Registration Rights."
The old senior preferred stock which is not
tendered for exchange or is tendered but not
accepted in connection with the exchange offer will
remain outstanding and be entitled to the benefits
of the senior preferred stockholders agreement and
the certificate of designations relating to the
senior preferred stock, but will not be entitled to
any future registered exchange offer. Holders of
such old senior preferred stock may, under the
circumstances described under "Registration
Rights," be entitled pursuant to the senior
preferred stockholders agreement to demand
registration of the old senior preferred stock on
two separate occasions and to request registration
incidental to any planned registration of WRC Media
capital stock. In the event the exchange offer for
the old senior preferred stock is completed, except
as described in the previous sentence, we will not
be required to register the remaining old senior
preferred stock.
Exchange Agent.................................. The exchange agent with respect to the exchange
offer is the Bankers Trust Company. The address and
telephone number of the exchange agent are stated
in "The Exchange Offer--Exchange Agent."
Use of Proceeds................................. There will be no proceeds to us from the exchange
pursuant to the exchange offer. See "Use of
Proceeds."
8
DESCRIPTION OF NEW NOTES
Issuers......................................... WRC Media Inc., Weekly Reader Corporation and
CompassLearning, Inc.
Securities Offered.............................. $152.0 million in aggregate principal amount of
12 3/4% Senior Subordinated Notes due 2009, which
we refer to as the new notes.
Maturity Date................................... November 15, 2009.
Interest and Payment Dates...................... We will pay interest on the notes semi-annually at
the rate of 12 3/4% per annum in cash in arrears on
November 15 and May 15 of each year, commencing May
15, 2000.
Optional Redemption............................. On or after November 15, 2004, we may redeem some
or all of the notes at any time at the redemption
prices listed under "Description of New
Notes--Optional Redemption." Prior to such date, we
may not redeem the notes, except as described in
the following sentence.
Prior to November 15, 2002, we may redeem up to 35%
of the notes with the net cash proceeds of certain
sales of our equity at a redemption price equal to
112.75% of the principal amount thereof, plus
accrued and unpaid interest and liquidated damages
thereon, if any, to the redemption date. See
"Description of New Notes--Optional Redemption" for
a description of these certain sales of or equity.
Change of Control............................... If a change of control occurs, you will have the
right to require us to repurchase all or a portion
of your notes at a purchase price in cash equal to
101% of the principal amount thereof, plus accrued
and unpaid interest and liquidated damages, if any,
to the date of repurchase; PROVIDED, HOWEVER, that
notwithstanding a change of control, we will not be
obligated to repurchase the notes pursuant to a
change of control offer if we have exercised our
right to redeem all the notes, as described under
"Optional Redemption" above. See "Description of
New Notes--Repurchase at the Option of Holders--
Change of Control."
Note Guarantees................................. The notes will be fully and unconditionally
guaranteed on a senior subordinated basis by note
guarantors consisting of our existing subsidiaries,
excluding Weekly Reader and CompassLearning, and
some future restricted subsidiaries. See
"Description of New Notes--Note Guarantees."
9
Ranking......................................... The notes and the note guarantees are senior
subordinated debt. They are subordinated to all of
the issuers' and the note guarantors' current and
future debt, except debt that expressly provides
that it is not senior to the notes and the note
guarantees. The new notes are equal in right of
payment with the old notes. See "Description of New
Notes--Subordination."
On a pro forma basis, after giving effect to the
transactions described under "Transactions," as of
September 30, 1999, the old notes were and the new
notes will be subordinated to $131.0 million of
senior secured debt (excluding unused commitments
under the revolving credit facility).
Registration Rights............................. We agreed to exchange the old notes within 210 days
after the issuance of the old notes for a new issue
of substantially identical debt securities
registered under the Securities Act of 1933 as
evidence of the same underlying obligation. This
exchange offer is in satisfaction of that
agreement.
We have also agreed to provide a shelf registration
statement to cover resales of the notes if:
- this exchange offer is not permitted by
applicable law, or rules, regulations or policies
of the Securities and Exchange Commission; or
- any holder of the old notes notifies us, prior to
the 20th day following consummation of the exchange
offer, that it cannot participate in the exchange
offer due to law, securities law policy or
prospectus delivery requirements or because it is
a broker-dealer who acquired the old notes from
us or an affiliate of ours.
If we fail to satisfy our obligations relating to
registration, we have agreed to pay liquidated
damages to you. See "Registration Rights--The
Notes."
Original Issue Discount......................... The notes are considered to be issued with original
issue discount for U.S. Federal income tax
purposes. As a result, you generally will be
required to include original issue discount (i.e.,
the difference between (1) the sum of all principal
and interest payable on the old notes other than
"qualified stated interest" and (2) the "issue
price" of the old notes) in your gross income for
U.S. Federal income tax purposes as it accrues, in
advance of the receipt of cash attributable to
income from original issue discount. See "Certain
U.S. Federal Tax Considerations."
10
DESCRIPTION OF NEW SENIOR PREFERRED STOCK
The new senior preferred stock will have the same financial terms and
covenants as the old senior preferred stock, which are as follows:
Securities Offered.............................. 3,000,000 shares of 15% Series B Senior Preferred
Stock due 2011 with a liquidation preference of
$25.00 per share.
Dividends....................................... To be paid out of funds legally available for the
payment of dividends at an annual fixed rate of (1)
15% or (2) 15.5% if WRC Media fails to comply with
its registration obligations with respect to the
old senior preferred stock. In addition, if WRC
Media fails to redeem all outstanding shares of the
senior preferred stock in connection with a
mandatory redemption of the senior preferred stock
on November 17, 2011 or a change of control, the
dividend rate on the new senior preferred stock
will increase by 0.50% each quarter or portion
thereof following the date on which such redemption
was required to be made until such default is
cured; however, the aggregate increase in such
dividend rate due to such failure to redeem will
not exceed 10%. See "Risk Factors--Dividends."
WRC Media will declare and pay dividends on
March 31, June 30, September 30 and December 31 of
each year, beginning on March 31, 2000.
Prior to December 31, 2004, or such earlier
dividend payment date as WRC Media may elect in its
sole discretion, dividends will not be payable in
cash, but will accrete to the liquidation
preference of the shares of the new senior
preferred stock, except as described in the next
sentence. Prior to December 31, 2004, at the
request of a majority of the holders of the new
senior preferred stock, WRC Media will pay
dividends in additional fully-paid and
nonassessable shares of senior preferred stock
having an aggregate liquidation preference equal to
the amount of such accrued and unpaid cash
dividends, in lieu of the dividends accreting to
the liquidation preference of the shares of the
senior preferred stock. After December 31, 2004,
WRC Media will pay dividends only in cash on the
liquidation preference per share of the new senior
preferred stock.
11
Optional Redemption............................. On and after November 17, 1999 (but not including
from November 17, 2002 to November 17, 2004), to
the extent WRC Media has legally available funds
for such payment, WRC Media may, at its option,
redeem, in whole but not in part, the shares of the
senior preferred stock at the applicable redemption
prices listed under "Description of New Senior
Preferred Stock--Redemption of Senior Preferred
Stock--Optional." If WRC Media redeems shares of
new senior preferred stock, WRC Media also will pay
accrued and unpaid cash dividends, if any, to the
date of redemption, without interest on such
redemption price.
Mandatory Redemption............................ WRC Media will be required to redeem all, if any,
of the shares of the new senior preferred stock
outstanding on November 17, 2011, to the extent it
has legally available funds for such payment, at a
redemption price equal to the aggregate liquidation
preference of such shares of senior preferred
stock, in cash, together with accrued and unpaid
cash dividends, if any, to the date of redemption,
without interest on such redemption price.
Change of Control............................... If a change of control occurs, to the extent WRC
Media has legally available funds for such payment
and to the extent permitted by the notes indenture,
WRC Media must offer to redeem any and all shares
of the senior preferred stock then outstanding in
cash at the redemption prices listed under
"Description of New Senior Preferred
Stock--Redemption of Senior Preferred Stock--Change
of Control."
If WRC Media fails to satisfy any of its redemption
obligations upon a change of control (including
because the notes indenture prohibits WRC Media
from complying with such obligation or because WRC
Media does not have funds legally available for a
redemption) then holders of the senior preferred
stock would be entitled to:
- additional voting rights; and
- an increase in the dividend rate;
and WRC Media would be prevented from:
- purchasing or redeeming securities that are on a
parity with the senior preferred stock; and
- making any distribution to securities that rank
junior to senior preferred stock.
12
We cannot assure you that:
- WRC Media will have sufficient funds to redeem
the senior preferred stock in the event of a change
of control;
- WRC Media will be able to make any such
redemption under the notes indenture; or
- our creditors will otherwise allow us to make the
redemption.
See "Risk Factors--Inability to Repurchase the
Notes Prior to or at Maturity or to Redeem the
Senior Preferred Stock Prior to or at Maturity."
Material Covenants.............................. The certificate of designations governing the new
senior preferred stock contains covenants for your
benefit which, among other things, limit WRC
Media's ability to:
- authorize, create or issue any class of
securities that rank senior to or equally with the
senior preferred stock; and
- declare or pay dividends on, or redeem, purchase
or acquire, any class of our capital stock that
ranks junior to or equally with the senior
preferred stock.
These covenants are subject to important exceptions
and qualifications which are described in
"Description of New Senior Preferred
Stock--Covenants." See "Risk Factors--Ranking of
the Senior Preferred Stock."
Voting Rights................................... Holders of the new senior preferred stock will not
have any voting rights, other than (1) those
required by law and (2) those specified in the
certificate of designations, including those
described in the next sentence. The holders of the
new senior preferred stock, voting together as a
single class with holders of other classes or
series of WRC Media's preferred stock having
similar voting rights, will be entitled to elect
one additional member of WRC Media's board of
directors, upon WRC Media's failure to:
- pay in full four consecutive or six quarterly
cash dividends;
- discharge an obligation to redeem all outstanding
shares of the new senior preferred stock in
connection with a mandatory redemption or a
change of control with respect to the senior
preferred stock for any reason (including because
there are no funds legally available for a
redemption);
- give the notice required to be given in
connection with any mandatory redemption provided
for in the certificate of designations; or
13
- comply with our covenants described in the
certificate of designations.
See "Description of New Senior Preferred
Stock--Voting Rights."
Exchange Feature................................ We may, at our option, but only in connection with
a reorganization transaction relating to an initial
public offering, redeem all but not less than all
of the shares of the senior preferred stock then
outstanding in exchange for an equivalent number of
shares of preferred stock of Weekly Reader of
identical type and liquidation preference, having
identical terms and conditions as the new senior
preferred stock (except that the issuer of such
stock will be Weekly Reader) and with equal amounts
of accrued and unpaid cash dividends.
DLJ Merchant Banking Partners II, L.P. and its
affiliates and their permitted transferees who
invested in the old senior preferred stock as part
of the transactions described under "Transactions,"
may, at their option, cause WRC Media to exchange
all, but not less than all, outstanding shares of
the senior preferred stock for an equal number of
shares of preferred stock of Weekly Reader and/or
CompassLearning of identical type and liquidation
preference, having identical terms and conditions
as the new senior preferred stock (except that the
issuer of such stock will be Weekly Reader and/or
CompassLearning) and with equal amounts of accrued
and unpaid cash dividends.
See "Description of New Senior Preferred Stock--
Exchange."
Registration Rights............................. WRC Media agreed to exchange the old senior
preferred stock within 210 days after issuance of
the old senior preferred stock for a new issue of
substantially identical preferred stock registered
under the Securities Act of 1933 as evidence of the
same underlying obligation. This exchange offer is
in satisfaction of that agreement.
WRC Media also agreed to file and keep effective a
shelf registration statement to cover resales of
the old senior preferred stock if:
- the exchange offer with respect to the old senior
preferred stock is not permitted by applicable
law or, rules, regulations or policies of the
Securities and Exchange Commission; or
14
- any holder of the old senior preferred stock
notifies us, prior to the 20th day following
consummation of the exchange offer, that it
cannot participate in the exchange offer due to
law, securities law policy or prospectus delivery
requirements or because it is a broker-dealer who
acquired the old senior preferred stock from us
or an affiliate of ours.
If we fail to satisfy our obligations relating to
registration, the dividend rate applicable to the
senior preferred stock will increase. See
"Registration Rights--The Senior Preferred Stock."
In addition, the senior preferred stockholders will
be entitled to certain demand registration and
"piggy-back" registration rights pursuant to the
senior preferred stockholders agreement. See
"Ownership of Stock--Senior Preferred Stockholders
Agreement" and "Registration Rights--The Senior
Preferred Stock."
Preferred Stockholders Agreement................ WRC Media entered into a stockholders agreement
concerning the relative rights and relationships of
the senior preferred stockholders with respect to
the senior preferred stock, governing, among other
things:
- corporate governance;
- transfer rights and restrictions;
- tag-along and drag-along rights; and
- registration rights.
For a summary of the terms of the senior preferred
stockholders agreement, see "Ownership of Stock--
Senior Preferred Stockholders Agreement."
Constructive Distributions...................... The new senior preferred stock will be considered
to be issued with redemption premium (i.e., the
excess of the redemption price of the new senior
preferred stock over its issue price) for U.S.
Federal income tax purposes. You will be required
to include such excess in your gross income over
the life of the new senior preferred stock
notwithstanding that the cash attributable to such
excess will not be received until a subsequent
period. In addition, any distributions on the new
senior preferred stock that are in the form of
additional shares of new senior preferred stock
will be taxable on the distribution date in the
same manner as a cash distribution on such new
senior preferred stock, and additional shares of
new senior preferred stock may be subject to the
redemption premium rules referred to above. See
"Certain U.S. Federal Tax Considerations."
YOU SHOULD REFER TO THE SECTION ENTITLED "RISK FACTORS" FOR AN EXPLANATION
OF THE RISKS OF INVESTING IN THE NEW NOTES AND THE NEW SENIOR PREFERRED STOCK.
15
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
This table presents summary unaudited pro forma consolidated financial
information derived from our unaudited pro forma consolidated financial
statements for the year ended December 31, 1998, and the nine-month period ended
September 30, 1999, which statements are included in this prospectus. The
summary unaudited pro forma consolidated operating information gives effect to
the transactions described under "Transactions," and to the acquisition of
American Guidance by PRIMEDIA Inc. ("PRIMEDIA") as if they had occurred on
January 1, 1998. The summary unaudited pro forma consolidated balance sheet
information gives effect to the transactions described under "Transactions" as
if they had occurred on September 30, 1999. The summary unaudited pro forma
consolidated financial information does not purport to represent what our
consolidated results of operations would have been had the transactions
described under "Transactions" and PRIMEDIA's acquisition of American Guidance
in fact occurred on these dates and does not project our consolidated financial
position or consolidated results of operations for the current year or any
future period.
NINE
YEAR ENDED MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
PRO FORMA
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Net revenue............................................... $206,718 $150,500
Cost of products sold..................................... 64,317 46,624
-------- --------
Gross profit.............................................. 142,401 103,876
Selling and administrative expenses:
Sales and marketing..................................... 46,328 32,496
Research and development................................ 8,022 5,655
Editorial............................................... 11,415 7,251
General, administrative and other....................... 41,018 27,844
Depreciation and amortization (a)....................... 35,460 26,752
Restructuring (b)....................................... 3,012 --
Write-off of in-process research & development costs
(c)................................................... -- 9,000
-------- --------
Net Loss from operations.................................. (2,854) (5,122)
Other expense............................................. (151) (161)
Interest expense (d)...................................... (35,381) (25,288)
-------- --------
Net loss before income taxes (e).......................... (38,386) (30,571)
Income tax benefit (expense).............................. -- --
-------- --------
Net loss (e).............................................. $(38,386) $(30,571)
======== ========
OTHER DATA:
EBITDA (f)................................................ $ 39,247 33,627
Depreciation and amortization (g)......................... 39,240 28,811
Capital expenditures...................................... 7,024 4,423
Cash interest expense (h)................................. 24,014
Ratio of EBITDA to cash interest expense.................. 1.4x
Ratio of total net debt to EBITDA (i)..................... 8.24x
BALANCE SHEET DATA (AT SEPTEMBER 30, 1999):
Cash on hand.............................................. $ 8,009
Total assets.............................................. 577,751
Total debt................................................ 277,193
Old senior preferred stock and Preferred Stockholder
Warrants (j)............................................ 75,000
Shareholders' equity...................................... 112,922
(FOOTNOTES APPEAR ON THE FOLLOWING PAGE)
16
(FOOTNOTES FROM TABLE ON PRIOR PAGE)
(a) Some depreciation and amortization charges are reflected in other expense
line items.
(b) In 1998, CompassLearning adopted a formal action plan for restructuring its
operations. The charge to earnings was $3.0 million. This restructuring
included a realignment of sale and service functions, certain on-line
training initiatives and headcount reductions. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Overview--
CompassLearning Restructuring."
(c) As part of the acquisition by WRC Media, CompassLearning wrote off certain
costs related to in-process research and development activities.
(d) For more information regarding our calculation of pro forma interest
expense, see note (f) to the Unaudited Pro Forma Consolidated Statements of
Operations included in this prospectus.
(e) Balances presented are before extraordinary items.
(f) EBITDA is defined as income before income taxes, interest expense,
depreciation and amortization, restructuring charges (described in note (b)
above) and non-recurring items (consisting solely of the non-recurring
income described in this paragraph). For the nine months ended
September 30, 1999, non-recurring income of $0.4 million and $1.5 million of
non-cash charges have been excluded from EBITDA. For more information
regarding our calculation of EBITDA, see notes (h) and (i) to the Unaudited
Pro Forma Consolidated Statements of Operations included in this prospectus.
EBITDA data is included because we understand that such information is
considered by certain investors as an additional basis on which to evaluate
WRC Media's ability to pay interest, repay debt and make capital
expenditures. Because all companies do not calculate EBITDA identically, the
presentation of EBITDA herein is not necessarily comparable to similarly
titled measures of other companies. EBITDA does not represent and should not
be considered more meaningful than, or an alternative to, measures of
operating performance as determined by generally accepted accounting
principles.
(g) Represents pro forma depreciation and amortization including depreciation
and amortization reflected in other cost line items, other than amortization
of deferred financing costs, which is included in interest expense.
(h) Cash interest expense excludes amortization of deferred financing costs and
original issue discount.
(i) Net debt represents total debt net of cash on hand.
(j) Represents $75.0 million in initial liquidation value of the old senior
preferred stock issued in connection with the transactions described under
"Transactions." Approximately $11.8 million is attributable to the value of
the warrants to acquire 13.0% of the common stock of Weekly Reader and 13.0%
of the common stock of CompassLearning. These warrants were issued in
connection with the old senior preferred stock mentioned above.
17
RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
We present below the ratio of (1) our earnings to fixed charges and (2) our
earnings to combined fixed charges and preferred stock dividends. Earnings
consist of net income (loss) plus fixed charges. Fixed charges consist of
interest expense, including amortization of debt issuance costs. The "pro forma"
information for the nine months ended September 30, 1999 and the year ended
December 31, 1998, reflects the original issuance of the 12 3/4% Senior
Subordinated Notes due 2009 and the issuance of the 15% Senior Preferred Stock
due 2011, as if these events had occurred as of January 1, 1998.
PRE-
SUCCESSOR PREDECESSOR PREDECESSOR
--------- --------------------------------------------------------- -----------
FOR THE YEARS ENDED DECEMBER 31,
7/14-9/30 1/1-7/13 -------------------------------- 6/30-12/31 7/6/94-
1999 1999 1998 1997 1996 1995 6/29/95
--------- -------- --------- --------- --------- ---------- -----------
WRC MEDIA INC. AND SUBSIDIARY
(COMPASSLEARNING)
(Deficiency) excess of
earnings to fixed
charges................. $(10,296) $(778) $(7,773) $(56,204) $(22,279) $(21,273) $(12,399)
FOR THE YEARS ENDED JUNE 30,
----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
ACTUAL
AMERICAN GUIDANCE
Ratio of earnings to cover
fixed charges...................... 46.56x 14.24x 4.59x 2.80x --
(Deficiency) of earnings to
fixed charges...................... -- -- -- -- $(6,445)
NINE MONTHS
ENDED
SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
------------- ----------------------------------------------------
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
WEEKLY READER
Ratio of earnings to cover
fixed charges...................... 1.13x 1.62x 1.52x -- 1.01x --
(Deficiency) of earnings to
fixed charges...................... -- -- -- $(2,863) -- $(1,708)
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1999, DECEMBER 31, 1998
------------------- -----------------
(PRO FORMA) (PRO FORMA)
WRC MEDIA INC. AND SUBSIDIARY
(Deficiency) excess of earnings to fixed
charges......................................... $(30,571) $(38,386)
18
RISK FACTORS
BEFORE YOU INVEST IN THE NEW NOTES OR THE NEW SENIOR PREFERRED STOCK, YOU SHOULD
BE AWARE THAT AN INVESTMENT IN THE NEW NOTES OR THE NEW SENIOR PREFERRED STOCK
INVOLVES VARIOUS RISKS, INCLUDING THOSE DESCRIBED IN THIS SECTION. YOU SHOULD
CAREFULLY CONSIDER THESE RISK FACTORS, TOGETHER WITH THE OTHER INFORMATION IN
THIS PROSPECTUS, BEFORE DECIDING TO EXCHANGE THE OLD NOTES OR THE OLD SENIOR
PREFERRED STOCK.
FAILURE TO EXCHANGE YOUR OLD NOTES OR OLD SENIOR PREFERRED STOCK--IF YOU FAIL TO
EXCHANGE YOUR OLD NOTES OR OLD SENIOR PREFERRED STOCK, THEY WILL CONTINUE TO BE
RESTRICTED SECURITIES AND MAY BECOME LESS LIQUID.
The old notes and the old senior preferred stock which you do not tender or
we do not accept will, following the exchange offer, continue to be restricted
securities. Therefore, you may only transfer or resell them in a transaction
registered under or exempt from the Securities Act of 1933 and applicable state
securities laws. We will issue the new notes in exchange for the old notes and
the new senior preferred stock in exchange for the old senior preferred stock
pursuant to the exchange offer only following the satisfaction of the procedures
and conditions described in "The Exchange Offer." Following the exchange offer,
if you did not tender your old notes, or we did not accept your tender, you
generally will not have any further registration rights unless you qualify for
the shelf registration rights described under "Registration Rights." Following
the exchange offer, if you did not tender your old senior preferred stock, or we
did not accept your tender, you may have the demand and incidental registration
rights described under "Registration Rights--the Senior Preferred Stock."
We do not currently anticipate that we will register the remaining old notes
under the Securities Act of 1933 or that we will register the remaining old
senior preferred stock unless required to do so pursuant to the senior preferred
stockholders agreement.
Because we anticipate that most holders of the old notes and old senior
preferred stock will elect to exchange such old notes or such old senior
preferred stock, we expect that the liquidity of the markets, if any, for any
old notes and old senior preferred stock remaining after the completion of the
exchange offer may be substantially limited. Any old notes tendered and
exchanged in the exchange offer will reduce the aggregate principal amount of
the old notes outstanding. Any old senior preferred stock tendered and exchanged
in the exchange offer will reduce the aggregate liquidation value of the old
senior preferred stock outstanding.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE--WE HAVE SUBSTANTIAL DEBT AND HAVE
SIGNIFICANT INTEREST PAYMENT REQUIREMENTS WHICH COULD ADVERSELY AFFECT OUR
ABILITY TO FULFILL OUR OBLIGATIONS UNDER THE NOTES AND THE SENIOR PREFERRED
STOCK AND TO OPERATE OUR BUSINESS.
We have a significant amount of indebtedness. On a pro forma basis, after
giving effect to the transactions described under "Transactions," as of
September 30, 1999, we would have had total indebtedness of approximately
$277.2 million and total shareholders' equity of $112.9 million. This pro forma
total indebtedness amount excludes unused commitments under the revolving credit
facility and is net of original issue discount on the old notes of $2.1 million
and discount of $3.7 million associated with the WRC Media common stock portion
of the units issued in connection with the transactions described under
"Transactions."
We will be able to incur substantial additional indebtedness in the future,
including $30.0 million of additional debt under the revolving credit facility.
All borrowings under the senior credit facilities, and WRC Media's and the note
guarantors' guarantees of them, will be secured and senior to the senior
preferred stock, the notes and the note guarantees.
19
Our substantial indebtedness could have important consequences to the
holders of the notes and the senior preferred stock. For example, it could:
- make it more difficult for us to satisfy our obligations with respect to
the notes and the senior preferred stock;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund the implementation of our business
strategy, working capital, capital expenditures, product development
efforts and other general corporate purposes;
- increase our interest expense if interest rates in general increase
because certain of our debt will bear interest based on market rates;
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- place us at a competitive disadvantage compared to our competitors that
have less debt;
- prevent us from raising the funds necessary to repurchase all of the notes
tendered to us upon the occurrence of certain changes of control, which
would constitute an event of default under the notes;
- prevent us from raising the funds necessary to redeem all of the senior
preferred stock upon the occurrence of a change of control; and
- limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional funds;
failing to comply with those covenants could result in an event of default
which, if not cured or waived, could have a material adverse effect on us.
We expect to pay our expenses and principal and interest on the notes and
other debt and interest and dividends on senior preferred stock with cash flow
from operations and future borrowings under the revolving credit facility. Our
ability to make payments on and to refinance our indebtedness, including the
notes and the senior preferred stock, and to fund our business strategy, working
capital, product development efforts and capital expenditures will depend on our
ability to generate cash in the future, which is subject to:
- general economic;
- financial;
- competitive;
- legislative;
- regulatory; and
- other factors that are beyond our control.
On a pro forma basis after giving effect to the transactions described under
"Transactions," our earnings would have been insufficient to cover our fixed
charges by $38.4 million for the year ended December 31, 1998, and
$30.6 million for the nine months ended September 30, 1999.
We cannot assure the holders of the notes and the senior preferred stock
that our business will generate sufficient cash flow from operations, or that
future borrowings will be available to us and our subsidiaries under the
revolving credit facility in an amount sufficient to enable us to pay our
20
indebtedness, including the notes and the senior preferred stock, or to fund our
other liquidity needs. If we cannot service our indebtedness, we will be forced
to take actions such as:
- delaying or reducing the implementation of our business strategy, capital
expenditures or product development efforts;
- selling assets;
- restructuring or refinancing our indebtedness (which could include the
notes); or
- seeking additional equity capital or bankruptcy protection.
We cannot assure the holders of the notes and the senior preferred stock
that any of these remedies can be effected on commercially reasonable terms or
at all. In addition, the terms of existing or future debt agreements, including
the credit agreement relating to the senior credit facilities and the notes
indenture, may restrict us from adopting any of these alternatives.
See "--Restrictive Covenants in Our Debt Instruments," "Description of
Senior Credit Facilities," "Description of New Notes--Repurchase at the Option
of Holders--Change of Control" and "Description of New Senior Preferred
Stock--Redemption of Senior Preferred Stock--Change of Control."
RANKING OF THE NOTES--YOUR RIGHT TO RECEIVE PAYMENTS ON THE NOTES WILL BE JUNIOR
TO OUR SENIOR DEBT AND MAY BE SUBJECT TO CERTAIN OTHER RESTRICTIONS.
The notes and the note guarantees will rank behind all of the issuers' and
the note guarantors' senior debt, which is all of their existing indebtedness
(other than trade payables) and future borrowings (other than trade payables)
except any future indebtedness that expressly provides that it ranks equal with,
or subordinated in right of payment to, the notes or the note guarantees.
Assuming we had completed the transactions described under "Transactions" on
September 30, 1999, the notes and the note guarantees would have been
subordinated to $131.0 million of senior debt (excluding $30.0 million of
available borrowings under the revolving credit facility). We will be permitted
to borrow substantial additional indebtedness, including senior debt, in the
future under the notes indenture.
None of the issuers or the note guarantors may pay principal, premium (if
any), interest or other amounts on account of the notes or any note guarantee if
they default on a payment on any senior debt or if they default on any
obligation that has resulted in the acceleration of designated senior debt,
including the senior credit facilities, unless such debt has been paid in full
or the default has been cured or waived. In the event of certain other defaults
with respect to designated senior debt, neither the issuers nor the note
guarantors may be permitted to pay any amount on account of the notes or any
note guarantee for up to 179 of 360 consecutive days. See "Description of New
Notes--Subordination" for a description of the designated senior debt. In the
event of a bankruptcy, liquidation, dissolution, reorganization or similar
proceeding with respect to any of the issuers or note guarantors, such issuer's
or note guarantor's assets will be available to pay obligations on the notes or
such note guarantor's note guarantee, as applicable, only after the senior debt
of such issuer or note guarantor has been paid in full. As a result, we cannot
assure the holders of the notes that there will be sufficient assets remaining
to pay amounts due on all or any of the notes or any note guarantee.
In addition, Weekly Reader's and CompassLearning's indebtedness under the
senior credit facilities and WRC Media's and the note guarantors' guarantees
relating to such senior credit facilities are secured by liens on substantially
all of the issuers' and the note guarantors' assets. If any of the issuers, the
note guarantors or certain of their subsidiaries are declared bankrupt or
insolvent or if any of them default under the senior credit facilities, the
lenders could declare all of the funds borrowed under the senior credit
facilities, together with accrued and unpaid interest, immediately due and
payable. If CompassLearning or Weekly Reader were unable to repay such
indebtedness or if WRC Media or any
21
of the other guarantors of the senior credit facilities were unable to satisfy
their guarantees under the senior credit facilities, the lenders could foreclose
on the pledged stock and on the assets in which they have been granted a
security interest, in each case to the exclusion of the holders of the notes,
even if an event of default exists under the notes indenture at such time.
Furthermore, under the note guarantees, if all shares of any note guarantor are
sold to persons pursuant to an enforcement of the pledge of shares of such note
guarantor for the benefit of the lenders under the senior credit facilities,
then the applicable note guarantor will be released from its note guarantee
automatically and immediately upon such sale. See "Description of Senior Credit
Facilities."
WRC Media conducts all of its operations through its subsidiaries, while
Weekly Reader conducts some of its operations through its subsidiaries. The
ability of subsidiaries of the issuers of the notes and the note guarantors to
pay dividends and make other payments may be restricted by, among other things,
applicable corporate and other laws and regulations and agreements of these
subsidiaries. Although the notes indenture will limit the ability of these
subsidiaries to enter into consensual restrictions on their ability to pay
dividends and make other payments, such limitations are subject to a number of
significant qualifications and exceptions. See "Description of New
Notes--Material Covenants--Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries."
RANKING OF THE SENIOR PREFERRED STOCK--THE SENIOR PREFERRED STOCK IS
SUBORDINATED TO OUR DEBT. AS A RESULT, UPON ANY DISTRIBUTION TO OUR CREDITORS IN
A BANKRUPTCY, LIQUIDATION OR REORGANIZATION OR SIMILAR PROCEEDING RELATING TO US
OR OUR PROPERTY, THE HOLDERS OF OUR DEBT WILL BE ENTITLED TO BE PAID IN CASH
BEFORE ANY PAYMENT MAY BE MADE WITH RESPECT TO THE SENIOR PREFERRED STOCK.
Our obligations with respect to the senior preferred stock are subordinate
and junior in right of payment to all our present and future indebtedness,
including the senior credit facilities and the old and new notes, but will rank
senior to our existing equity securities. The old and new senior preferred stock
will have an equal rank. In the event of our bankruptcy, liquidation or
reorganization, our assets will be available to pay obligations on the senior
preferred stock only after all holders of our indebtedness and all our other
creditors have been paid, and there may not be sufficient assets remaining to
pay amounts due on any or all of the senior preferred stock then outstanding.
See "Description of New Senior Preferred Stock--Ranking."
While any shares of the senior preferred stock are outstanding, without the
written consent of a majority of the outstanding shares of the senior preferred
stock, we may not create, authorize, issue or reclassify:
- any class of stock ranking prior to, or on parity with, the senior
preferred stock with respect to dividends or upon liquidation,
dissolution, winding up or otherwise; or
- any security that is convertible or exchangeable into such stock.
However, without such approval, we may create, authorize, issue or reclassify
shares of securities that rank equally in right of payment with the senior
preferred stock if we use the proceeds from the issuance of such securities for
the redemption of all outstanding shares of the senior preferred stock in
accordance with the terms of the certificate of designations relating to the
senior preferred stock.
DIVIDENDS--OUR ABILITY TO PAY ANY DIVIDENDS ON THE SENIOR PREFERRED STOCK MAY BE
LIMITED.
Our ability to pay any cash or noncash dividends on the senior preferred
stock is subject to applicable provisions of state law and to the terms of the
notes indenture, the senior credit facilities and any other outstanding
indebtedness. We are not required to pay cash dividends on the senior preferred
stock until December 31, 2004. The terms of the notes indenture permit us to pay
any cash dividend on the senior preferred stock only if the amount of the cash
dividend is permitted under the covenant for restricted payments described under
"Description of New Notes--Material Covenants" and in the absence of any default
under the notes indenture. We cannot assure the holders of the
22
senior preferred stock that the notes indenture or the terms of our other
indebtedness will permit us to pay cash dividends on the senior preferred stock.
Moreover, under Delaware law, we are permitted to pay cash or noncash
dividends on our capital stock, including the senior preferred stock, only out
of surplus, or in the event that there is no surplus, out of our net profits for
the fiscal year in which a dividend is declared or for the immediately preceding
fiscal year. Surplus is defined as the excess of a company's total assets over
the sum of its total liabilities plus the par value of its outstanding capital
stock. In order to pay dividends, we must have surplus or net profits equal to
the full amount of the dividends at the time such dividend is declared. In
determining our ability to pay dividends, Delaware law permits our board of
directors to revalue our assets and liabilities from time to time to their fair
market values in order to establish the amount of surplus. We cannot predict
what the value of our assets or the amount of our liabilities will be in the
future and, accordingly, we cannot assure the holders of the senior preferred
stock that we will be able to pay dividends on the senior preferred stock.
RESTRICTIVE COVENANTS IN OUR DEBT INSTRUMENTS--RESTRICTIVE DEBT COVENANTS IN THE
CREDIT AGREEMENT RELATING TO THE SENIOR CREDIT FACILITIES, THE NOTES INDENTURE
AND FUTURE DEBT AGREEMENTS MAY ADVERSELY AFFECT US.
The credit agreement relating to the senior credit facilities and the notes
indenture will restrict our and our subsidiaries' ability to:
- incur additional indebtedness;
- pay dividends and make other distributions;
- prepay subordinated debt;
- make restricted payments;
- create liens;
- sell and otherwise dispose of assets; and
- enter into certain transactions with affiliates.
We cannot assure the holders of the notes and the senior preferred stock
that these restrictions will not adversely affect our ability to finance future
operations, implement our business strategy, fund our capital needs or engage in
other business activities that may be in our interest. In addition, the credit
agreement relating to the senior credit facilities will require us to maintain
compliance with certain financial ratios. Our ability to comply with these
ratios may be affected by events beyond our control.
A breach of any of these restrictive covenants or our inability to comply
with the required financial ratios could result in a default under the senior
credit facilities. In the event of any such default, the lenders under the
senior credit facilities may elect to:
- declare all borrowings outstanding, together with accrued and unpaid
interest and other fees, to be immediately due and payable;
- require us to apply all of our available cash to repay such borrowings; or
- prevent us from making debt service payments on the notes which would
result in an event of default under the terms of the notes.
The lenders will also have the right in such circumstances to terminate any
commitments they have to provide further financing, including under the
revolving credit facility.
23
If we are unable to repay any such borrowings when due, the lenders under
the senior credit facilities also will have the right to proceed against the
collateral, which will consist of substantially all of the assets of WRC Media
and each of its direct and indirect domestic subsidiaries, including:
- Weekly Reader;
- American Guidance;
- CompassLearning; and
- World Almanac.
The lenders under the senior credit facilities will also have the right to
proceed against up to 65% of the capital stock of any future direct and indirect
foreign subsidiary of WRC Media. If the indebtedness under the senior credit
facilities and the notes were to be accelerated, we cannot assure the holders of
the notes and the senior preferred stock that our assets would be sufficient to
repay such indebtedness in full. Any future credit agreements or other agreement
relating to our indebtedness to which we or any of our subsidiaries may become a
party or under which we are or any one of our subsidiaries is a guarantor may
include the covenants described above and other restrictive covenants.
See "Description of New Notes--Material Covenants" and "Description of
Senior Credit Facilities."
HISTORY OF NET LOSSES--WE HAVE INCURRED NET LOSSES AT COMPASSLEARNING AND MAY
CONTINUE TO INCUR NET LOSSES.
We cannot assure the holders of the notes and the senior preferred stock
that CompassLearning will be able to achieve net income in the future on a
sustained basis or at all. CompassLearning reported net losses of:
- $22.3 million for the year ended December 31, 1996;
- $56.2 million for the year ended December 31, 1997; and
- $7.8 million for the year ended December 31, 1998.
Such net losses resulted principally from two factors: product introduction
issues and a disruption in its sales force. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations--WRC Media and its Subsidiary (CompassLearning)."
NO PRIOR OPERATIONS AS AN INDEPENDENT COMPANY--WE DO NOT HAVE A HISTORY OF
OPERATING AS AN INDEPENDENT COMPANY AND WE MAY NOT ACHIEVE THE ANTICIPATED COST
SAVINGS OF OPERATING INDEPENDENTLY.
Our business plan anticipates that we will have the ability to operate our
subsidiaries with lower costs than the management overhead allocated by PRIMEDIA
prior to the consummation of the transactions described under "Transactions."
These potential annualized cash cost savings are reflected as adjustments in the
unaudited pro forma consolidated financial information in this prospectus. See
"Unaudited Pro Forma Consolidated Financial Information." Actual cost savings,
to the extent realized, may vary considerably, or be considerably delayed,
compared to the estimates described in this prospectus. The potential cost
savings are based on analyses completed by members of our management. Such
analyses involve assumptions as to future events, including:
- general business and industry conditions;
- competitive factors;
- local labor markets; and
- labor productivity.
24
Many of these factors are beyond our control and may not materialize. While we
believe these analyses and underlying assumptions to be reasonable, there could
be unforeseen factors that may offset the estimated cost savings or other
components of our business plan in whole or in part.
BUSINESS STRATEGY--WE MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO IMPLEMENT
OUR BUSINESS STRATEGY.
Our future financial performance and success are largely dependent on our
ability to successfully implement our business strategy. We cannot assure the
holders of the notes and the senior preferred stock that the implementation of
the business strategy we describe in this prospectus will be successful or that
it will improve our operating results. In particular, we cannot assure the
holders of the notes and the senior preferred stock that:
- we will be able to capitalize on any growth in the supplemental education
materials market;
- extend our brand names into new markets;
- expand our electronic delivery capabilities; or
- successfully cross-sell our products in different distribution channels.
Furthermore, any growth through acquisition or investment will depend upon our
identification of suitable acquisition or investment candidates and our
successful consummation of such transactions on favorable terms. Such
acquisitions and investments may require additional funding which may be
provided in the form of additional debt or equity financing or a combination
thereof. We cannot assure the holders of the notes and the senior preferred
stock that any such additional financing will be available to us on acceptable
terms. In addition, we cannot assure the holders of the notes and the senior
preferred stock that we will be permitted under the senior credit facilities (or
any replacement thereof) or under the terms of the notes indenture to obtain
such financing for such purposes. Moreover, such additional indebtedness may
reduce our liquidity and financial flexibility. Other risks include:
- integrating acquisitions into our business, which would require members of
management to divert their time and resources away from our existing
operations;
- the increasing demands on our operational systems;
- adverse effects on our reported operating results;
- the loss of key employees; and
- the difficulty of presenting a unified corporate image.
See "--History of Net Losses," "--Competition," "Business--Business Strategy,"
"Description of Senior Credit Facilities" and "Description of New
Notes--Material Covenants."
We base our business strategy in part on our assumptions about future demand
for our current products and the new products we are developing, as well as on
our ability to continue to produce our products profitably and to adapt to
changes in our markets. Each of these assumptions could be affected by a number
of factors beyond our control, including:
- trends in the supplemental education materials market;
- increased competition;
- pricing pressures;
- legal developments;
- general economic conditions; or
- increased operating costs or expenses.
25
For example, our strategy to expand our electronic delivery capabilities could
be adversely affected by trends in the industry as products in the supplemental
education materials market increasingly move toward an Internet-based delivery
mechanism. Our experience in electronic delivery of courseware is primarily in
networked environments and not over the Internet. In addition, our strategy to
capitalize on any growth in the supplemental education materials market may be
adversely affected by increased competition in so far as growth in the market
may come in segments which are not currently the focus of our product portfolio
but are the focus of one or more of our competitors' products. This type of
growth would necessitate the expansion of our existing product lines or the
development of new products.
Failure to successfully implement our business strategy may adversely affect
our ability to service our indebtedness, including our ability to:
- make principal and interest payments on the notes; and
- pay cash dividends on the senior preferred stock.
We may, in addition, decide to alter or discontinue aspects of our business
strategy at any time.
INCREASES IN PAPER PRICES OR POSTAGE COSTS--OUR BUSINESS MAY BE ADVERSELY
AFFECTED BY INCREASES IN PAPER PRICES OR IN POSTAGE COSTS.
The price of paper is a significant expense of ours relating to our print
products and direct mail solicitations. The price of paper rose dramatically in
1995 and significantly affected our operating income and continues to experience
moderate increases. Postage for product distribution and direct mail
solicitation is also a significant expense for us. We generally use the United
States Postal Service or the United Parcel Service. Postage costs increase
periodically and can be expected to increase in the future. If paper or postage
prices increase significantly and we are unable to pass such increased costs on
to our customers, any such increases could have a material adverse effect on our
business, financial condition and results of operations. We cannot assure the
holders of the notes and the senior preferred stock that we can pass such paper
or postage cost increases through to our customers.
CUSTOMER PURCHASING POWER--MANY OF OUR CUSTOMERS DEPEND ON VARIOUS SOURCES OF
GOVERNMENT FUNDING AND A REDUCTION IN THIS FUNDING COULD ADVERSELY AFFECT US.
Most of our customers make purchases of our products with monies received
from various sources of governmental funding, including Federal, state and local
governments. Although we believe most of our customers are not dependent on a
single source of funding, any reduction in governmental funding earmarked for
education could have a material adverse effect on us.
COMPETITION--WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
The supplemental education materials market is highly competitive and each
of our operating companies faces significant competition within its particular
field of product offerings. In each case, several of our competitors are larger,
with greater financial and other resources, and have more prominent brand names.
Competition from each of our competitors has increased over the past several
years, and we expect it to continue to increase. In addition, our strategy to
capitalize on any growth in the supplemental education materials market may be
adversely affected to the extent that growth occurs in segments that are not
currently the focus of our product portfolio, necessitating the expansion of our
existing product lines or the development of new products. In this respect, we
may be at a competitive disadvantage with entities that already offer such
products, are able to develop new products faster or have superior products.
26
In addition, the environment in which we conduct our business is rapidly
evolving. There is a trend towards offering certain supplemental education
materials in an electronic format and in particular over the Internet. We are
likely to see new competitors emerge, increasing competition for customers and
increasing price pressure for our products, particularly from Internet-based
products. Our experience in the electronic delivery of courseware is primarily
in networked environments and not over the Internet. Our failure to adapt to new
technology or delivery methods, or our choice of one technological innovation
over another, may have an adverse impact on our ability to compete for new
customers or meet demands of our existing customers. Therefore, should one or
more of our competitors formulate a business plan to offer supplemental
educational materials to students through the Internet or other media and we
fail to effectively respond, our business, financial condition or results of
operations could suffer a material adverse effect.
Competition from each of our competitors has increased over the past several
years and we expect it to continue to increase. Weekly Reader's primary
competitors are Scholastic Inc. and Time, Inc. Weekly Reader's percentage of the
total circulation of classroom periodicals offered by these three major
publishers of classroom periodicals declined when Time, Inc. expanded the size
of the classroom periodicals market, and captured essentially all of this
expansion of the market, as well as certain existing purchasers of classroom
periodicals, by introducing TIME FOR KIDS in 1995. For additional information
concerning our competitors, including CompassLearning's, American Guidance's and
World Almanac's competitors, see "Business--Competition."
SEASONALITY--OUR BUSINESS IS SEASONAL AND SEASONAL FLUCTUATIONS MAY ADVERSELY
AFFECT US.
Our operating results have varied and are expected to continue to vary from
quarter to quarter as a result of seasonal patterns. Weekly Reader's and
CompassLearning's sales are significantly affected by the school year. Weekly
Reader's sales in the third, and to a lesser extent the fourth, quarter are
typically the strongest as products are shipped in connection with the start of
the school year. CompassLearning's sales are typically strongest in the second
quarter, and to a lesser extent the fourth quarter. CompassLearning's sales are
generally strongest in the second quarter because schools frequently couple
funds from two budget years, which typically end on June 30 of each year, to
make significant purchases, such as purchases of CompassLearning's electronic
courseware, and because by purchasing in the second quarter, schools are able to
have the software products that they purchase installed over the summer and
ready to train teachers when they return from summer vacation. CompassLearning's
fourth quarter sales are strong as a result of sales patterns driven in part by
its commissioned sales force seeking to meet year end sales goals as well as by
schools purchasing software to be installed in time for teachers to be trained
prior to the end of the school year in June. We cannot assure the holders of the
notes and the senior preferred stock that seasonal and quarterly fluctuations
will not have a material adverse effect on our business, financial condition or
results of operations in the future.
DEPENDENCE ON INTELLECTUAL PROPERTY--WE DEPEND UPON BEING ABLE TO USE OUR
LICENSED INTELLECTUAL PROPERTY AND PROTECT OUR OWNED INTELLECTUAL PROPERTY.
DISRUPTIONS OF THE USE OF THIS INTELLECTUAL PROPERTY AND THE CONTRACTUAL
REQUIREMENTS THAT WE TERMINATE THE USE OF THE INTELLECTUAL PROPERTY DESCRIBED
BELOW COULD ADVERSELY AFFECT US.
We rely on copyrights and, in some cases, trademarks to protect our
products. Effective trademark and copyright protection may be unavailable or
limited, or may not be applied for, in the United States. In addition, we have
been, and may in the future be, notified of claims that our products may be
infringing on trademarks, copyrights or other intellectual property rights of
others. Such claims, including any litigation with respect to those claims,
could result in significant expense to us and adversely affect our sales of the
relevant products, whether or not such litigation is resolved in our favor.
In connection with WRC Media's acquisition of CompassLearning,
CompassLearning was granted an exclusive license to use certain trademarks owned
by Jostens, Inc., the former parent company of
27
CompassLearning, including "Jostens Learning" and "Jostens Learning
Corporation." We believe that our right to use these trademarks provides us with
a competitive advantage. However, pursuant to the terms of the license
agreement, our right to use these trademarks expires on December 31, 2000.
As a result, as of January 24, 2000, we changed the name of JLC Learning
Corporation to
CompassLearning, Inc. (which we refer to throughout this prospectus as
CompassLearning). Our decision to change the name of CompassLearning, Inc. and
inability to use these trademarks after that date may adversely affect our
business.
From 1991 until November 1999, Weekly Reader and World Almanac were owned by
PRIMEDIA. Subsequent to its acquisition in 1998 and through November 1999,
American Guidance was owned by PRIMEDIA. Although each of Weekly Reader, World
Almanac and American Guidance has maintained its own brands during its ownership
by PRIMEDIA and will continue to retain these brands, Weekly Reader and World
Almanac have previously used the "PRIMEDIA" name in various promotional and
other materials. Under the recapitalization agreement with PRIMEDIA described
under "Transactions," we must cease any use of PRIMEDIA's name in connection
with Weekly Reader's, World Almanac's and American Guidance's ongoing operations
as soon as reasonably practicable, but no later than May 17, 2000. As a result,
we changed the name of PRIMEDIA Reference Inc., to World Almanac Education
Group, Inc. on December 23, 1999 (which we refer to throughout this prospectus
as "World Almanac"). The businesses of each of Weekly Reader, World Almanac and
American Guidance could be materially adversely affected by ceasing to be a part
of PRIMEDIA's operations and being prohibited from using PRIMEDIA's name in
their promotional materials or otherwise.
DEPENDENCE ON KEY MANAGEMENT AND HIGHLY-SKILLED PERSONNEL--WE DEPEND ON OUR
ABILITY TO RETAIN OUR SENIOR MANAGEMENT AND TO RECRUIT AND RETAIN KEY PERSONNEL,
AND ANY FAILURE TO RETAIN SUCCESSFULLY AND RECRUIT SUCH MANAGEMENT OR PERSONNEL
COULD ADVERSELY AFFECT US.
We believe that our success depends on our ability to retain our senior
management team, including, in particular, Martin E. Kenney, Jr., our Chief
Executive Officer. Our business will be managed by a small group of key
executive officers. The loss of services of Mr. Kenney or one or more of these
senior executives could adversely affect our ability to effectively manage our
overall operations or successfully execute current or future business
strategies. We have entered into employment agreements with several of our top
executives, including Mr. Kenney. See "Management."
In addition, our success depends on our continued ability to recruit and
retain highly skilled, knowledgeable and sophisticated technical, managerial,
sales and professional personnel. Competition for highly skilled personnel to
create our supplemental instructional materials and assessment products, and, in
particular, our electronically delivered and Internet-based supplemental
education materials, is intense. Accordingly, we cannot assure the holders of
the notes and the senior preferred stock of our ongoing ability to attract and
retain such qualified employees.
OWNERSHIP OF WRC MEDIA AND ITS SUBSIDIARIES--THE INTERESTS OF OUR CONTROLLING
STOCKHOLDER MAY CONFLICT WITH THE INTERESTS OF THE HOLDERS OF THE NOTES AND THE
SENIOR PREFERRED STOCK.
After consummation of the transactions described under "Transactions,"
Ripplewood Holdings L.L.C., through its beneficial ownership of our common stock
and the rights granted to it under certain shareholder agreements and the
limited liability company agreement of EAC III L.L.C., owns approximately 73.3%
of our voting equity, and has effective control of us by virtue of its ability
to elect the majority of our directors and the directors of our subsidiaries, to
approve any action requiring the approval of our stockholders, such as
amendments to our charter documents, and to effect fundamental corporate
transactions such as mergers and certain asset sales. The interests of
Ripplewood Holdings L.L.C. as a stockholder may differ from the interests of the
holders of the senior preferred stock and the notes. See "Ownership of Stock."
In addition, Ripplewood Holdings L.L.C. may in the future make significant
investments in other education-based companies. Some of these companies may be
our competitors. Ripplewood Holdings
28
L.L.C. and its affiliates are not obligated to advise us of any investment or
business opportunities of which they are aware.
INABILITY TO REPURCHASE THE NOTES PRIOR TO OR AT MATURITY OR TO REDEEM THE
SENIOR PREFERRED STOCK PRIOR TO OR AT MATURITY--WE MAY BE UNABLE TO MAKE A
CHANGE OF CONTROL OFFER OR AN ASSET SALE OFFER WHEN REQUIRED BY THE CERTIFICATE
OF DESIGNATIONS RELATING TO THE SENIOR PREFERRED STOCK OR THE NOTES INDENTURE
BECAUSE OF PROHIBITIONS IN THE SENIOR CREDIT FACILITIES AND THE NOTES INDENTURE.
If we experience certain changes of control:
- holders of the notes will have the right to require us to repurchase the
notes at a purchase price equal to 101% of the principal amount of the
notes plus accrued and unpaid interest and liquidated damages; or
- to the extent WRC Media has legally available funds for such payment and
to the extent permitted by the notes indenture, WRC Media must offer to
redeem any and all shares of senior preferred stock then outstanding in
cash.
In addition, if we make certain asset sales, we may be required to repurchase
some or all of the notes at a purchase price in cash equal to 100% of the
principal amount of the notes plus accrued and unpaid interest and liquidated
damages. However, we are prohibited by the senior credit facilities from
repurchasing any notes or redeeming any shares of senior preferred stock. The
senior credit facilities also provide that certain change of control events and
asset sales with respect to us constitute a default under the senior credit
facilities. We may also become a party to, or guarantor under, future credit
agreements or other agreements relating to senior indebtedness that contain
similar restrictions or provisions.
If we experience certain changes of control or make certain asset sales when
we are prohibited from repurchasing notes or redeeming senior preferred stock,
we could seek the consent of the lenders under the senior credit facilities to
purchase the notes or redeem the senior preferred stock or could attempt to
refinance the borrowings that contain such a prohibition. If we do not obtain
such consent and do not refinance such borrowings, we would remain prohibited
from purchasing the notes or redeeming the senior preferred stock. In such case,
our failure to purchase tendered notes would constitute a default under the
notes indenture. This in turn, could result in amounts outstanding under the
senior credit facilities and other senior indebtedness being declared due and
payable. Any such declaration could have adverse consequences to both the
holders of the notes and the senior preferred stock as well as us. If we
experience certain changes of control or make certain asset sales, we cannot
assure the holders of the notes and the senior preferred stock that we would
have sufficient funds to satisfy all of our obligations under the senior credit
facilities, the notes and the senior preferred stock. If a default occurs with
respect to any senior indebtedness, the subordination provisions of the notes
would likely restrict payments to the holders of the notes and the senior
preferred stock. The provisions relating to a change of control included in the
notes indenture or the certificate of designations relating to the senior
preferred stock may increase the difficulty of a potential acquiror obtaining
control of us. See "Description of Senior Credit Facilities," "Description of
New Notes--Repurchase at the Option of Holders--Change of Control" and
"Description of New Notes--Repurchase at the Option of Holders--Asset Sales."
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FRAUDULENT CONVEYANCE MATTERS--UNDER FEDERAL AND STATE STATUTES, UNDER SPECIFIC
CIRCUMSTANCES, A COURT MAY VOID OUR OBLIGATIONS AND A NOTE GUARANTOR'S
OBLIGATIONS TO THE HOLDERS OF THE NOTES WITH RESPECT TO THE NOTES AND REQUIRE
THE RETURN OF CERTAIN PAYMENTS RECEIVED FROM US OR THE NOTE GUARANTORS BY THE
HOLDERS OF THE NOTES.
Under Federal bankruptcy law and comparable provisions of state fraudulent
transfer laws, a note or note guarantee could be voided, or claims in respect of
a note or note guarantee could be subordinated to all other debts of any of the
issuers of the notes or the applicable note guarantor if, among other things,
such issuer or note guarantor, at the time the indebtedness represented by the
old notes or the applicable note guarantee was incurred:
- incurred such indebtedness with the intent to hinder, delay or defraud
creditors; or
- received less than reasonably equivalent value or fair consideration for
the incurrence of such indebtedness; and
- was insolvent or rendered insolvent because of such incurrence; or
- was engaged or about to engage in a business or transaction for which its
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
In addition, any payment by any of the issuers of the notes pursuant to the
terms of the notes or by a note guarantor pursuant to its note guarantee could
be voided and required to be returned to such issuer or note guarantor, or to a
fund for the benefit of such issuer's or note guarantor's creditors.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a person would be
considered insolvent if:
- the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of all of its assets; or
- if the present fair saleable value of its assets were less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
- it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, we believe that each issuer and each note guarantor, after
giving effect to the indebtedness incurred in connection with the transactions
described under "Transactions," will:
- not be insolvent;
- not have unreasonably small capital for the business in which it is
engaged; and
- not have incurred debts beyond its ability to pay such debts as they
mature.
We cannot assure the holders of the notes, however, as to what standard a court
would apply in making such determinations or that a court would agree with our
conclusions in this regard.
Moreover, although the note guarantees provide the holders of the notes with
a direct claim against the assets of the note guarantors, enforcement of the
note guarantees against any note guarantor may be subject to a legal challenge
in a bankruptcy or reorganization case or a lawsuit by or on behalf of creditors
of such note guarantor and would be subject to certain defenses available to
guarantors generally. Although the notes indenture contains waivers of most
guarantor defenses, certain of those waivers may not be enforced by a court in a
particular case. To the extent that the note guarantees are not enforceable, the
notes would be effectively subordinated to all liabilities of the note
guarantors, including trade payables, whether or not such liabilities constitute
senior debt under the notes indenture.
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THERE IS NO PRIOR MARKET FOR THE SECURITIES--HOLDERS OF THE NEW NOTES AND THE
NEW SENIOR PREFERRED STOCK CANNOT BE SURE THAT AN ACTIVE TRADING MARKET WILL
DEVELOP FOR THE NEW NOTES OR THE NEW SENIOR PREFERRED STOCK. IF AN ACTIVE
TRADING MARKET FOR THE NEW NOTES OR THE NEW SENIOR PREFERRED STOCK DOES NOT
DEVELOP, THE LIQUIDITY AND VALUE OF THE SECURITIES COULD BE HARMED.
The securities are new securities for which there is currently no trading
market. This exchange offer is not conditioned on any minimum or maximum
aggregate principal amount of old notes and the number of old senior preferred
stock being tendered for exchange. Although Donaldson, Lufkin & Jenrette
Securities Corporation and Banc of America Securities LLC have advised us that
they currently intend to make a market in the new notes, they are not obligated
to do so and they may cease any market-making at any time without notice. In
addition, such market making activity may be limited during the pendency of the
exchange offer for the notes or the effectiveness of a shelf registration
statement in lieu thereof. Accordingly, we cannot assure the holders of the new
notes and the new senior preferred stock as to the development or liquidity of
any market for the new notes and the new senior preferred stock. We do not
intend to apply for listing of the new notes or the new senior preferred stock
on any securities exchange or interdealer quotation system.
ORIGINAL ISSUE DISCOUNT--THE NOTES WILL BE CONSIDERED TO BE ISSUED WITH ORIGINAL
ISSUE DISCOUNT, WHICH MAY RESULT IN THE CREATION OF TAXABLE INTEREST INCOME FOR
THE HOLDERS AND MAY LIMIT THE HOLDERS' CLAIMS IN THE EVENT OF A BANKRUPTCY.
The notes will be considered to be issued with original issue discount for
U.S. Federal income tax purposes. Original issue discount is the difference
between the stated redemption price at maturity of the notes and the issue price
of the notes and will accrue from the issue date of the notes and generally will
be includable as interest income in the holder's gross income for U.S. Federal
income tax purposes in advance of the cash payments to which the income is
attributable. For a more detailed discussion of the U.S. Federal income tax
consequences to the holders of the notes of the exchange, ownership and
disposition of such notes, see "Certain U.S. Federal Tax Considerations."
If a bankruptcy case is commenced by or against us under Federal bankruptcy
law after the issuance of the notes, the claim of a holder of any of the notes
with respect to the principal amount thereof may be limited to an amount equal
to the sum of:
(1) the initial offering price allocable to the notes; and
(2) the portion of original issue discount which is not deemed to constitute
"unmatured interest" for purposes of Federal bankruptcy law.
Any original issue discount that was not amortized as of any such bankruptcy
filing would constitute "unmatured interest."
CERTAIN TAX CONSIDERATIONS FOR THE SENIOR PREFERRED STOCK--HOLDERS OF THE SENIOR
PREFERRED STOCK WILL HAVE TO RECOGNIZE INCOME IN ADVANCE OF THEIR RECEIPT OF THE
CASH ATTRIBUTABLE TO SUCH INCOME.
Because the redemption price of the senior preferred stock exceeds its issue
price by more than a DE MINIMIS amount, a holder of the senior preferred stock
will be required to treat such excess as a series of constructive distributions
over the term of the senior preferred stock notwithstanding that the cash
attributable to such excess will not be received by the holder until a
subsequent period.
In the case of a distribution on the senior preferred stock that is paid in
the form of additional shares of the senior preferred stock ("additional
preferred shares," each, individually, an "additional preferred share"), the
fair market value of the additional preferred shares on the distribution date
will be taxable for U.S. Federal income tax purposes in the same manner as a
cash distribution on the distribution date notwithstanding that the cash
attributable to such distribution will not be received by the holder until a
subsequent period. In addition, if the redemption price of an additional
preferred share exceeds the issue price of such share by more than a DE MINIMIS
amount, then a holder thereof
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would be required to treat such excess as a series of constructive distributions
over the term of the additional preferred share as described under the rules
above. For a more detailed discussion of the U.S. Federal income tax
consequences to the holders of the senior preferred stock of the exchange,
ownership and disposition of such preferred stock, see "Certain U.S. Federal Tax
Considerations."
YEAR 2000 COMPLIANCE PROBLEMS COULD AFFECT OUR BUSINESS--IF WE FAIL TO RESOLVE
POTENTIAL YEAR 2000 PROBLEMS IN A TIMELY MANNER, WE COULD EXPERIENCE SIGNIFICANT
BUSINESS DISRUPTIONS.
We cannot assure the holders of the notes and the senior preferred stock
that our Year 2000 program or the programs of third parties who do business with
us has been effective. To date, we have not experienced any problem in light of
Year 2000 information processing issues. To our knowledge, all products and
services were provided through January 1, 2000 without any interruption or loss.
However, it is still too early to assess whether we will experience any of the
potential Year 2000 information processing problems. Significant Year 2000
information processing problems which may yet be encountered by us or certain of
our customers or suppliers could have an adverse effect on our business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Risk."
The Year 2000 issue is the result of computer programs that were written
using only two digits, rather than four, to represent a year. Date-sensitive
software or hardware may not be able to distinguish between the years 1900 and
2000 and programs that perform arithmetic operations, comparisons or sorting of
date fields may begin yielding incorrect results. This could potentially cause a
system failure or miscalculations.
Our operations may be affected by Year 2000-related risks resulting from:
- noncompliance in our own products or facilities;
- noncompliance in hardware and software systems used in conjunction with
our products or interacting with our products; or
- noncompliance in the products or services of significant suppliers of
goods and services.
Such Year 2000-related defects could result in disruption in our operations,
damage to our reputation, possible litigation and significant losses in revenue,
all or any of which could have a significant adverse effect on our future
results of operations, financial position or cash flow.
The majority of CompassLearning's products and some of World Almanac's
computer-based products operate in complex computer networked environments and
directly or indirectly interact with a number of our customers' or potential
customers' hardware and software systems. Furthermore, some of CompassLearning's
computer-based products are designed to operate in conjunction with hardware and
software systems designed by third parties, such as Apple and Novell. These
third-party hardware and software systems may contain errors or defects
associated with Year 2000 date functions. We are presently unable to predict to
what extent our business may be affected if such third-party hardware or
software systems contain errors or defects associated with Year 2000 date
functions.
In addition, all of our products and operations are subject to Year
2000-related risks that may be caused by the noncompliance of the products or
services of third-party suppliers. We rely on a broad range of suppliers to
deliver goods and services such as:
- utilities;
- pre-press operations;
- printing services;
- paper;
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- wholesale distribution;
- mailings; and
- banking services.
Although we have communicated with suppliers, financial institutions and other
third parties we do business with to obtain reasonable assurance that their
products and services were Year 2000 compliant, we cannot assure the holders of
the notes and the senior preferred stock that their responses are reliable or
that the Year 2000 compliance programs of such third parties were effective or
completed by December 31, 1999.
Although we believe, based on efforts to date, that our products and
facilities will be substantially Year 2000 ready, any inability to remedy
unforeseen Year 2000 problems or the failure of third parties to do so may
cause:
- business interruptions or shutdown;
- financial loss;
- regulatory actions;
- reputational harm; or
- legal liability.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
In connection with the sale of the old notes, we entered into a registration
rights agreement with Donaldson, Lufkin & Jenrette Securities Corporation and
Banc of America Securities LLC under which we agreed to file with the Securities
and Exchange Commission an exchange offer registration statement with respect to
the exchange of the old notes for a series of registered notes with
substantially identical terms as the old notes. The new notes, however, will not
contain terms with respect to transfer restrictions and will not require us to
consummate a registered exchange offer. In the event the exchange offer for the
old notes is completed, we will not be required to register the remaining old
notes unless holders are entitled to shelf registration rights under the
circumstances described under "Registration Rights--The Notes."
In connection with the sale of the old senior preferred stock, we entered
into a senior preferred stockholders agreement with DLJ Merchant Banking
Partners II, L.P. and the other parties signatory thereto under which we agreed
to file with the Securities and Exchange Commission an exchange offer
registration statement with respect to the exchange of the old senior preferred
stock for registered senior preferred stock with identical terms as the old
senior preferred stock, except that the new senior preferred stock will not
contain terms with respect to transfer restrictions and will not require us to
consummate a registered exchange offer. Even if the exchange offer for the old
senior preferred stock is consummated, holders of old senior preferred stock
may, under the circumstances described under "Registration Rights," be entitled
pursuant to the senior preferred stockholders agreement, to demand registration
of the senior preferred stock on two occasions and to request registration
incident to any planned registration of WRC Media capital stock. In the event
the exchange offer for the old senior preferred stock is completed, except as
described in the previous sentence, we will not be required to register the
remaining old senior preferred stock.
We are making the exchange offer in reliance on the position of the
Securities and Exchange Commission as stated in previous no-action letters.
However, we have not sought our own no-action letter. Based upon this position,
we believe that a holder who exchanges the old notes for the new notes or the
old senior preferred stock for the new senior preferred stock in the exchange
offer generally may offer for resale, sell and otherwise transfer the new notes
or the new senior preferred stock without further registration under the
Securities Act of 1933 and without delivery of a prospectus that satisfies the
requirements of section 10 of the Securities Act of 1933 if the conditions
listed in the next sentence are satisfied. A holder who wishes to participate in
the exchange offer must:
- not be an "affiliate" of ours, as that term is defined in Rule 405 of the
Securities Act of 1933;
- acquire the new notes or the new senior preferred stock in the ordinary
course of business; and
- not participate, not intend to participate and have no arrangement or
understanding with any person to participate in a distribution of the new
notes or the new senior preferred stock.
Any holder of the old notes or the old senior preferred stock using the
exchange offer to participate in a distribution of the new notes or the new
senior preferred stock cannot rely on the no-action letters referred to above.
This includes a broker-dealer that acquired the old notes or the old senior
preferred stock directly from us, but not as a result of market-making
activities or other trading activities. Consequently, the holder must comply
with the registration and prospectus delivery requirements of the Securities Act
of 1933 and the applicable state securities laws in the absence of an exemption
from such requirements.
Each broker-dealer that receives new notes or new senior preferred stock for
its own account in exchange for old notes or old senior preferred stock, as a
result of market-making activities or other trading activities, must represent
and acknowledge pursuant to the applicable letter of transmittal that
34
it will deliver a prospectus in connection with any resale of such new notes or
new senior preferred stock. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes or new senior preferred stock received in exchange for
old notes or old senior preferred stock where such old notes or old senior
preferred stock were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The applicable letter of transmittal
states that by acknowledging that it will deliver and delivering a prospectus in
connection with any resale of new notes or new senior preferred stock, a
broker-dealer will not be considered to admit that it is an "underwriter" within
the meaning of the Securities Act of 1933. We have agreed that for a period of
one year after the expiration date, we will make this prospectus available to
broker-dealers for use in connection with any such resale. See "Plan of
Distribution."
Except as described above, this prospectus may not be used for an offer to
resell, resale or other retransfer of new notes or new senior preferred stock.
The exchange offer is not being made to, nor will we accept tenders for
exchange from, holders of old notes or old senior preferred stock in any
jurisdiction in which the exchange offer or the acceptance of it would not be in
compliance with the securities or blue sky laws of such jurisdiction.
TERMS OF THE EXCHANGE
Upon the terms and subject to the conditions of the exchange offer, we will,
unless such old notes or old senior preferred stock are withdrawn in accordance
with the withdrawal right specified in "Withdrawal of Tenders" below, accept any
and all old notes and old senior preferred stock validly tendered prior to
5:00 p.m., New York City time, on , 2000. The date of acceptance for
exchange of the old notes and the old senior preferred stock, and completion of
the exchange offer, is the exchange date, which will be the first business day
following the expiration date (unless extended as described in this document).
We will issue, on, or promptly after, the exchange date:
- an aggregate principal amount of up to $152,000,000 of new notes in
exchange for an equal principal amount of outstanding old notes tendered
and accepted in connection with the exchange offer; and
- an aggregate of up to 3,000,000 shares of new senior preferred stock for
an equal number of outstanding shares of old senior preferred stock
tendered and accepted in connection with the exchange offer.
The new notes and the new senior preferred stock issued in connection with the
exchange offer will be delivered on the earliest practicable date following the
exchange date. Holders may tender some or all of their old notes or old senior
preferred stock in connection with the exchange offer. However, old notes may be
tendered only in integral multiples of $1,000 and the old senior preferred stock
may not be tendered in fractional shares.
Holders of old notes and old senior preferred stock do not have any
appraisal or dissenters' rights in connection with the exchange offer.
TERMS OF NEW NOTES AND NEW SENIOR PREFERRED STOCK
The new notes will have terms substantially identical to the terms of the
old notes. The new notes will not contain terms with respect to transfer
restrictions and will not require us to consummate a registered exchange offer.
Except as described in the previous sentence, the new notes will evidence the
same debt as the old notes and will be entitled to the same benefits under the
notes indenture as the old notes. As of the date of this prospectus,
$152,000,000 aggregate principal amount of the old notes is outstanding. See
"Description of New Notes."
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The new senior preferred stock will have terms substantially identical to
the terms of the old senior preferred stock. The new senior preferred stock will
not contain terms with respect to transfer restrictions and will not require us
to consummate a registered exchange offer. Except as described in the previous
sentence, the new senior preferred stock will evidence the same rights and
obligations as the old senior preferred stock and will be entitled to the same
benefits under the preferred stockholders agreement and the certificate of
designations relating to the senior preferred stock as the old senior preferred
stock. As of the date of this prospectus, 3,000,000 shares of old senior
preferred stock are outstanding. See "Description of New Senior Preferred
Stock."
METHOD OF EXCHANGE
In connection with the issuance of the old notes, we have arranged for the
old notes originally purchased by qualified institutional buyers to be issued in
the form of global notes and transferable in book-entry form through the
facilities of The Depository Trust Company (the "DTC"), acting as depositary.
Except as described under "Book-Entry, Delivery and Form," the new notes will be
issued in the form of a global note registered in the name of DTC or its nominee
and each holder's interest in it will be transferable in book-entry form through
DTC. See "Book-Entry, Delivery and Form."
In connection with the issuance of the old senior preferred stock, we have
arranged for the old senior preferred stock to be issued in certificated form
and transferable through physical delivery.
TENDER AND ACCEPTANCE
We shall be considered to have accepted validly tendered old notes and old
senior preferred stock if and when we have given oral or written notice to the
exchange agent. The exchange agent will act as agent for the tendering holders
for the purposes of receiving the new notes and the new senior preferred stock
from us. The exchange agent will make the exchange promptly on the date of
acceptance for exchange of the old notes and the old senior preferred stock.
This exchange date will be the first business day following the expiration date
(unless extended as described in this document). The exchange shall be deemed to
be effected immediately after the close of business on this exchange date and,
as a result, the holders in whose names the new notes and the new senior
preferred stock shall be issuable upon exchange shall be deemed to be the
holders of record of the new notes and the new senior preferred stock.
If we do not accept any tendered old notes and old senior preferred stock
for exchange because:
- the notes or the senior preferred stock were not validly tendered pursuant
to the procedures for tendering; see "--Procedures for Tendering;"
- we determine in our reasonable discretion, that any of the conditions to
the exchange offer have not been satisfied; see "--Conditions to the
Exchange Offer;"
- a holder has validly withdrawn a tender of old notes or old senior
preferred stock as described under "--Withdrawal of Tenders;" or
- we have, in our reasonable judgment, delayed or terminated the exchange
offer; see "--Expiration Date; Extensions; Amendments;"
as quickly as possible after the expiration date, we will:
- return certificates for such unaccepted old senior preferred stock and any
old notes held in certificated form, without expense, to the tendering
holder; and
- cause a financial institution that participates in DTC's book-entry
transfer facility system to make a book-entry delivery of the old notes
which have been tendered in book-entry form into
36
the account from which the notes were originally transferred, without
expense to the tendering holders.
Pursuant to such delivery, DTC will credit the old notes back into the account
from which the notes were originally transferred. See "--Procedures for
Tendering" for a more complete description of how to tender your old notes and
old senior preferred stock.
Old notes which are not tendered for exchange or are tendered but not
accepted in connection with the exchange offer will remain outstanding and be
entitled to the benefits of the notes indenture, but will not be entitled to any
future registered exchange offer under the registration rights agreement.
Holders of any old notes after expiration of the exchange offer may be entitled
to shelf registration rights under the circumstances described under
"Registration Rights." Old senior preferred stock which is not tendered for
exchange or is tendered but not accepted in connection with the exchange offer
will remain outstanding and be entitled to the benefits of the senior preferred
stockholders agreement and the certificate of designations relating to the
senior preferred stock, but will not be entitled to any future registered
exchange offer. Holders of such old senior preferred stock may, under the
circumstances described under "Registration Rights," be entitled pursuant to the
senior preferred stockholders agreement to demand registration of the old senior
preferred stock on two occasions and to request registration incidental to any
planned registration of WRC Media capital stock. In the event the exchange offer
for the old senior preferred stock is completed, except as described in the
previous sentence, we will not be required to register the remaining old senior
preferred stock.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The expiration date for the exchange offer is , 2000 (30 days
following the commencement of the exchange offer), unless extended by us in our
sole discretion, in which case the term "expiration date" shall mean the latest
date and time to which the exchange offer is extended.
We reserve the right, in our sole discretion:
- to delay, to extend or to terminate the exchange offer if, in our
reasonable judgment, any of the conditions described below shall not have
been satisfied, by giving oral or written notice of the delay, extension
or termination to the exchange agent; or
- to amend the terms of the exchange offer in any manner deemed by us to be
advantageous to the holders of the old notes or the old senior preferred
stock.
If we amend the exchange offer in a manner that we consider material, we
will:
- disclose such amendment by means of a prospectus supplement; and
- extend the exchange offer for a period of five to ten business days,
depending upon the significance of the amendment and the manner of
disclosure to the registered holders, if the exchange offer would
otherwise expire during such five to ten business day period.
If we determine to make a public announcement of any delay, extension,
amendment or termination of the exchange offer, we will do so by making a timely
release through an appropriate news agency.
CONDITIONS TO THE EXCHANGE OFFER
Despite any other term of the exchange offer, we will not be required to
accept for exchange any old notes or old senior preferred stock and may
terminate or amend the exchange offer before the acceptance of the old notes or
the old senior preferred stock, if:
- the exchange offer is not permitted by applicable law or rules,
regulations or policies of the Securities and Exchange Commission; or
37
- the exchange offer would impair or interfere with, in any material
respect, any contemplated financing, acquisition, disposition, corporate
reorganization or other similar material corporate transaction involving
WRC Media or any subsidiary.
The conditions listed above are for our sole benefit and may be asserted by
us regardless of the circumstances giving rise to any of these conditions. We
may waive these conditions in our sole discretion in whole or in part at any
time and from time to time. The failure by us at any time to exercise any of the
above rights shall not be considered a waiver of such right and such right shall
be considered an ongoing right which may be asserted at any time and from time
to time.
We have no obligation to, and will not knowingly, permit acceptance of
tenders of old notes or old senior preferred stock:
- from our affiliates within the meaning of Rule 405 under the Securities
Act of 1933;
- from any other holder or holders who are not eligible to participate in
the exchange offer under applicable law or interpretations by the
Securities and Exchange Commission; or
- if the new notes or the new senior preferred stock to be received by such
holder or holders of old notes or old senior preferred stock in the
exchange offer, upon receipt, will not be tradable by such holder without
restriction under the Securities Act of 1933 and the Securities Exchange
Act of 1934 and without material restrictions under the "blue sky" or
securities laws of substantially all of the states of the United States.
If we determine in our reasonable discretion that any of the conditions are
not satisfied, we may:
- refuse to accept any old notes or old senior preferred stock and return
all tendered old notes or old senior preferred stock to the tendering
holders;
- extend the exchange offer and retain all old notes or old senior preferred
stock tendered before the expiration of the exchange offer, subject,
however, to the rights of holders to withdraw these old notes or old
senior preferred stock (See "--Withdrawal of Tenders" below); or
- waive unsatisfied conditions relating to the exchange offer and accept all
properly tendered old notes or old senior preferred stock which have not
been withdrawn.
PROCEDURES FOR TENDERING
VALID TENDER:
To tender old notes held in DTC global form, a holder of old notes must
cause a financial institution that participates in DTC's book entry transfer
facility system to make a book-entry delivery of the old notes. Pursuant to such
delivery, DTC will credit the old notes into the exchange agent's account.
Unless the transferring financial institution causes delivery to the exchange
agent, and the exchange agent receives, timely confirmation of the book-entry
transfer of the old notes into the exchange agent's account at DTC prior to
5:00 p.m., New York City time, on the expiration date, such transfer will not
constitute delivery to the exchange agent. DELIVERY OF DOCUMENTS TO DTC IN
ACCORDANCE WITH ITS PROCEDURES WITHOUT TIMELY CONFIRMATION TO THE EXCHANGE AGENT
DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. In addition, although
delivery of old notes held in DTC global form may be effected through book-entry
transfer into the exchange agent's account at DTC, a holder of old notes held in
DTC global form must, prior to 5:00 p.m., New York City time, on the expiration
date:
- mail or otherwise deliver a completed, signed and dated letter of
transmittal applicable to the old notes (or a facsimile), with the
required signature guarantees and any other required documents, to the
exchange agent at its addresses listed under the caption "--Exchange
Agent;" or
38
- cause DTC to transmit to the exchange agent a message stating that the
tendering holder has expressly acknowledged receipt of, and agreement to
be bound by and held accountable under, the applicable letter of
transmittal.
To receive confirmation of book-entry delivery, a holder should contact
financial institution that made the book-entry delivery of the old notes. In
addition, to receive confirmation of valid tender of the old notes, a holder
should contact the exchange agent at the telephone number listed under the
caption "--Exchange Agent."
A holder of old notes held in DTC global form may also tender pursuant to
the "Guaranteed Delivery Procedures" described below.
To tender old senior preferred stock and any old notes held in certificated
form, a holder must mail or otherwise deliver to the exchange agent at its
addresses listed under the caption "Exchange Agent" prior to 5:00 p.m., New York
City time, on the expiration date:
- a completed, signed and dated letter of transmittal on the form applicable
to the securities tendered (or a facsimile), with the required signature
guarantees; and
- certificates representing the old senior preferred stock and the old notes
held in certificated form and any other required documents.
A holder of old senior preferred stock and any old notes held in
certificated form may also tender pursuant to the "--Guaranteed Delivery
Procedures" described below.
To receive confirmation of valid tender of old senior preferred stock and
any old notes held in certificated form, a holder should contact the exchange
agent at the telephone number listed under the caption "--Exchange Agent."
Holders should receive copies of the applicable letter of transmittal with
this prospectus. A holder may obtain additional copies of the applicable letter
of transmittal for the old notes and the old senior preferred stock from the
exchange agent at its offices listed under the caption "--Exchange Agent." By
executing and delivering the applicable letter of transmittal, each holder of
old notes or old senior preferred stock will represent to us that, among other
things:
- any new notes or new senior preferred stock acquired in connection with
the exchange offer will be obtained in the ordinary course of business of
the person receiving the new notes or the new senior preferred stock,
whether or not such person is the holder;
- neither the holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution, within
the meaning of the Securities Act of 1933, of such new notes or new senior
preferred stock; and
- neither the holder nor any such other person is our "affiliate" (as
defined in Rule 405 under the Securities Act of 1933).
If a holder of old notes or old senior preferred stock is our "affiliate"
(as defined in Rule 405 under the Securities Act of 1933), or has an arrangement
or understanding with respect to the distribution of the new notes or the new
senior preferred stock to be acquired pursuant to the exchange offer, such
holder cannot rely on the applicable interpretations of the staff of the
Securities and Exchange Commission and must comply with the registration and
prospectus delivery requirement of the Securities Act of 1933 in connection with
any secondary resale transaction. If the holder is a broker-dealer which will
receive new notes or new senior preferred stock for its own account in exchange
of old notes or old senior preferred stock, it will acknowledge that it acquired
such old notes or old senior preferred stock as the result of market making
activities or other trading activities and it will deliver a prospectus in
connection with any resale of such old notes or old senior preferred stock. See
"Plan of Distribution."
39
The tender by a holder of old notes and old senior preferred stock will
constitute an agreement between us and the holder in accordance with the terms
and subject to the conditions set forth in this prospectus and in the applicable
letter of transmittal. If a holder tenders less than all the old notes or the
old senior preferred stock held by such holder, such tendering holder should
fill in the applicable box of the applicable letter of transmittal. The amount
of old notes and the number of old senior preferred stock delivered to the
exchange agent, whether by book-entry or physical delivery, will be deemed to
have been tendered unless otherwise indicated.
Any beneficial owner whose old notes or old senior preferred stock are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on behalf of the
beneficial owner. If the beneficial owner wishes to tender on that owner's own
behalf, the owner must, prior to completing and executing the applicable letter
of transmittal and delivery of such owner's old notes or old senior preferred
stock, either make appropriate arrangements to register ownership of the old
notes or the old senior preferred stock in the owner's name or obtain a properly
completed bond power from the registered holder. The transfer of registered
ownership may take considerable time.
If the applicable letter of transmittal or any old notes or old senior
preferred stock or bond powers are signed or endorsed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and unless waived by us, submit to the exchange agent
evidence satisfactory to us of their authority to act in that capacity with the
letter of transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND OLD SENIOR PREFERRED STOCK AND THE
LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS
AT THE ELECTION AND RISK OF THE HOLDERS. INSTEAD OF DELIVERY BY MAIL, WE
RECOMMEND THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES,
HOLDERS SHOULD ALLOW SUFFICIENT TIME TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OF OLD NOTES OR OLD SENIOR
PREFERRED STOCK SHOULD BE SENT TO US. HOLDERS MAY REQUEST THEIR RESPECTIVE
BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE
TENDERS FOR SUCH HOLDERS.
SIGNATURES, SIGNATURE GUARANTEES, ENDORSEMENTS:
If the applicable letter of transmittal is signed by the record holder(s) of
the old notes and the old senior preferred stock tendered, the signature must
correspond with the name(s) written on the face of the old note and the old
senior preferred stock without alteration, enlargement or any change whatsoever.
If the applicable letter of transmittal is signed by a participant in DTC, the
signature must correspond with the name as it appears on the security position
listing as the holder of the old notes.
A signature on a letter of transmittal or a notice of withdrawal must be
guaranteed by an eligible guarantor institution within the meaning of
Rule 17Ad-15 under the Securities Exchange Act of 1934, unless the old notes or
the old senior preferred stock tendered pursuant thereto are tendered:
- by a registered holder who has not completed the box entitled "Special
Payment Instructions" or "Special Delivery Instructions" on the applicable
letter of transmittal; or
- for the account of an eligible guarantor institution.
In the event that signatures on a letter of transmittal or a notice of
withdrawal are required to be guaranteed, such guarantee must be by:
- a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc.;
- a commercial bank or trust company having an office or correspondent in
the United States; or
40
- an "eligible guarantor institution."
If the letter of transmittal is signed by a person other than the registered
holder of any old notes or old senior preferred stock, the old notes and the old
senior preferred stock must be endorsed by the registered holder or accompanied
by a properly completed bond power, in each case signed or endorsed in blank by
the registered holder.
DETERMINATION OF VALIDITY, RECEIPT, ACCEPTANCE:
We will determine all questions as to the validity, form, eligibility
(including time of receipt) and acceptance and withdrawal of tendered old notes
or old senior preferred stock in our sole discretion. We reserve the absolute
right to reject any and all old notes or old senior preferred stock not properly
tendered or any old notes or old senior preferred stock whose acceptance by us
would, in the opinion of our U.S. counsel, be unlawful. We also reserve the
right to waive any defects, irregularities or conditions of tender as to any
particular old notes or old senior preferred stock either before or after the
expiration date. Our interpretation of the terms and conditions of the exchange
offer (including the instructions in the applicable letter of transmittal) will
be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of
old notes or old senior preferred stock must be cured within a time period we
will determine. Although we intend to request the exchange agent to notify
holders of defects or irregularities relating to tenders of old notes or old
senior preferred stock, neither we, the exchange agent nor any other person will
have any duty or incur any liability for failure to give such notification.
Tenders of old notes or old senior preferred stock will not be considered to
have been made until such defects or irregularities have been cured or waived.
Any old notes or old senior preferred stock received by the exchange agent that
are not properly tendered and as to which the defects or irregularities have not
been cured or waived will be returned by the exchange agent to the tendering
holders, unless otherwise provided in the letter of transmittal, as soon as
practicable following the expiration date.
In addition, we reserve the right, as described above under the caption
"--Conditions to the Exchange Offer," to terminate the exchange offer.
A tender will be deemed to have been received as of the date when the
exchange agent receives:
- the tendering holder's duly signed letter of transmittal accompanied by
old notes and old senior preferred stock;
- a timely confirmation of book-entry transfer of old notes into the
exchange agent's account at DTC with a message from DTC stating that the
tendering holder has expressly acknowledged receipt of, and agreement to
be bound by and held accountable under, the applicable letter of
transmittal; or
- a notice of guaranteed delivery from an eligible institution.
If less than all of the old senior preferred stock or the old notes held in
certificated form evidenced by a submitted certificate are to be tendered, the
tendering holder(s) should fill in the aggregate liquidation preference of the
old senior preferred stock or aggregate principal amount of the old notes to be
tendered, in the applicable "Letter of Transmittal." A newly reissued
certificate for the old senior preferred stock or the old notes held in
certificated form submitted but not tendered will be sent to such holder as soon
as practicable after the expiration date. All of the old senior preferred stock
or the old notes held in certificated form delivered to the exchange agent will
be deemed to have been tendered unless otherwise clearly indicated.
41
Issuances of new notes and new senior preferred stock in exchange for old notes
and old senior preferred stock tendered pursuant to a notice of guaranteed
delivery by an eligible institution will be made only against:
- delivery of the applicable letter of transmittal and any other required
documents; and
- the tendered old notes or old senior preferred stock or a timely
confirmation received of a book-entry transfer of old notes into the
exchange agent's account at DTC with the exchange agent.
We will not accept for exchange old notes or old senior preferred stock
which has been tendered if:
- the old notes or the old senior preferred stock were not validly tendered
pursuant to the procedures for tendering;
- we determine in our reasonable discretion, that any of the conditions to
the exchange offer have not been satisfied; see "--Conditions to the
Exchange Offer;"
- a holder has validly withdrawn a tender of old notes or old senior
preferred stock as described under "--Withdrawal of Tenders;" or
- we have, in our reasonable judgment, delayed or terminated the exchange
offer; see "--Expiration Date; Extensions; Amendments."
GUARANTEED DELIVERY PROCEDURES
A holder who wishes to tender its old notes or old senior preferred stock
and:
- whose old notes or old senior preferred stock are not immediately
available;
- who cannot deliver the holder's old notes or old senior preferred stock,
the applicable letter of transmittal or any other required documents to
the exchange agent prior to the expiration date; or
- who cannot complete, with respect to the old notes, the procedures for
book-entry transfer, before the expiration date,
may effect a tender if:
- the holder makes the tender through an eligible guarantor institution
within the meaning of Rule 17Ad-15 under the Securities Exchange Act of
1934;
- before the expiration date, the exchange agent receives from the eligible
guarantor institution a properly completed and duly executed notice of
guaranteed delivery substantially in the form accompanying the applicable
letter of transmittal, by facsimile transmission, mail or hand delivery
including:
-- the name and address of the holder,
-- the certificate number(s) of the old notes held in certificated form
and the certificate number(s) of the old senior preferred stock,
-- the principal amount of old notes and the number of shares of old
senior preferred stock tendered,
-- a statement that the tender is being made, and
-- a guarantee that the eligible guarantor institution will deliver to
the exchange agent, within five New York Stock Exchange trading days
after the expiration date, a properly
42
completed and duly executed letter of transmittal, or facsimile
thereof, a confirmation of book-entry transfer of the old notes and
the certificate(s) representing the old notes held in certificated
form and the old senior preferred stock in proper form for transfer,
and any other documents required by the applicable letter of
transmittal; and
- the eligible guarantor institution mails or otherwise delivers to the
exchange agent within five New York Stock Exchange trading days after the
expiration date, a properly completed and executed letter of transmittal,
or facsimile thereof, as well as a confirmation of book-entry transfer of
the old notes and the certificate(s) representing all tendered old notes
held in certificated form or old senior preferred stock in proper form for
transfer, and all other documents required by the applicable letter of
transmittal.
A holder or eligible guarantor institution may obtain additional forms for
the notice of guaranteed delivery from the exchange agent at its offices listed
under "--Exchange Agent."
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, holders may withdraw their tenders of
old notes and old senior preferred stock at any time prior to 5:00 p.m., New
York City time, on the expiration date.
To withdraw a tender of old notes and old senior preferred stock in
connection with the exchange offer, a holder must mail or otherwise deliver to
the exchange agent at its offices listed under "--Exchange Agent" a written
notice of withdrawal by mail or by facsimile transmission prior to 5:00 p.m.,
New York City time, on the expiration date of the exchange offer. Any such
notice of withdrawal must:
- specify the name of the person who deposited the old notes or the old
senior preferred stock to be withdrawn;
- identify the old notes or the old senior preferred stock to be withdrawn
(including the principal amount of such old notes or the aggregate
liquidation preference of old senior preferred stock and the certificate
number or numbers of the old senior preferred stock or the old notes
tendered in certificated form);
- be signed by the holder in the same manner as the original signature on
the applicable letter of transmittal by which such old notes or old senior
preferred stock were tendered, with any required signature guarantees, or
be accompanied by documents of transfer sufficient to have the trustee
register the transfer of such old notes or old senior preferred stock into
the name of the person withdrawing the tender; and
- specify the name in which any such old notes or old senior preferred stock
are to be registered, if different from that of the depositor.
If old notes have been tendered pursuant to the procedures of book-entry
transfer described above under "--Procedures for Tendering," any notice of
withdrawal must specify the name and number of the account at DTC's book-entry
transfer facility to be credited with the withdrawn old notes and otherwise
comply with the procedures of such facility.
A holder may obtain a form of the notice of withdrawal from the exchange
agent at its offices listed under "--Exchange Agent."
We will determine all questions as to the validity, form and eligibility
(including time of receipt) of such withdrawal notices. Any old notes and old
senior preferred stock so withdrawn will be considered not to have been validly
tendered for purposes of the exchange offer and no new notes and new senior
preferred stock will be issued unless the old notes and the old senior preferred
stock withdrawn are validly re-tendered. Any old notes and old senior preferred
stock which have been tendered but which
43
are not accepted for exchange or which are withdrawn will be returned to the
holder without cost to such holder (or, in the case of the old notes tendered by
book-entry transfer into the exchange agent's account at DTC's book-entry
transfer facility pursuant to the book-entry transfer procedures described above
under "--Procedures for Tendering," such old notes) will be credited to an
account maintained with such book-entry transfer facility for the old notes as
soon as practicable after withdrawal, rejection of tender or termination of the
exchange offer. Properly withdrawn old notes and old senior preferred stock may
be retendered by following one of the procedures described above under the
caption "--Procedures for Tendering" at any time prior to the expiration date.
EXCHANGE AGENT
Bankers Trust Company has been appointed as exchange agent in connection
with the exchange offer. Questions and requests for assistance, requests for
additional copies of this prospectus or of the applicable letter of transmittal,
the form of notice guaranteed delivery and the form of notice of withdrawal
should be directed to the exchange agent, by one of the following methods:
- if by mail, to BT Services Tennessee, Inc. Reorganization Unit, P.O. Box
292737 Nashville, TN 37229-2737;
- if by overnight mail or courier, to BT Services Tennessee, Inc., Corporate
Trust & Agency Services, Reorganization Unit, 648 Grassmere Park Road,
Nashville, TN 37211 (to confirm by telephone, call (615) 835-3572);
- if by hand, to Bankers Trust Company, Corporate Trust & Agency Services,
Attn: Reorganization Department, Receipt & Delivery Window, 123 Washington
Street, 1st Floor, New York, NY 10006;
- if by fax, to BT Services Tennessee, Inc., Corporate Trust & Agency
Service, Reorganization Unit at facsimile number (615) 835-7301; or
- if by phone, to Bankers Trust Company at phone number 1-800-735-7777.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders pursuant to the exchange
offer. We will not make any payment to brokers, dealers or others soliciting
acceptances of the exchange offer. We will pay other expenses to be incurred in
connection with the exchange offer, including the fees and expenses of the
exchange agent, accounting and the reasonable legal fees of the holders of old
notes and old senior preferred stock as defined in the registration rights
agreement and the senior preferred stockholders agreement. Holders who tender
old notes or old senior preferred stock in connection with the exchange offer
will not be required to pay brokerage commissions or fees.
Holders who tender their old notes or old senior preferred stock for
exchange will not be obligated to pay any transfer taxes. A tendering holder,
however, will be required to pay any transfer taxes (whether imposed on the
registered holder or any other person) incurred if:
- new notes or new senior preferred stock are to be delivered to, or issued
in the name of, any person other than the registered holder of the old
notes or the old senior preferred stock tendered; or
- tendered old notes or the shares of old senior preferred stock are
registered in the name of any person other than the person signing the
applicable letter of transmittal; or
- a transfer tax is imposed for any reason other than the exchange of old
notes or old senior preferred stock in connection with the exchange offer.
44
If satisfactory evidence of payment of such taxes or exemption from them is
not submitted with the applicable letter of transmittal, the amount of such
transfer taxes will be billed directly to the tendering holder.
ACCOUNTING TREATMENT
The new notes and the new senior preferred stock will be recorded in our
accounting records at the same carrying value as the old notes and the old
senior preferred stock, respectively, as reflected in our accounting records on
the date of the exchange. Accordingly, we will not recognize any gain or loss
for accounting purposes upon the completion of the exchange offer. Any expenses
of the exchange offer that we pay will be charged against our earnings in
accordance with generally accepted accounting principles.
CONSEQUENCES OF FAILURES TO PROPERLY TENDER OLD NOTES AND OLD SENIOR PREFERRED
STOCK IN THE EXCHANGE
Issuance of the new notes in exchange for the old notes and issuance of the
new senior preferred stock in exchange for the old senior preferred stock under
the exchange offer will be made only after timely receipt by the exchange agent
of such old notes and old senior preferred stock, a properly completed and duly
executed letter of transmittal and all other required documents. Therefore,
holders desiring to tender old notes and old senior preferred stock in exchange
for new notes and new senior preferred stock should allow sufficient time to
ensure timely delivery. We are under no duty to give notification of defects or
irregularities of tenders of old notes and old senior preferred stock for
exchange. Old notes and old senior preferred stock that are not tendered or that
are tendered but we do not accept, will, following completion of the exchange
offer, continue to be subject to the existing restrictions upon transfer thereof
under the Securities Act of 1933.
Upon completion of the exchange offer, we will no longer be required to
consummate a registered exchange offer, pursuant to the registration rights
agreement and the senior preferred stockholders agreement, for the old notes and
the old senior preferred stock which remain outstanding. In addition, in the
event the exchange offer for the old notes is completed, we will not be required
to register the remaining old notes unless holders are entitled to shelf
registration rights under the circumstances described under "Registration
Rights." Even if the exchange offer for the old senior preferred stock is
consummated, holders of old senior preferred stock may, under the circumstances
described under "Registration Rights," be entitled pursuant to the senior
preferred stockholders agreement, to demand registration of the old senior
preferred stock on two occasions and to request registration incident to any
planned registration of WRC Media capital stock. In the event the exchange offer
for the old senior preferred stock is completed, except as described in the
previous sentence, we will not be required to register the remaining old senior
preferred stock.
Remaining old notes and old senior preferred stock will continue to be
subject to the following restrictions on transfer:
- the remaining old notes and old senior preferred stock may be resold only
if registered pursuant to the Securities Act of 1933, if any exemption
from registration is available, or if neither such registration nor such
exemption is required by law; and
- the remaining old notes and old senior preferred stock will bear a legend
restricting transfer in the absence of registration or an exemption.
We do not currently anticipate that we will register the remaining old notes
under the Securities Act of 1933 or that we will register the remaining old
senior preferred stock unless required to do so pursuant to the senior preferred
stockholders agreement. To the extent that old notes and old senior preferred
stock are tendered and accepted in connection with the exchange offer, any
trading markets for the remaining old notes and the remaining old senior
preferred stock could be adversely affected. See "Risk Factors--Failure to
Exchange Your Old Notes or Old Senior Preferred Stock."
45
TRANSACTIONS
The exchange offer is related to a series of acquisition and
recapitalization transactions that were completed on November 17, 1999. On
July 14, 1999, WRC Media acquired 100% of the capital stock of CompassLearning
through a wholly owned subsidiary for aggregate consideration in the amount of
$55.2 million including the assumption and repayment of certain indebtedness and
redemption of preferred stock. In connection with the financing of the
acquisition of CompassLearning:
- Ripplewood Partners, L.P., its affiliates and co-investors made a cash
equity contribution of $28.7 million to WRC Media; and
- CompassLearning entered into, and made initial borrowings under, old
senior credit facilities in an amount of $12.0 million and issued
$19.0 million of senior subordinated notes.
A portion of the net proceeds from the financings described below has been used
to refinance the indebtedness entered into in connection with the acquisition of
CompassLearning.
On November 17, 1999, we completed the recapitalization of the Supplemental
Education Group of PRIMEDIA, consisting of the businesses of Weekly Reader,
American Guidance and World Almanac and their respective subsidiaries, and other
related transactions. In connection with the recapitalization:
- PRIMEDIA contributed 100% of the outstanding capital stock of American
Guidance and World Almanac to Weekly Reader; and
- WRC Media, Weekly Reader, and CompassLearning made cash payments of
$395 million to PRIMEDIA.
As a result of the recapitalization:
- WRC Media owns 94.9% and PRIMEDIA owns 5.1% of the voting stock of Weekly
Reader;
- Ripplewood Partners, L.P., EAC III, L.L.C. ("EAC III"), EAC IV, L.L.C.,
those co-investors and members of our management listed under "Ownership
of Stock--Beneficial Ownership of WRC Media," own 100% of the voting stock
of WRC Media; and
- WRC Media, Weekly Reader, American Guidance and World Almanac have no
outstanding indebtedness other than the indebtedness described below.
To finance the repayment of the indebtedness entered into in connection with
the acquisition of CompassLearning and the recapitalization:
- WRC Media, Weekly Reader and CompassLearning issued units consisting of
the old notes and shares of WRC Media common stock;
- CompassLearning and Weekly Reader entered into, and made initial
borrowings under, the senior credit facilities, providing for credit
facilities of up to $161.0 million. The senior credit facilities consist
of a $30.0 million revolving credit facility, a $31.0 million term loan A
facility, and a $100.0 million term loan B facility;
- WRC Media issued to the senior preferred stockholders $75.0 million of the
old senior preferred stock which we are offering to exchange for new
senior preferred stock in the exchange offer. The senior preferred
stockholders consist of DLJ Merchant Banking Partners II, L.P. and certain
of its affiliates (collectively, the "DLJMB Investors") and other
investors;
- Weekly Reader and CompassLearning issued to the senior preferred
stockholders warrants (the "Preferred Stockholder Warrants") to acquire
13.0% of the common stock of Weekly Reader and 13.0% of the common stock
of CompassLearning; and
46
- WRC Media issued common stock in exchange for the cash equity contribution
of $95.0 million by Ripplewood Partners, L.P., its affiliates and
co-investors and their designees.
Certain lenders providing the financing for the acquisition of
CompassLearning also received warrants to acquire WRC Media common stock. In
connection with the recapitalization, these warrants were exercised and the
common stock received was contributed to EAC III in exchange for membership
interests in EAC III. EAC III is the investment vehicle owned by Ripplewood
Partners, L.P., its affiliates and certain co-investors, that owns approximately
71.0% of the WRC Media common stock. See "Use of Proceeds," "Description of
Senior Credit Facilities," "Description of New Notes" and "Description of New
Senior Preferred Stock."
47
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes and
the new senior preferred stock under the exchange offer. In consideration for
issuing the new notes and the new senior preferred stock as contemplated in this
prospectus, we will receive old notes in like principal amount and old senior
preferred stock of like liquidation preference, the terms of which are identical
in all material respects to the new notes and the new senior preferred stock.
The old notes and the old senior preferred stock surrendered in exchange for the
new notes and the new senior preferred stock will be retired and canceled and
cannot be reissued. Accordingly, the issuance of the new notes and the new
senior preferred stock will not result in any increase in our indebtedness or
capital stock. The proceeds received from the sale of the old notes and the old
senior preferred stock were used to help finance the transactions described
under "Transactions."
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock and do
not expect to pay cash dividends on our capital stock in the foreseeable future,
except that we are required to, by the terms of our outstanding senior preferred
stock, pay dividends on our senior preferred stock only in cash after
December 31, 2004. It is the current intention of our boards of directors to
retain future earnings, if any, to finance the expansion of our businesses.
Future declaration and payment of dividends, if any, will be determined in light
of the then-current conditions, including our earnings, operations, capital
requirements, financial condition and other factors deemed relevant by our
boards of directors. The notes indenture and the senior credit facilities
restrict our ability to pay dividends. Any future indebtedness incurred by us
may also restrict our ability to pay dividends. See "Description of Senior
Credit Facilities," Description of New Senior Preferred Stock" and "Description
of New Notes."
48
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
We are presenting below our unaudited consolidated pro forma financial
statements to show how our financial statements might have looked if we had been
an independent company for the periods presented.
The unaudited pro forma consolidated statement of operations data give
effect to the transactions described under "Transactions" and the acquisition of
American Guidance by PRIMEDIA as if they had occurred on January 1, 1998. The
unaudited pro forma consolidated balance sheet data give effect to the
transactions described under "Transactions" as if they had occurred as of
September 30, 1999.
In the following unaudited consolidated pro forma financial statements of
WRC Media, we accounted for the acquisition of 94.9% of the stock of Weekly
Reader and for the acquisition of CompassLearning by WRC Media as a purchase.
Under purchase accounting, the total purchase cost and fair value of liabilities
assumed are allocated to the tangible and intangible assets of the company
acquired based upon their respective fair values as of the closing date based on
valuations and studies. A preliminary allocation of the purchase cost has been
made to major categories of assets and liabilities in the accompanying unaudited
pro forma consolidated financial information based on estimates. The actual
allocation of purchase cost and the resulting effect on income from operations
may differ from the pro forma amounts included in this prospectus.
The historical Weekly Reader balances included in the unaudited pro forma
consolidated information include a retroactive adjustment to reflect the
contribution of 100% of the capital stock of American Guidance and World Almanac
by PRIMEDIA to Weekly Reader using the historical carrying value of such stock.
The historical Weekly Reader balances include the operations of American
Guidance from July 1, 1998, the effective date of PRIMEDIA's acquisition of all
of the capital stock of American Guidance. For periods prior to July 1, 1998, we
present American Guidance financial information on a stand-alone basis.
The unaudited pro forma consolidated financial information is for
informational purposes only and does not purport to be indicative of our
financial position or the results of our operations that would have actually
been obtained had the transactions described under "Transactions" and PRIMEDIA's
acquisition of American Guidance in fact occurred as of the assumed dates or for
the periods presented, nor are they indicative of, or projections for our
results of operations or financial position for any future period or date. The
pro forma adjustments are based on preliminary estimates of purchase price
allocation, available information and assumptions that we deem appropriate. You
should read the following unaudited pro forma consolidated financial information
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the selected historical financial information and
the financial statements and the related notes included in this prospectus.
49
WRC MEDIA INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
HISTORICAL (A) PRO FORMA
------------------------------ -----------------------------
WRC MEDIA
COMPASS- WEEKLY AMERICAN TRANSACTION INC. AND ITS
LEARNING READER GUIDANCE ADJUSTMENTS SUBSIDIARIES
-------- -------- -------- ----------- ------------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT:
Net revenue........................... $68,898 $118,236 $19,584 $ -- $206,718
Cost of products sold................. 29,400 30,646 4,164 107 (b) 64,317
------- -------- ------- -------- --------
Gross profit.......................... 39,498 87,590 15,420 (107) 142,401
Selling and administrative expenses:
Sales and marketing................. 24,034 17,636 4,658 -- 46,328
Research and development............ 8,022 -- -- -- 8,022
Editorial........................... -- 10,596 2,700 (1,881)(c) 11,415
General, administrative and other... 7,705 31,739 6,552 (4,978)(d) 41,018
Depreciation and amortization (e)... 245 12,212 404 22,599 (e) 35,460
Restructuring....................... 3,012 -- -- -- 3,012
------- -------- ------- -------- --------
Net (loss) income from operations..... (3,520) 15,407 1,106 (15,847) (2,854)
Other income (expense)................ 33 (368) -- 184 (f) (151)
Interest expense, net................. (4,286) (9,232) (37) (21,826)(f) (35,381)
------- -------- ------- -------- --------
Net (loss) income before income taxes
(g)................................. (7,773) 5,807 1,069 (37,489) (38,386)
Income tax (expense) benefit.......... -- (3,942) (378) 4,320 --
------- -------- ------- -------- --------
Net (loss) income (g)................. $(7,773) $ 1,865 $ 691 $(33,169) $(38,386)
======= ======== ======= ======== ========
OTHER DATA:
EBITDA (h)............................ $ 3,550 $ 27,435 $ 1,510 $ 6,752 (i) $ 39,247
Capital expenditures (c).............. 536 4,299 308 1,881 (c) 7,024
See notes to unaudited pro forma consolidated statements of operations.
50
WRC MEDIA INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
HISTORICAL (A) PRO FORMA
---------------------------------- --------------------------
WRC MEDIA
INC. AND ITS
SUBSIDIARY WRC MEDIA
(COMPASS- COMPASS- WEEKLY TRANSACTION INC. AND ITS
LEARNING) LEARNING READER ADJUSTMENTS SUBSIDIARIES
------------ -------- -------- ----------- ------------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT:
Net revenue.......................... $ 14,847 $34,023 $101,630 $ -- $150,500
Cost of products sold................ 5,329 13,374 27,921 -- 46,624
-------- ------- -------- -------- --------
Gross profit......................... 9,518 20,649 73,709 -- 103,876
Selling and administrative expenses:
Sales and marketing................ 4,971 11,038 16,487 -- 32,496
Research and development........... 1,824 3,831 -- -- 5,655
Editorial.......................... -- -- 7,251 -- 7,251
General, administrative and
other............................ 1,382 3,978 25,888 (3,404) 27,844
Depreciation and amortization
(e).............................. 1,739 131 11,884 12,998 26,752
Write-off of purchased research and
development...................... 9,000 -- -- -- 9,000
-------- ------- -------- -------- --------
Net income (loss) from operations.... (9,398) 1,671 12,199 (9,594) (5,122)
Other income (expense)............... 16 405 (736) 154 161
Interest expense, net................ (914) (2,854) (10,133) (11,387) (25,288)
-------- ------- -------- -------- --------
Net loss before income taxes (g)..... (10,296) (778) 1,330 (20,827) (30,571)
Income tax benefit (expense)......... -- -- (1,938) 1,938 --
-------- ------- -------- -------- --------
Net loss (g)......................... $(10,296) $ (778) $ (608) $(18,889) $(30,571)
======== ======= ======== ======== ========
OTHER DATA:
EBITDA (h)........................... $ 1,834 $ 3,393 $ 24,995 $ 3,404 $ 33,627
Capital expenditures................. 167 142 4,114 -- 4,423
See notes to unaudited pro forma consolidated statements of operations.
51
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(a) The historical Weekly Reader balances include a retroactive adjustment to
reflect the contribution of 100% of the capital stock of American Guidance
and World Almanac by PRIMEDIA to Weekly Reader using the historical carrying
value of such stock. The historical Weekly Reader balances include the
operations of American Guidance from July 1, 1998, the effective date of
PRIMEDIA's acquisition of all of the capital stock of American Guidance. For
periods prior to July 1, 1998, American Guidance financial information is
presented on a stand alone basis. CompassLearning financial information is
presented on a stand-alone basis for periods prior to its acquisition by WRC
Media, on July 14, 1999. Subsequent to July 14, 1999, CompassLearning's
balances are included in WRC Media and Subsidiary's operations.
(b) Pro forma adjustment of $107 to conform American Guidance's accounting,
prior to its acquisition by PRIMEDIA, for inventory on a LIFO basis to
Weekly Reader's accounting for inventory on a FIFO basis.
(c) Pro forma adjustment of $1,881 to conform American Guidance's accounting,
prior to its acquisition by PRIMEDIA, for prepublication costs to Weekly
Reader's policy of capitalizing such costs, effective as of January 1, 1998.
Historically, such costs were expensed by American Guidance. Capitalized
prepublication costs are amortized over a period of five to ten years, and
are considered capital expenditures.
(d) Pro forma adjustments to general, administrative and other expenses reflect
the following:
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
Elimination of American Guidance Employee Stock
Ownership Plan ("ESOP") contribution and other benefit
plan costs not continued.............................. $(2,230) $ --
Elimination of historical allocated corporate overhead
charges............................................... (4,438) (5,114)
Estimated new salaries and fees for outside services
less savings from headcount reductions................ 1,690 1,710
------- -------
Total................................................... $(4,978) $(3,404)
======= =======
(e) Certain depreciation and amortization charges are reflected in other cost
line items. The pro forma depreciation and amortization adjustment is
calculated as follows:
YEAR NINE MONTHS
ENDED ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
Additional amortization related to the increase in
goodwill and other intangibles........................ $22,449 $12,998
Additional amortization of capitalized prepublication
costs (1)............................................. 150 --
------- -------
$22,599 $12,998
======= =======
----------------------------
(1) See note (c) above.
52
(f) Pro forma adjustment to interest expense is based on the pro forma borrowing
amounts of WRC Media as of September 30, 1999 and the rates that are
expected to be in effect as of the closing, as presented below:
YEAR NINE MONTHS
ENDED ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
Term loan A facility (estimated at 9.280%).............. $ 2,877 $ 2,158
Term loan B facility (estimated at 10.030%)............. 10,030 7,523
12.75% Senior subordinated notes due 2009............... 19,380 14,535
Commitment fee on unutilized revolving credit facility
commitments (0.5%).................................... 150 113
Accretion of discount................................... 298 252
Amortization of deferred financing costs related to:
Senior credit facilities............................ 690 367
Senior subordinated notes due 2009.................. 456 342
Write-off of financing costs............................ 1,500 --
Elimination of historical interest expense and
amortization of deferred financing costs.............. (13,555) (13,903)
-------- --------
Net increase in interest expense........................ $ 21,826 $ 11,387
======== ========
Weekly Reader's amortization of deferred financing costs was reclassified
from other income (expense) to interest expense, net on a pro forma basis to
conform the presentation to that of WRC Media.
The effect of a 0.125% change in the interest rate on the senior credit
facilities would increase or decrease pro forma interest expense by $123 for
the nine-month periods and $164 for the twelve-month periods.
(g) Balances presented are before extraordinary items.
(h) EBITDA is defined as net income before income taxes, interest expense,
depreciation and amortization, restructuring charges and non-recurring items
(as shown in the table). EBITDA data is included because we understand that
such information is considered by certain investors as an additional basis
on which to evaluate WRC Media's ability to pay interest, repay debt and
make capital expenditures. Because all companies do not calculate EBITDA
identically, the presentation of EBITDA in this prospectus is not
necessarily comparable to similarly titled measures of other companies.
EBITDA does not represent and should not be considered more meaningful than,
or an alternative to, measures of operating performance as determined in
accordance with generally accepted accounting principles.
53
For the pro forma periods, EBITDA was calculated as follows:
YEAR NINE MONTHS
ENDED ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
Pro forma net loss before income taxes.................. $(38,386) $(30,571)
Interest expense........................................ 35,381 25,288
Depreciation and amortization (1)....................... 39,240 28,811
Restructuring charges................................... 3,012 --
Write-off of research and development................... -- 9,000
Non-cash excess inventory and litigation charge......... -- 1,494
Non-recurring income from sale of investment............ -- (396)
-------- --------
EBITDA.................................................. $ 39,247 $ 33,627
======== ========
----------------------------
(1) Represents pro forma depreciation and amortization including
depreciation and amortization reflected in other cost line items, other
than amortization of deferred financing costs, which is included in
interest expense.
(i) The pro forma adjustment for EBITDA is reconciled as follows:
YEAR NINE MONTHS
ENDED ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
------------------ -------------------
Elimination of American Guidance ESOP contribution and
change in accounting for inventory to a FIFO basis
(see notes (b) and (d) above)......................... $(2,123) $ --
Prepublication costs now capitalized which were
historically expensed (see note (c) above)............ (1,881) --
Elimination of certain historical corporate overhead
allocations and redundant employees net of new
salaries and other expenses (see note (d) above)...... (2,748) (3,404)
------- -------
Total................................................... $(6,752) $(3,404)
======= =======
54
WRC MEDIA INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AT SEPTEMBER 30, 1999
HISTORICAL
WRC MEDIA INC. PRO FORMA
AND ITS WRC MEDIA INC.
SUBSIDIARY HISTORICAL ADJUSTMENTS FOR AND ITS
(COMPASSLEARNING) WEEKLY READER THE TRANSACTIONS SUBSIDIARIES
----------------- ------------- ---------------- --------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents............. $ 258 $ 2,282 $ 5,469 (a) $ 8,009
Accounts receivable, net.............. 19,004 41,363 -- 60,367
Inventories........................... 624 14,269 -- 14,893
Prepaid expenses...................... 1,595 2,343 -- 3,938
Other current assets.................. 23 18,766 -- 18,789
-------- -------- -------- --------
Total current assets................ 21,504 79,023 5,469 105,996
Property and equipment, net............. 1,601 6,322 -- 7,923
Deferred financing costs................ 1,937 1,139 4,905 (b) 7,981
Deferred income taxes................... -- 5,854 (5,854)(c) --
Software development costs.............. 7,063 -- -- 7,063
Intangibles............................. 46,383 38,634 87,133 (d) 172,150
Goodwill................................ -- 107,766 159,166 (d) 266,932
Other assets............................ -- 9,706 -- 9,706
-------- -------- -------- --------
Total............................... $ 78,488 $248,444 $250,819 $577,751
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses............................ $ 8,180 $ 19,538 -- $ 27,718
Salaries and related items............ 6,983 4,493 -- 11,476
Deferred revenue...................... 16,018 31,210 -- 47,228
Short-term debt....................... -- -- -- --
Other current liabilities............. -- 22,954 -- 22,954
-------- -------- -------- --------
Total current liabilities........... 31,181 78,195 -- 109,376
Non-current portion of deferred
revenue............................... 941 -- -- 941
Non-current other accrued liabilities... 319 -- -- 319
Long-term debt:
Existing CompassLearning
Indebtedness........................ 25,499 -- (25,499)(e) --
Senior credit facilities.............. -- -- 131,000 (e) 131,000
Senior subordinated notes due 2009.... -- -- 146,193 (e) 146,193
-------- -------- -------- --------
Total long-term debt................ 25,499 -- 251,694 277,193
WRC Media preferred stock and
warrants.............................. -- -- 75,000 (f) 75,000
Common stock subject to redemption...... -- -- 2,000 (g) 2,000
Shareholders' equity:
Common stock.......................... 14 100 (70)(g) 44
Additional paid-in capital............ 30,844 187,316 (90,635)(g) 127,525
Accumulated deficit................... (10,296) (17,167) 12,830 (g) (14,633)
Comprehensive loss.................... (14) -- -- (14)
-------- -------- -------- --------
Total equity........................ 20,548 170,249 (77,875) 112,922
-------- -------- -------- --------
Total............................... $ 78,488 $248,444 $250,819 $577,751
======== ======== ======== ========
See accompanying notes to unaudited pro forma consolidated balance sheet.
55
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET DATA
(DOLLARS IN THOUSANDS)
For the purpose of our unaudited pro forma financial statements, "Existing
CompassLearning Indebtedness" represents the financing in connection with the
acquisition of CompassLearning which consisted of (1) $12.0 million initial
borrowings made under the old senior credit facilities and (2) the issuance of
$19.0 million of senior subordinated notes. "Common Equity Contribution"
represents the financing in connection with the recapitalization and repayment
of the Existing CompassLearning Indebtedness which consisted of the cash equity
contribution of $95.0 million by Ripplewood Partners, L.P., its affiliates and
co-investors in exchange for WRC Media common stock.
The following unaudited pro forma adjustments relate to the transactions
described under "Transactions," other than the acquisition of CompassLearning,
as if they had occurred as of September 30, 1999:
(a) Change in cash and cash equivalents, calculated as follows:
Senior secured term loans................................... $ 131,000
Units offered on November 17, 1999.......................... 149,904
WRC Media preferred stock and Preferred Stockholder
Warrants................................................ 75,000
Common Equity Contribution.................................. 95,000
PRIMEDIA cash payments...................................... (395,000)
Repayment of Existing CompassLearning Indebtedness.......... (25,499)
Estimated transaction costs................................. (22,654)
Cash retained by PRIMEDIA................................... (2,282)
---------
Net change in cash and cash equivalents..................... $ 5,469
=========
(b) Debt issuance costs for the senior credit facilities and the
notes offered........................................... $ 9,481
Write-off of certain financing costs........................ (1,500)
Write-off of deferred financing costs related to the
Existing CompassLearning Indebtedness................... (3,076)
---------
Total change................................................ $ 4,905
=========
(c) Decrease in the deferred tax asset due to the other pro
forma adjustments:
Long-term................................................... $ (5,854)
(d) Change to goodwill and intangibles:
Purchase price.............................................. $ 395,000
Net assets acquired......................................... (169,110)
Cash retained by PRIMEDIA................................... 2,282
Adjustment to the deferred tax asset........................ 5,854
Estimated transaction and advisory costs.................... 12,273
---------
Total....................................................... 246,299
Increase in identified intangibles (e.g., tradename,
customer lists)......................................... (87,133)
---------
Increase in excess of purchase price over net assets
acquired................................................ $ 159,166
=========
56
(e) New borrowings and payments of indebtedness:
Repayment of Existing CompassLearning Indebtedness (net of
$1,543 attributable to the value of certain of the
warrants issued in connection therewith)................ $ (25,499)
Senior secured term loans................................... $ 131,000
Proceeds of notes offered (net of $2,096 discount and $3,711
of the value of common stock offered with the notes).... $ 146,193
(f) WRC Media preferred stock, including $11,751 attributable to
the value of the Preferred Stockholder Warrants......... $ 75,000
(g) Represents common stock subject to redemption............... $ 2,000
Elimination of the historical equity balances and recording
of the equity investment less estimated fees and
expenses:
Common Equity Contribution.................................. $ 28
Common equity associated with notes offered on November 17,
1999.................................................... 2
Elimination of historical equity contribution............... (100)
---------
Change in WRC Media common stock............................ $ (70)
=========
Elimination of historical equity............................ $(187,316)
Additional paid-in capital contribution..................... 94,972
Common stock subject to redemption.......................... (2,000)
Additional paid-in capital associated with notes offered on
November 17, 1999....................................... 3,709
---------
Change in additional paid-in-capital........................ $ (90,635)
=========
Elimination of historical accumulated deficit............... $ 17,167
Loss related to a write-off of certain financing costs...... (1,500)
Charges related to recapitalization of Weekly Reader........ (900)
Extraordinary loss related to write-off of deferred
financing costs and debt discount related to the
Existing CompassLearning Indebtedness................... (1,937)
---------
Change in accumulated deficit............................... $ 12,830
=========
57
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
WEEKLY READER CORPORATION
The following table presents selected historical consolidated financial
information for Weekly Reader and its subsidiaries for each of the five fiscal
years in the period ended December 31, 1998 and the nine-month periods ended
September 30, 1998 and 1999. The financial statements of Weekly Reader included
in this prospectus, including the selected historical consolidated financial
information presented below, include a retroactive adjustment to reflect the
contribution of 100% of the capital stock of American Guidance and World Almanac
by PRIMEDIA to Weekly Reader using the historical carrying value of such stock.
The selected historical consolidated financial information presented below is
based on the unaudited historical consolidated financial statements of Weekly
Reader for the fiscal years ended December 31, 1994 and 1995, which are not
included in this prospectus, as well as the audited historical consolidated
financial statements of Weekly Reader for the fiscal years ended December 31,
1996, 1997 and 1998, and the unaudited historical condensed consolidated interim
financial statements for the nine-month periods ended September 30, 1998 and
1999, which are included elsewhere in this prospectus. The selected historical
consolidated financial information for the fiscal years ended December 31, 1994
and 1995 and for the nine-month periods ended September 30, 1998 and 1999, are
unaudited, and in the opinion of management, reflect all adjustments, consisting
of normal recurring adjustments, that are necessary to present fairly the
financial results for these periods. The selected historical consolidated
financial statements do not indicate results of operations as of any future date
or for any future period. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Weekly Reader" and the financial statements
and related notes to them included elsewhere in this prospectus.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, (A) SEPTEMBER 30, (A)
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Sales, net (b)..................................... $ 85,817 $101,061 $ 89,733 $ 92,904 $118,236 $ 74,002 $101,630
Cost of goods sold................................. 21,723 21,167 25,503 23,825 30,646 19,082 27,921
-------- -------- -------- -------- -------- -------- --------
Gross profit....................................... 64,094 79,894 64,230 69,079 87,590 54,920 73,709
Operating costs and expenses:
Marketing and selling............................ 12,350 11,830 13,067 11,745 17,636 10,590 16,487
Distribution, circulation and fulfillment........ 11,713 10,510 10,836 11,593 10,881 7,130 8,436
Editorial........................................ 8,470 8,354 8,889 9,030 10,596 7,423 7,251
General and administrative....................... 9,861 10,450 11,598 12,736 15,281 10,382 11,903
Corporate and group overhead (c)................. 1,840 2,044 2,728 2,456 5,577 2,903 5,549
Depreciation and amortization.................... 14,214 30,266 13,168 11,428 12,212 7,993 11,884
-------- -------- -------- -------- -------- -------- --------
Operating income................................... 5,646 6,440 3,944 10,091 15,407 8,499 12,199
Other income (expense):
Intercompany interest expense.................... (6,262) (6,134) (5,851) (6,968) (9,232) (3,966) (10,133)
Amortization of deferred financing costs......... (236) (268) (963) (663) (184) (137) 154
Other, net....................................... (856) 5 7 1,545 (184) (191) (582)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income tax provision
(benefit)........................................ (1,708) 43 (2,863) 4,005 5,807 4,205 1,330
Income tax provision (benefit)..................... (341) 7,207 (1,108) 5,772 3,942 2,992 1,938
-------- -------- -------- -------- -------- -------- --------
Net income (loss).................................. $ (1,367) $ (7,164) $ (1,755) $ (1,767) $ 1,865 $ 1,213 $ (608)
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
EBITDA (d)......................................... $ 19,004 $ 36,711 $ 17,119 $ 23,064 $ 27,435 $ 16,301 $ 24,995
Capital expenditures............................... 1,475 509 782 387 4,299 2,039 4,114
Ratio of earnings to fixed charges (e)............. -- 1.01x -- 1.52x 1.62x 2.02x 1.13x
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets....................................... $133,691 $101,118 $107,573 $108,138 $237,276 $261,118 $248,444
Total debt......................................... -- -- -- -- -- -- --
Total shareholder's equity......................... 99,908 64,507 68,906 73,071 167,392 182,844 170,249
58
(a) The financial statements include the operations of American Guidance from
July 1, 1998, the effective date of PRIMEDIA's acquisition of all of the
capital stock of American Guidance. The financial statements of Weekly
Reader included in this prospectus, including the selected historical
consolidated financial information presented in the table above, include a
retroactive adjustment to reflect the contribution of 100% of the capital
stock of American Guidance and World Almanac by PRIMEDIA to Weekly Reader
using the historical carrying value of such stock.
(b) In 1994 and 1995, sales, net includes revenue from a license agreement for
the FUNK & WAGNALLS ENCYCLOPEDIA database of $2.8 million in 1994 and
$20.6 million in 1995. During 1995, the licensee made a one time payment to
acquire a perpetual, royalty-free license to use the database. Following
1995, no subsequent cash payments were received. Sales, net includes sales
of Facts On File News Services, Gareth Stevens, Inc. and American Guidance
following Facts On File News Services' acquisition in March 1996, Gareth
Stevens, Inc.'s acquisition in February 1997 and American Guidance's
acquisition in July 1998. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations--Weekly
Reader."
(c) Includes cost for: (1) amounts allocated as corporate overhead to Weekly
Reader by PRIMEDIA for services and administrative functions shared with
PRIMEDIA and its other operating companies, such as, executive management
costs, salaries and fringe benefits for certain legal, financial,
information technology and human resources personnel, information technology
expenses, real estate expenses and third party costs; and (2) direct group
overhead costs such as the salaries, fringe benefits and expenses for
PRIMEDIA staff directly involved in Weekly Reader's operations.
(d) EBITDA is defined as net income (loss) before interest expense, income taxes
and depreciation and amortization. EBITDA data is included because we
understand that such information is considered by certain investors as an
additional basis on which to evaluate Weekly Reader's ability to pay
interest, repay debt and make capital expenditures. Because all companies do
not calculate EBITDA identically, the presentation of EBITDA in this
prospectus is not necessarily comparable to similarly titled measures of
other companies. EBITDA does not represent and should not be considered more
meaningful than, or an alternative to, measures of operating performance as
determined in accordance with generally accepted accounting principles.
(e) Ratio of earnings to fixed charges is calculated as net earnings, which is
defined as net income (loss) before income tax provision (benefit) plus
fixed charges, divided by fixed charges. Fixed charges are defined as
interest expensed and capitalized, amortized premiums, discounts and
capitalized expenses related to indebtedness and estimated interest included
in rental expense. Earnings were insufficient to cover fixed charges by
$1,708 in 1994 and $2,863 in 1996.
59
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
AMERICAN GUIDANCE SERVICE, INC.
The following table presents selected historical consolidated financial
information for American Guidance for each of the five fiscal years in the
period ended June 30, 1998. This information is based on the audited historical
consolidated financial statements of American Guidance for the fiscal years
ended June 30, 1994 and 1995, which are not included in this prospectus, and the
audited historical consolidated financial statements of American Guidance for
the fiscal years ended June 30, 1996, 1997 and 1998, which are included
elsewhere in this prospectus. The financial statements of Weekly Reader in this
prospectus include the operations of American Guidance since PRIMEDIA acquired
all of its capital stock, which was effective on July 1, 1998. Following its
acquisition by PRIMEDIA, American Guidance's fiscal year was changed to end on
December 31 of each year. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--American Guidance" and the financial
statements and the related notes to them included elsewhere in this prospectus.
FISCAL YEAR ENDED JUNE 30,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Sales (a)............................................. $26,257 $28,303 $29,390 $33,449 $42,680
Cost of sales......................................... 7,475 7,928 8,548 9,480 11,779
------- ------- ------- ------- -------
Gross profit.......................................... 18,782 20,375 20,842 23,969 30,901
Expenses:
Development......................................... 5,165 6,007 4,947 4,407 5,349
Sales............................................... 5,691 5,954 6,824 7,455 8,447
General and administrative.......................... 4,793 5,144 5,759 6,346 7,044
Pension............................................. 242 363 402 486 452
ESOP contribution (b)............................... 1,054 1,156 1,462 1,307 1,600
Writedown of certain assets (c)..................... 7,595 323 -- -- --
------- ------- ------- ------- -------
Operating income...................................... (5,758) 1,428 1,448 3,968 8,009
Other income (expense) (d)............................ (687) (456) (113) (935) (765)
------- ------- ------- ------- -------
Income (loss) before income tax (expense) benefit..... (6,445) 972 1,335 3,033 7,244
Income tax (expense) benefit.......................... 1,615 30 200 (775) (2,700)
------- ------- ------- ------- -------
Net income (loss)..................................... $(4,830) $ 1,002 $ 1,535 $ 2,258 $ 4,544
======= ======= ======= ======= =======
OTHER DATA:
EBITDA (c)............................................ $ 3,813 $ 2,650 $ 2,435 $ 3,886 $ 8,145
Depreciation and amortization......................... 1,975 815 728 624 742
Capital expenditures.................................. 833 390 354 391 387
Interest expense...................................... 688 540 372 229 159
Ratio of earnings to fixed charges (e)................ -- 2.8x 4.6x 14.2x 46.6x
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.......................................... $14,769 $13,199 $13,615 $14,479 $16,852
Total debt............................................ 10,541 4,536 2,117 1,453 1,500
Total stockholders' equity............................ 171 2,159 4,597 5,442 6,971
60
(a) Includes sales attributable to certain assets acquired from Craig-Hart
Publishing Company in October 1997, International Thomson Publishing Inc. in
March 1997 and Lake Publishing Company in April 1996.
(b) ESOP contribution expenses represent American Guidance contributions to its
leveraged ESOP plan, primarily used to repay debt of such ESOP. These
contributions ended with the acquisition of American Guidance by PRIMEDIA
and will not recur in the future.
(c) EBITDA is defined as net income (loss) before interest expense, income
taxes, depreciation and amortization and non-recurring writedowns. American
Guidance recorded non-recurring writedowns relating to copyrights and
associated inventory of $7,595 in 1994 and, for certain data processing
software, of $323 in 1995, in each case to net realizable value. EBITDA data
is included because we understand that such information is considered by
certain investors as an additional basis on which to evaluate American
Guidance's ability to pay interest, repay debt and make capital
expenditures. Because all companies do not calculate EBITDA identically, the
presentation of EBITDA in this prospectus is not necessarily comparable to
similarly titled measures of other companies. EBITDA does not represent and
should not be considered more meaningful than, or an alternative to,
measures of operating performance as determined in accordance with generally
accepted accounting principles.
(d) Amounts include interest expense, net of interest income.
(e) Ratio of earnings to fixed charges is calculated as earnings, which is
defined as net income (loss) before income tax (expense) benefit plus fixed
charges, divided by fixed charges. Fixed charges are defined as interest
expensed and capitalized, amortized premiums, discounts and capitalized
expenses related to indebtedness and estimated interest included in rental
expense. Earnings were insufficient to cover fixed charges by $6,445 in
fiscal year 1994.
61
SELECTED HISTORICAL FINANCIAL INFORMATION
WRC MEDIA INC. AND ITS SUBSIDIARY (COMPASSLEARNING)
The following table presents selected historical financial information for
CompassLearning for the fiscal year ended June 30, 1994, the period July 6, 1994
through June 29, 1995, the six months ended December 31, 1995, the fiscal years
ended December 31, 1996, 1997 and 1998, and the nine-month periods ended
September 30, 1998 and the period from January 1, 1999 through July 13, 1999 and
the period July 14, 1999 through September 30, 1999. The selected historical
financial information presented in the table below is based on the audited
historical financial statements of CompassLearning for the fiscal year ended
June 30, 1994, the period July 6, 1994 through June 29, 1995 and the six months
ended December 31, 1995, which are not included in this prospectus, as well as
the audited historical financial statements of CompassLearning for the fiscal
years ended December 31, 1996, 1997 and 1998, and the unaudited historical
condensed financial statements for the nine-month period ended September 30,
1998 and the period from January 1, 1999 through July 13, 1999 and the period
July 14, 1999 through September 30, 1999, which are included elsewhere in this
prospectus. The selected historical condensed financial information for the
nine-month period ended September 30, 1998 is unaudited, and in the opinion of
management, reflects all adjustments, consisting of normal recurring
adjustments, that are necessary to present fairly the financial results for
these periods. The selected historical financial information does not purport to
indicate results of operations as of any future date or for any future period.
This information should be read in conjunction with "Management's Discussion and
Analysis of Financial Conditions and Results of Operations--Results of
Operations--WRC Media and its Subsidiary (CompassLearning)," and the audited and
unaudited financial statements of CompassLearning and the notes to them,
included elsewhere in this prospectus.
PRE-PREDECESSOR PREDECESSOR
--------------------------- ---------------------------------------------------------------
PERIOD FROM PERIOD FROM NINE MONTHS
YEAR ENDED JULY 6, 1994- JUNE 30, 1995- ENDED
JUNE 30, JUNE 29, DECEMBER 31, YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------- ------------- -------------- ------------------------------ -------------
1994(A) 1995(A) 1995(A) 1996 1997 1998 1998
----------- ------------- -------------- -------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Net revenue:
Software.................... $ 68,970 $ 43,720 $ 26,950 $ 40,423 $ 29,159 $30,949 $23,096
Service..................... 57,675 46,699 19,783 35,385 36,029 33,935 25,737
Hardware (b)................ 50,824 20,303 14,428 10,924 6,624 4,014 3,227
-------- -------- -------- -------- -------- ------- -------
177,469 110,722 61,161 86,732 71,812 68,898 52,060
Cost of products sold (c)..... 130,103 71,482 40,293 50,161 59,384 29,400 21,779
-------- -------- -------- -------- -------- ------- -------
Gross profit.................. 47,366 39,240 20,868 36,571 12,428 39,498 30,281
Selling and administrative
expenses:
Sales and marketing......... 42,203 28,826 15,994 28,019 31,357 24,034 19,477
Research and development.... 12,902 9,558 5,093 11,715 11,177 8,022 6,393
Write-off of in-process
research and development.. -- -- 11,772
General and administrative
(d)....................... 13,242 10,202 4,733 11,281 13,508 7,705 6,392
Amortization of
intangibles............... -- -- 1,853 3,245 5,449 245 184
Restructuring (e)........... 59,336 -- -- -- -- 3,012 3,012
-------- -------- -------- -------- -------- ------- -------
Income (loss) from
operations.................. (80,317) (9,346) (18,577) (17,689) (49,063) (3,520) (5,177)
Other (expense) income (f).... -- (3,053) (789) -- (2,128) 33 24
Interest expense, net......... (1,940) -- (1,907) (4,590) (5,013) (4,286) (3,193)
-------- -------- -------- -------- -------- ------- -------
Loss before income taxes...... (82,257) (12,399) (21,273) (22,279) (56,204) (7,773) (8,346)
Income tax (expense)
benefit..................... 15,547 (175) (208) -- -- -- --
-------- -------- -------- -------- -------- ------- -------
Net Loss...................... $(66,710) $(12,574) $(21,481) $(22,279) $(56,204) $(7,773) $(8,346)
======== ======== ======== ======== ======== ======= =======
OTHER DATA:
EBITDA (g).................... $ 2,531 $ 1,509 $ 755 $ (1,943) $(15,301) $ 3,550 $ (781)
Depreciation and
amortization................ 23,512 13,908 8,349 15,746 33,733 4,025 2,922
Capital expenditures.......... 3,994 2,582 1,323 901 1,136 536 257
Ratio of earnings to fixed
charges (h)................... -- -- -- -- -- -- --
BALANCE SHEET DATA (AT END OF ) (UNAUDITED
PERIOD):
Total assets.................. $119,999 $ 85,756 $123,672 $ 95,063 $ 41,816 $31,753 36,881
Total debt.................... -- -- 26,450 16,020 25,500 28,989 32,312
Total stockholder's equity
(deficit)................... 51,028 39,901 18,076 23,138 (33,066) (40,525) (52,372)
PREDECESSOR SUCCESSOR
------------ --------------
PERIOD FROM PERIOD FROM
JANUARY 1, JULY 14, 1999-
1999-JULY 13 SEPTEMBER 30,
------------ --------------
1999 1999
------------ --------------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Net revenue:
Software.................... $16,231 $ 7,821
Service..................... 15,923 6,291
Hardware (b)................ 1,669 735
------- --------
33,823 14,847
Cost of products sold (c)..... 13,374 5,329
------- --------
Gross profit.................. 20,449 9,518
Selling and administrative
expenses:
Sales and marketing......... 11,038 4,971
Research and development.... 3,831 1,824
Write-off of in-process
research and development.. 9,000
General and administrative
(d)....................... 3,978 1,382
Amortization of
intangibles............... 131 1,739
Restructuring (e)........... -- --
------- --------
Income (loss) from
operations.................. 1,471 (9,398)
Other (expense) income (f).... 605 16
Interest expense, net......... (2,854) (914)
------- --------
Loss before income taxes...... (778) (10,296)
Income tax (expense)
benefit..................... -- --
------- --------
Net Loss...................... $ (778) $(10,296)
======= ========
OTHER DATA:
EBITDA (g).................... $ 3,393 $ 1,834
Depreciation and
amortization................ 1,720 2,216
Capital expenditures.......... 142 167
Ratio of earnings to fixed
charges (h)................... -- --
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets.................. $27,695 $ 78,488
Total debt.................... 31,642 25,499
Total stockholder's equity
(deficit)................... 41,619 20,548
62
(a) The financial position and results of operations on and prior to June 29,
1995 are shown on a predecessor basis prior to the purchase accounting
related to the acquisition of CompassLearning by its prior owner. In
connection with a change in independent accountants, the five-day period
from July 1, 1994 through July 5, 1994 was not audited. Management believes
that there was no revenue and expense activity during this period. Following
the acquisition of CompassLearning by its previous owner on June 29, 1995,
CompassLearning's fiscal year end was changed from June 30 to December 31.
(b) During the year ended June 30, 1994, CompassLearning began discontinuing its
wholesale hardware business because of its lower profit margins as compared
to CompassLearning's other businesses as well as to reduce the need for
inventory and the risk of technological change rendering inventory obsolete.
(c) During the year ended June 30, 1994, CompassLearning accelerated the
amortization charge on capitalized software development costs by $27,222 and
during the year ended December 31, 1997, by $17,269, to reflect net
realizable value of capitalized software development cost on hand as of
these dates. Subsequent to January 1, 1998, all software development costs
have been expensed as incurred as no such costs have been considered
eligible for capitalization.
(d) The balance for the period ended June 29, 1995, includes $2,013 of executive
bonuses paid in connection with the acquisition of CompassLearning by its
former owner that were previously included in intercompany charges.
(e) In 1994 and 1998, CompassLearning adopted formal action plans for
restructuring its operations. The charge to earnings was $59,336 in 1994 and
$3,012 in 1998. The 1994 restructuring included the exiting of certain lines
of business and headcount reductions. The 1998 restructuring included a
realignment of sale and service functions, certain on-line training
initiatives and headcount reductions. See "Management's Discussion and
Analysis of Financial Condition and Results of
Operations--Overview--CompassLearning Restructuring."
(f) For the year ended December 31, 1997 and for the six months period ended
July 13, 1999, $2,157 of other expense and $396 of other income, was
recorded to account for the non-recurring loss and gain associated with the
sale of stock, respectively, and is excluded from EBITDA.
(g) EBITDA is defined as income (loss) before interest expense, income taxes,
depreciation and amortization, restructuring charges and non-recurring
items. CompassLearning recorded restructuring charges of $59,336 in 1994 and
$3,012 in 1998. EBITDA excludes non-recurring charges of $11,772, related to
an in-process research and development write-off in the period from
June 30, 1995 to December 31, 1995, and $2,157, related to the write-off of
an investment in the year ended December 31, 1997, and non-recurring income
of $396, related to the gain on the sale of an investment, in the six month
period ended July 13, 1999. EBITDA data is included because we understand
that such information is considered by certain investors as an additional
basis on which to evaluate CompassLearning's ability to pay interest, repay
debt and make capital expenditures. Because all companies do not calculate
EBITDA identically, the presentation of EBITDA in this prospectus is not
necessarily comparable to similarly titled measures of other companies.
EBITDA does not represent and should not be considered more meaningful than,
or an alternative to, measures of operating performance as determined in
accordance with generally accepted accounting principles.
(h) Ratio of earnings to fixed charges is calculated as earnings, which is
defined as income (loss) before income tax provision (benefit) plus fixed
charges, divided by fixed charges. Fixed charges are defined as interest
expensed and capitalized, amortized premiums, discounts and capitalized
expenses related to indebtedness and estimated interest included in rental
expense. Earnings were insufficient to cover fixed charges by $12,399,
$21,273, $22,279, $56,204, $7,773, $8,346, $778 and $10,296 for the periods
July 6, 1994 through June 29, 1995; June 30, 1995 through December 31, 1995;
the years ended December 31, 1996; 1997 and 1998; the nine months ended
September 30, 1998; the period from January 1, 1999 through July 13, 1999;
and July 14, 1999 through September 30, 1999, respectively.
63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE RELATED NOTES OF WEEKLY READER, COMPASSLEARNING AND AMERICAN
GUIDANCE, AND THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF WRC
MEDIA, IN EACH CASE THAT ARE INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE
FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF WEEKLY READER, WRC MEDIA AND ITS SUBSIDIARY (COMPASSLEARNING), AND
AMERICAN GUIDANCE COVER PERIODS PRIOR TO THE CONSUMMATION OF ALL THE
TRANSACTIONS, EXCEPT FOR THE PERIODS THAT REFLECT THE ACQUISITION OF
COMPASSLEARNING ON JULY 14, 1999, DESCRIBED UNDER "TRANSACTIONS." THUS, THIS
DISCUSSION DOES NOT FULLY REFLECT THE IMPACT OF THESE EVENTS OR OF THE BUSINESS
STRATEGY IMPLEMENTED AFTER THE CONSUMMATION OF THE TRANSACTIONS DESCRIBED UNDER
"TRANSACTIONS." SEE "RISK FACTORS" AND "--LIQUIDITY AND CAPITAL RESOURCES."
UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO "WEEKLY READER" IN THIS
SECTION ARE TO WEEKLY READER AND ITS SUBSIDIARIES, INCLUDING AMERICAN GUIDANCE,
WORLD ALMANAC AND LIFETIME LEARNING SYSTEMS, INC.
OVERVIEW
We are a leading publisher of supplemental education materials for the Pre
K-12 education market. Our portfolio of products includes a broad range of both
print and electronic supplemental instructional materials, testing and
assessment products and library materials, several of which have been published
for over 40 years, including, but not limited to:
- WEEKLY READER;
- TEEN NEWSWEEK;
- the PEABODY PICTURE VOCABULARY TEST;
- TOMORROW'S PROMISE;
- THE WORLD ALMANAC AND BOOK OF FACTS; and
- FACTS ON FILE WORLD NEWS DIGEST.
Our targeted customers are:
- teachers;
- school and school district-level administrators;
- librarians;
- other educational professionals; and
- parents.
One or more of our products are used in over 80,000, or approximately 75% of the
elementary, middle and secondary schools in the United States.
Our revenues consist primarily of:
- subscription revenues for our periodicals;
- revenues from sales of printed products (including nonfiction and fiction
books, workbooks, worktexts, reference materials and test preparation
materials);
- computer courseware and hardware;
- professional development services; and
- technical support services.
64
Our operations are conducted primarily through the following four operating
subsidiaries:
- Weekly Reader;
- American Guidance;
- World Almanac; and
- CompassLearning.
On July 14, 1999, WRC Media acquired 100% of the capital stock of
CompassLearning through a wholly owned subsidiary. On August 13, 1999, WRC Media
entered into the recapitalization agreement providing for the recapitalization
of PRIMEDIA's Supplemental Education Group. In connection with the
recapitalization, PRIMEDIA contributed 100% of the outstanding capital stock of
American Guidance and World Almanac to Weekly Reader, prior to WRC Media's
acquisition of 94.9% of the outstanding common stock of Weekly Reader, with the
remaining 5.1% being retained by PRIMEDIA.
The financial statements for Weekly Reader included in this prospectus and
used as a basis for the financial presentation and discussion of Weekly Reader's
results of operations below include a retroactive adjustment on Weekly Reader's
financial statements reflecting the contribution of 100% of the capital stock of
American Guidance and World Almanac by PRIMEDIA to Weekly Reader using the
historical carrying value of such stock. Such financial statements include the
operations of American Guidance since PRIMEDIA acquired all of its capital
stock, which was effective on July 1, 1998. Separate financial statements for
American Guidance's fiscal years ended June 30, 1996, 1997 and 1998, the most
recently reported financial periods prior to its acquisition by PRIMEDIA, are
also included in this prospectus with a related separate results of operations
discussion for such periods. Upon acquisition by PRIMEDIA, the fiscal year of
American Guidance was changed to end on December 31 each year.
REVENUES.
For the nine months ended September 30, 1999, Weekly Reader (not including
American Guidance or World Almanac) had net revenue of $28.0 million, American
Guidance had net revenue of $39.5 million, World Almanac had net revenue of
$34.2 million. For the period between January 1, 1999 to July 13, 1999,
CompassLearning had net revenue of $34.0 million and for the period between
July 14, 1999 to September 30, 1999, WRC Media and its Subsidiary
(CompassLearning) had net revenue of $14.8 million.
WEEKLY READER. Weekly Reader's revenues are derived from its own
operations, including those of its subsidiary Lifetime Learning Systems, Inc.,
as well as from the operations of American Guidance and World Almanac. Weekly
Reader (not including American Guidance or World Almanac) derives revenues from
three primary sources:
- periodicals;
- skills books; and
- sponsored instructional materials published by Lifetime Learning
Systems, Inc.
Weekly Reader's periodicals are sold as subscriptions, all of which are for
periods of twelve months or less, with a significant amount of each year's
revenues coming from subscription renewals. Lifetime Learning Systems, Inc.'s
sponsored supplemental educational materials are paid for by corporate, trade
association or not-for-profit sponsors and are distributed for free primarily to
K-12 students. American Guidance derives revenues from two product lines:
- testing and assessment products; and
- supplemental instructional materials.
65
Testing and assessment products are typically sold in kits containing the test,
test record forms, easels used to administer the test, scoring sheets and a
manual describing the proper use of the test. Each test uses a different test
record form, which typically come in packages of 25 and must be purchased from
American Guidance for as long as the school uses the test (some tests are used
for over 15 years). Approximately 37% of American Guidance's revenues from
testing and assessment products for the twelve months ended June 30, 1999 were
from replenishment sales for these test record forms. American Guidance's
supplemental instructional materials consist of curriculum-based instructional
materials and are sold primarily to middle and secondary schools. World Almanac
derives revenues primarily from the sale of its reference and informational
materials, including:
- printed products and electronic databases;
- nonfiction and fiction books; and
- the distribution of third-party products targeted for K-12 students.
Weekly Reader's subscriptions are recorded as deferred revenue when received and
recognized as income over the term of the subscription, whereas sales of its
other products, including sponsored instructional materials, skills books, tests
and other supplemental instructional materials, are recognized as revenue upon
shipment, generally net of an allowance for returns.
COMPASSLEARNING. CompassLearning's revenues are derived from its:
- software products;
- professional development services;
- technical support services; and
- hardware sales.
CompassLearning's software products include:
- electronic courseware;
- assessment software;
- management systems; and
- Internet-based products.
Sales of software products historically have been negatively impacted primarily
due to two factors:
- product introduction issues; and
- a disruption in CompassLearning's sales force.
Prior to 1995, CompassLearning's product development strategy focused on
providing certain product features and functions that were dependent on emerging
technological advances which typically required proprietary hardware to function
and were not compatible with many third-party products. Following the 1995
acquisition by its former owner, CompassLearning changed its strategy to develop
products based on known technology platforms which included standard hardware
configurations and were more compatible with third-party products, thereby
addressing a broader marketplace and minimizing the risk of product
obsolescence. The acquisition of Ideal Learning, Inc. in December 1995, allowed
CompassLearning to accelerate its strategic direction to release a management
system that functioned in an open environment and co-existed with third-party
products and to package its curriculum products by subject and by grade. In
order to decrease time to market, the new product offerings of TOMORROW'S
PROMISE and COMPASS were released in stages throughout 1997. While market
acceptance of the new products was strong, customers were reluctant to migrate
to the new product
66
line until some features were available, which occurred in early 1998.
Therefore, the full benefit of this new product line was not realized until
1998, when software revenue grew by 6%.
In addition, during the nine months following the 1995 acquisition of
CompassLearning by its former owner, a significant portion of the
CompassLearning's seasoned sales personnel left to join a start-up company. The
departing sales representatives collectively accounted for approximately
$20 million of new software sales in the twelve-month period prior to their
respective departures. This disruption in the sales force negatively impacted
CompassLearning's sales cycle and resulted in reduced sales in 1997.
CompassLearning typically sells its professional development services and
technical support services on an annual basis. Professional development services
generally consist of a specific number of days of training. Technical support
service contracts are typically for one-year periods and are provided at varying
levels, from telephone help-line services to priority systems engineer
dispatching. CompassLearning's electronic courseware customers purchase, on
average, eight days of professional development services and a one-year
technical support contract for help-line and systems engineer services in
connection with their software purchases. These service contracts are frequently
renewed following the expiration of the initial service period, with
approximately 23% of professional development services revenue and approximately
57% of technical support services revenue for the twelve months ended June 30,
1999 coming from renewal sales. CompassLearning's services revenues,
particularly those attributable to renewals of existing services contracts, have
been decreasing recently as a result of:
- the decrease in new software sales, which reduces the amount of new
service sales as well as subsequent renewal sales;
- the improved quality of our software products, which require less
technical support;
- more customers supplying their own training and support services through
in-house expertise; and
- the allocation by customers of a greater amount of limited resources to
upgrade their hardware and software systems for Year 2000 compliance.
Services revenues are recognized over the period of the applicable service
contract.
CompassLearning's hardware business revenues are generally derived from
reselling hardware to customers who request that CompassLearning provide a
package of software and hardware. Prior to 1995, CompassLearning offered
hardware to customers as a wholesaler of private label and other products.
However, because of the less profitable nature of the business compared to
CompassLearning's other businesses and to reduce the need for inventory and the
risk of technological change rendering inventory obsolete, CompassLearning began
discontinuing its wholesale hardware business in 1994. Currently,
CompassLearning is a reseller for Apple, IBM, Compaq and Dell computers in order
to accommodate requests by customers for complete hardware and software
solutions. Revenues from sales of hardware are typically recognized upon
shipment.
OPERATING COSTS AND EXPENSES.
WEEKLY READER. For Weekly Reader, operating costs and expenses are
comprised primarily of:
- cost of goods sold;
- marketing and selling;
- distribution;
- circulation and fulfillment;
67
- editorial;
- general and administrative expenses;
- corporate and group overhead costs; and
- depreciation and amortization.
Weekly Reader's cost of goods sold for its products consist primarily of paper,
printing and binding costs. Marketing and selling expenses are typically for
direct mail costs including:
- postage;
- paper;
- printing;
- advertising;
- mailing list rental fees;
- telemarketing costs; and
- the costs of sales employees.
Distribution, circulation and fulfillment expenses are typically for postage,
third-party fulfillment, warehousing and shipping. Weekly Reader's editorial
costs consist of expenses incurred for its staff of writers as well as
third-party contractors, such as freelance writers. General and administrative
expenses consist primarily of:
- salaries and fringe benefits for executives as well as for finance,
information technology and human resources employees;
- information technology expenses (other than salaries); and
- real estate expenses.
Corporate and group overhead costs include costs for:
- amounts allocated as corporate overhead by PRIMEDIA for services and
administrative functions shared with PRIMEDIA and its other operating
companies, including, but not limited to:
-- executive management costs,
-- salaries and fringe benefits for certain legal, financial,
information technology and human resources personnel,
-- information technology expenses,
-- real estate expenses,
-- third-party costs; and
- direct group overhead, such as salaries, fringe benefits and other
expenses for PRIMEDIA staff directly involved in operating Weekly Reader.
COMPASSLEARNING. CompassLearning's operating costs and expenses consist
primarily of:
- cost of products sold;
- sales and marketing;
- research and development; and
68
- general and administrative expenses.
Sales and marketing expenses are the largest component of operating costs and
expenses and consist primarily of direct sales force expenses as well as
expenses for promotional activities. Sales and marketing expenses increased
significantly in 1997 and 1998 as a result of the introduction of TOMORROW'S
PROMISE and COMPASS in April 1997, including the development of new promotional
materials for the products, and the need to hire and train sales personnel to
replace those lost to a competitor following the prior owner's acquisition of
CompassLearning in 1995. Cost of products sold consist primarily of:
- production and packaging costs, royalty expenses and amortization of
capitalized software development costs for software products;
- salaries and related costs of employees providing professional development
services and technical support services for CompassLearning's services
business; and
- the cost to CompassLearning to purchase the hardware for resale, as well
as the internal cost to support this line of business, for its hardware
business.
Research and development costs consist primarily of salaries and related costs
of employees, as well as temporary staff hired as needed, and are typically
expensed as incurred. Prior to 1996, CompassLearning had been capitalizing
approximately 50% or more of its software development costs. In 1997,
CompassLearning's product focus changed with the introduction of TOMORROW'S
PROMISE, and amortization charges of approximately $17.3 million in connection
with older capitalized software were accelerated to reflect such software's new
net realizable values. This cost is included in cost of goods sold. Since
January 1, 1998, all new software development costs have been expensed as
incurred as no such costs have been considered eligible for capitalization.
COMPASSLEARNING RESTRUCTURING.
In July 1998, CompassLearning implemented an extensive re-engineering effort
to reduce operating costs through increased efficiencies. As part of this
effort, the following major steps were taken:
- sales and services were realigned geographically to reduce travel time and
expenses;
- on-line training was introduced and new productivity tools for the field
support staff were implemented to reduce costs and increase operational
leverage; and
- headcount was reduced from 695 to a targeted level of 545, primarily
through reductions in sales and administrative, service and training
areas.
CompassLearning recorded a $3.0 million charge for the year ended
December 31, 1998, in connection with these restructuring efforts. Primarily as
a result of these efforts, cost of goods sold for our services and selling and
administrative expenses at CompassLearning were reduced by at least
$20.0 million during the year ended December 31, 1998 compared to the year ended
December 31, 1997.
69
RESULTS OF OPERATIONS--WEEKLY READER
The following table sets forth, for the periods indicated, statements of
consolidated operations data, expressed in millions of dollars and as a
percentage of net sales. The financial statements for Weekly Reader included in
this prospectus and used as a basis for the financial presentation and
discussion of Weekly Reader's results of operations herein reflect the
contribution by PRIMEDIA of 100% of the capital stock of American Guidance and
World Almanac to Weekly Reader. For accounting purposes, such contribution has
been reflected as a reorganization of entities under common control.
Accordingly, all prior periods have been restated to reflect that reorganization
using the historical carrying value of such stock. The financial statements
include the operations of American Guidance since PRIMEDIA acquired its capital
stock, which was effective on July 1, 1998. For a discussion of the results of
operations of American Guidance prior to July 1, 1998, see "--Results of
Operations--American Guidance."
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
1998 1999
-------------------- --------------------
% OF % OF
AMOUNT NET SALES AMOUNT NET SALES
-------- --------- -------- ---------
(UNAUDITED)
(DOLLARS IN MILLIONS)
Sales, net................................................ $74.0 100.0% $101.6 100.0%
Cost of goods sold........................................ 19.1 25.8% 27.9 27.5%
----- ----- ------ -----
Gross profit.............................................. 54.9 74.2% 73.7 72.5%
OPERATING COSTS AND EXPENSES:
Marketing and selling................................... 10.6 14.3% 16.5 16.2%
Distribution, circulation and fulfillment............... 7.1 9.6% 8.4 8.3%
Editorial............................................... 7.4 10.0% 7.3 7.2%
General and administrative.............................. 10.4 14.1% 11.9 11.7%
Corporate and group overhead (a)........................ 2.9 3.9% 5.5 5.4%
Depreciation and amortization........................... 8.0 10.8% 11.9 11.7%
----- ----- ------ -----
Operating income.......................................... 8.5 11.5% 12.2 12.0%
Other income (expense):
Intercompany interest expense (b)....................... (4.0) (5.4%) (10.1) (9.9%)
Amortization of deferred financing costs................ (0.1) (0.1%) (0.2) (0.2%)
Other, net.............................................. (0.2) (0.3%) (0.6) (0.6%)
----- ----- ------ -----
Income (loss) before income tax provision (benefit)....... 4.2 5.7% 1.3 1.3%
Income tax provision...................................... 3.0 4.1% 1.9 1.9%
----- ----- ------ -----
Net income (loss)......................................... $ 1.2 1.6% $ (0.6) (0.6%)
===== ===== ====== =====
- ------------------------
(a) Includes costs for: (1) amounts allocated as corporate overhead to Weekly
Reader by PRIMEDIA for services and administrative functions shared with
PRIMEDIA and its other operating companies including, but not limited to,
executive management costs, salaries and fringe benefits for certain legal,
financial, information technology and human resources personnel, information
technology expenses, real estate expenses and third-party costs; and
(2) direct group overhead costs, such as the salaries, fringe benefits and
expenses for PRIMEDIA staff directly involved in operating Weekly Reader.
(b) Allocation of interest expense arising from borrowings at the PRIMEDIA
corporate level.
70
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1997 1998
-------------------- -------------------- --------------------
% OF % OF % OF
AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES
-------- --------- -------- --------- -------- ---------
(DOLLARS IN MILLIONS)
Sales, net....................................... $89.7 100.0% $92.9 100.0% $118.2 100.0%
Cost of goods sold............................... 25.5 28.4% 23.8 25.6% 30.6 25.9%
----- ----- ----- ----- ------ -----
Gross profit..................................... 64.2 71.6% 69.1 74.4% 87.6 74.1%
OPERATING COSTS AND EXPENSES:
Marketing and selling.......................... 13.1 14.6% 11.8 12.7% 17.6 14.9%
Distribution, circulation and fulfillment...... 10.8 12.1% 11.6 12.5% 10.9 9.2%
Editorial...................................... 8.9 9.9% 9.0 9.7% 10.6 9.0%
General and administrative..................... 11.6 12.9% 12.7 13.7% 15.3 12.9%
Corporate and group overhead (a)............... 2.7 3.0% 2.5 2.6% 5.6 4.8%
Depreciation and amortization.................. 13.2 14.7% 11.4 12.3% 12.2 10.3%
----- ----- ----- ----- ------ -----
Operating income................................. 3.9 4.4% 10.1 10.9% 15.4 13.0%
Other income (expense):
Intercompany interest expense (b).............. (5.9) 6.6% (7.0) 7.5% (9.2) 7.7%
Amortization of deferred financing costs....... (0.9) 1.0% (0.6) 0.7% (0.2) 0.2%
Other, net..................................... -- -- 1.5 1.6% (0.2) 0.2%
----- ----- ----- ----- ------ -----
Income (loss) before income tax provision
(benefit)...................................... (2.9) 3.2% 4.0 4.3% 5.8 4.9%
Income tax provision (benefit)................... (1.1) 1.2% 5.8 6.2% 3.9 3.3%
----- ----- ----- ----- ------ -----
Net income (loss)................................ $(1.8) 2.0% $(1.8) 1.9% $ 1.9 1.6%
===== ===== ===== ===== ====== =====
- ------------------------
(a) Includes costs for: (1) amounts allocated as corporate overhead to Weekly
Reader by PRIMEDIA for services and administrative functions shared with
PRIMEDIA and its other operating companies including, but not limited to,
executive management costs, salaries and fringe benefits for certain legal,
financial, information technology and human resources personnel, information
technology expenses, real estate expenses and third party costs; and
(2) direct group overhead costs, such as the salaries, fringe benefits and
expenses for PRIMEDIA staff directly involved in operating Weekly Reader.
(b) Allocation of interest expense arising from borrowings at the PRIMEDIA
corporate level.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
SALES, NET. For the nine months ended September 30, 1999, net sales
increased $27.6 million, or 37.3%, to $101.6 million from $74.0 million for the
same period in 1998. This increase was primarily due to the inclusion of an
additional $21.7 million of sales attributable to American Guidance as it was
included in the operations for the full nine months in 1999, compared to three
months in 1998, as American Guidance was acquired as of July 1, 1998.
Additionally, Weekly Reader's (not including World Almanac and American
Guidance) net sales increased by $3.3 million or 13.4%, due to an increase in
sales of sponsored instructional material by Lifetime Learning Systems, Inc.
Further, World Almanac's sales increased by $2.6 million, or 8.2%, primarily due
to increased sales by World Almanac Education as a result of increases in the
number of products offered in, and in the mailing volume of, certain catalogs.
GROSS PROFIT. For the nine months ended September 30, 1999, gross profit
increased by $18.8 million, or 34.2%, to $73.7 million from $54.9 million for
the same period in 1998. This increase was primarily due to the inclusion of an
additional $16.6 million of gross profit attributable to American Guidance as it
was included in the operations for a full nine months in 1999, compared to
71
three months in 1998. In addition, Weekly Reader's (not including World Almanac
and American Guidance) gross profit increased by $1.8 million, or 8.6% due to
increased sales of Lifetime Learning Systems, Inc.'s instructional materials.
World Almanac's gross profit increased by a net of $0.4 million, or 1.7%,
resulting from increased sales, which was offset by a charge of $1.2 million
related to excess inventory levels at World Almanac's Gareth Stevens, Inc.
division. Gross profit as a percentage of sales decreased to 72.5%, from 74.2%
for the same period in 1998. This decrease was due to a slight product mix
change, as Lifetime Learning System, Inc.'s sponsored instructional materials
are sold at a lower gross profit margin than Weekly Reader's classroom
periodicals. Additionally, the gross profit margin decreased due to World
Almanac's inventory related charge previously noted.
OPERATING COSTS AND EXPENSES. For the nine months ended September 30, 1999,
operating costs and expenses increased by $15.1 million, or 32.5%, to
$61.5 million from $46.4 million for the same period in 1998. The increase was
primarily due to the inclusion of an additional $14.8 million of additional
operating expenses attributable to American Guidance as it was included in the
operations for a full nine months in 1999, compared to three months in 1998. For
the nine months ended September 30, 1999, operating costs and expenses as a
percentage of sales decreased to 60.5% from 62.7% for the same period in 1998.
This decrease was primarily due to increased sales at Weekly Reader (excluding
World Almanac and American Guidance) and World Almanac. Sales for these two
units combined increased by $6.0 million or 10.7%, while operating costs and
expenses increased at a lower rate, by $0.3 million or 0.8% to $39.4 million
from $39.1 million, for the same period in 1998.
OPERATING INCOME. For the nine months ended September 30, 1999, operating
income increased by $3.7 million, or 43.5%, to $12.2 million from $8.5 million
for the same period in 1998, and operating income as a percentage of sales
increased to 12.0% from 11.5% for the same period in 1998. These increases were
primarily due to the factors described above.
INTERCOMPANY INTEREST EXPENSE. For the nine months ended September 30,
1999, intercompany interest expense increased by $6.1 million, or 152.5%, to
$10.1 million from $4.0 million for the same period in 1998, and intercompany
interest expense as a percentage of sales increased to 9.9% from 5.4% for the
same period in 1998. These increases were primarily as a result of the inclusion
of additional PRIMEDIA allocations of intercompany interest expense related to
the acquisition of American Guidance.
OTHER, NET. For the nine months ended September 30, 1999, other expense,
net increased by $0.4 million, to $0.6 million from $0.2 million for the same
period in 1998. This increase was a result of an increase in miscellaneous taxes
at Weekly Reader (not including World Almanac and American Guidance) and
American Guidance.
INCOME TAX PROVISION. For the nine months ended September 30, 1999, income
tax provision decreased by $1.1 million, or 36.7%, to $1.9 million from
$3.0 million for the same period in 1998. This decrease was primarily due to
lower income before income tax provision for the nine months ended
September 30, 1999 compared to the same period in 1998. Income tax provision as
a percentage of income before income tax provision, or the effective income tax
rate, increased to 146.2% for the nine months ended September 30, 1999 from
71.4% for the same period in 1998. This increase is mainly attributable to the
non-deductible goodwill relating to the acquisition of American Guidance. Weekly
Reader's high effective tax rate is attributable to PRIMEDIA's accounting policy
whereby Weekly Reader, American Guidance, and World Almanac are not permitted to
offset income/losses among that group but rather receive tax benefits only if
such entities would have received such benefits on a separate company return
basis.
NET INCOME (LOSS). For the nine months ended September 30, 1999, net income
decreased by $1.8 million, to a net loss of $0.6 million from net income of
$1.2 million for the same period in 1998. Net income (loss) as a percentage of
net sales decreased to a negative 0.6% for the nine months ended
72
September 30, 1999 from a positive 1.6% for the same period in 1998. These
decreases were primarily due to the factors described above.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
SALES, NET. For the year ended December 31, 1998, net sales increased by
$25.3 million, or 27.2%, to $118.2 million from $92.9 million in 1997. This
increase was primarily due to the acquisition of American Guidance, which added
$26.6 million in sales. This increase was partially offset by a decrease in
Weekly Reader's (not including World Almanac and American Guidance) net sales of
$1.5 million, or 3.3%, to $43.7 million in 1998 from $45.2 million in 1997 as a
result of a change in the publishing schedule in 1997 which shifted one issue of
the periodicals from January 1998 to December 1997. As a result of this
permanent change, 1997 contained 27 issues instead of the conventional 26 that
were shipped in 1998, as well as years prior to and subsequent to 1997. World
Almanac sales increased by $0.2 million, or 0.4%, to $47.9 million in 1998 from
$47.7 million in 1997 as a result of a sales increase of $1.6 million due to
increases in the number of products offered in, and in the mailing volume of,
certain catalogs and as a result of a sales increase of $1.4 million as a result
of the February 1997 acquisition of Gareth Stevens, Inc. (1997 results do not
include Gareth Stevens, Inc. for January 1997). These increases were partially
offset by a sales decrease of $2.4 million at Funk & Wagnalls from the decline
in print encyclopedia sales and attrition to the annuals customer list.
GROSS PROFIT. For the year ended December 31, 1998, gross profit increased
by $18.5 million, or 26.8%, to $87.6 million from $69.1 million in 1997. Gross
profit as a percentage of net sales decreased to 74.1% in 1998 from 74.4% in
1997. This increase and decrease, respectively, were primarily due to the
acquisition of American Guidance which added $19.0 million in gross profit but
operated at a lower gross margin than Weekly Reader's other businesses.
OPERATING COSTS AND EXPENSES. For the year ended December 31, 1998,
operating costs and expenses increased by $13.2 million, or 22.4%, to
$72.2 million from $59.0 million in 1997. This increase was primarily due to the
acquisition of American Guidance, which added $17.1 million to operating costs
and expenses, partially offset by a reduction of $3.8 million in operating
expenses at World Almanac, as a result of lower intangible amortization at Facts
On File News Services and Funk & Wagnalls. For the year ended December 31, 1998,
operating costs and expenses as a percentage of sales decreased to 61.1% from
63.5% in 1997. This decrease was primarily due to the decline in intangible
asset amortization at World Almanac, which decreased World Almanac's operating
costs and expenses as a percentage of sales to 56.2% in 1998 from 64.4% in 1997
and was partially offset by the inclusion of American Guidance which had higher
operating costs and expenses as a percentage of sales than Weekly Reader's other
businesses for the period.
OPERATING INCOME. For the year ended December 31, 1998, operating income
increased by $5.3 million, or 52.5%, to $15.4 million from $10.1 million in 1997
and operating income as a percentage of net sales increased to 13.0% from 10.9%
in 1997. These increases were primarily due to the factors described above.
INTERCOMPANY INTEREST EXPENSE. For the year ended December 31, 1998,
intercompany interest expense increased $2.2 million, or 31.4%, to $9.2 million
from $7.0 million in 1997 and intercompany interest expense as a percentage of
net sales increased to 7.7% from 7.5% for the same period in 1997. These
increases were primarily due to increased allocations from PRIMEDIA as a result
of the acquisition of American Guidance.
OTHER, NET. For the year ended December 31, 1998, other, net decreased by
$1.7 million to $(0.2) million from $1.5 million. This decrease was the result
of a gain on the sale of assets realized by Weekly Reader in 1997 that did not
recur in 1998.
INCOME TAX PROVISION (BENEFIT). For the year ended December 31, 1998,
income tax provision decreased $1.9 million, or 32.8%, to $3.9 million from
$5.8 million in 1997 and income tax provision as
73
a percentage of income (loss) before income tax provision (benefit), or the
effective income tax rate, decreased to 67.2% from 145.0%. In both years, the
effective income tax rate was higher than the statutory income tax rate
primarily due to provisions recorded to establish a valuation allowance, in each
such year, against net deferred income tax assets of Weekly Reader. The
effective income tax rate decreased during 1998 primarily due to a reduction in
the provision to record the valuation allowance.
NET INCOME (LOSS). For the year ended December 31, 1998, net income
increased by $3.7 million to $1.9 million, from a net loss of $1.8 million in
1997 and net income as a percentage of sales increased to 1.6% from a net loss
for the same period in 1997. These increases were primarily due to the factors
described above.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
SALES, NET. For the year ended December 31, 1997, net sales increased
$3.2 million, or 3.6%, to $92.9 million from $89.7 million in 1996. This
increase was primarily due to:
- the inclusion of $9.7 million of sales at Gareth Stevens, Inc., which was
acquired in February 1997;
- a $1.1 million increase in Weekly Reader (not including American Guidance
and World Almanac) sales as a result of a change in the publishing
schedule which resulted in 27 periodical issues being shipped in 1997,
versus 26 issues in 1996; and
- the inclusion of $1.0 million in sales resulting from a full year of Facts
On File News Services, which was acquired in March 1996.
This increase was partially offset by decreases of $6.2 million at Funk &
Wagnalls due to the decline in the print encyclopedia business and the attrition
to the annuals customer list, a decrease of $2.7 million for World Almanac due
to the absence in 1997 of one title published in 1996 and the loss of a
significant customer and a decrease in skills book sales of $1.1 million caused
by the Presidential election books sales in 1996 that were not repeated in 1997.
GROSS PROFIT. For the year ended December 31, 1997, gross profit increased
$4.9 million, or 7.6%, to $69.1 million from $64.2 million in 1996 and gross
profit as a percentage of sales increased to 74.4% from 71.6% in 1996. These
increases were primarily due to the inclusion of a full year of Facts On File
News Services, the acquisition of Gareth Stevens, Inc. and a favorable product
mix at World Almanac's other lines of business related to increased sales from
product lines with lower cost of goods/higher gross profit (World Almanac
Education and Gareth Stevens, Inc.), and decreased sales from product lines with
higher cost of goods/lower gross profit (World Almanac and print version of the
FUNK & WAGNALLS ENCYCLOPEDIA).
OPERATING COSTS AND EXPENSES. For the year ended December 31, 1997,
operating costs and expenses decreased $1.3 million, or 2.2%, to $59.0 million
from $60.3 million in 1996 and operating costs and expenses as a percentage of
net sales decreased to 63.5% from 67.2% in 1996. These decreases were primarily
due to a decrease in operating expenses at Weekly Reader (not including American
Guidance and World Almanac) as a result of a decline in promotional expenses
related to a strategic decision to reduce the number of promotional campaigns
and to attempt to focus promotional spending to be more efficient. The decrease
in absolute dollars was partially offset by, and the decrease as a percentage of
sales was partially the result of, the inclusion of Gareth Stevens, Inc. in
1997.
OPERATING INCOME. For the year ended December 31, 1997, operating income
increased by $6.2 million, or 159.0%, to $10.1 million from $3.9 million in 1996
and operating income as a percentage of net sales increased to 10.9% from 4.4%
in 1996. These increases were primarily due to the factors described above.
INTERCOMPANY INTEREST EXPENSE. For the year ended December 31, 1997,
intercompany interest expense increased by $1.1 million, or 18.6%, to
$7.0 million from $5.9 million in 1996. These increases
74
were due to additional allocations by PRIMEDIA to World Almanac as a result of
the acquisition of Gareth Stevens, Inc.
OTHER, NET. For the year ended December 31, 1997, other, net increased by
$1.5 million, to $1.5 million from $0.0 million in 1996. This increase was due
to a gain on the sale of assets realized by Weekly Reader in 1997.
INCOME TAX PROVISION (BENEFIT). For the year ended December 31, 1997,
income tax provision increased $6.9 million, to $5.8 million from a benefit of
$1.1 million in 1996 and income tax provision (benefit) as a percentage of
income (loss) before income tax provision (benefit), or the effective income tax
rate, increased to 145.0% from (37.9)%. The effective income tax rate in 1997 is
higher than the statutory income tax rate primarily due to a provision recorded
to establish a valuation allowance against net deferred income tax assets of
Weekly Reader. The effective income tax rate also increased during 1997
primarily due to the provision to record a valuation allowance against deferred
income tax assets.
NET LOSS. For the year ended December 31, 1997, net loss remained constant
at $1.8 million primarily due to the factors described above.
75
RESULTS OF OPERATIONS--AMERICAN GUIDANCE
The following table sets forth, for the periods indicated, statement of
income data, expressed in millions of dollars and as a percentage of sales.
PRIMEDIA acquired all of the capital stock of American Guidance effective as of
July 1, 1998. Prior to PRIMEDIA's acquisition of American Guidance, American
Guidance's fiscal year ended on June 30 of each year. Following its acquisition
by PRIMEDIA, the fiscal year of American Guidance was changed to December 31 of
each year. American Guidance's results of operations subsequent to July 1, 1998
are included in the results of operations of Weekly Reader.
YEAR ENDED JUNE 30,
------------------------------------------------------------------
1996 1997 1998
-------------------- -------------------- --------------------
% OF % OF % OF
AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES
-------- --------- -------- --------- -------- ---------
(DOLLARS IN MILLIONS)
Sales................................................. $29.4 100.0% $33.5 100.0% $42.7 100.0%
Cost of sales......................................... 8.6 29.3% 9.5 28.4% 11.8 27.6%
----- ----- ----- ----- ----- -----
Gross Profit.......................................... 20.8 70.7% 24.0 71.6% 30.9 72.4%
EXPENSES:
Development......................................... 4.9 16.7% 4.4 13.1% 5.3 12.4%
Sales............................................... 6.8 23.1% 7.5 22.4% 8.5 19.9%
General and administrative.......................... 5.8 19.7% 6.3 18.8% 7.0 16.4%
Pension............................................. 0.4 1.4% 0.5 1.5% 0.5 1.2%
ESOP contribution (a)............................... 1.5 5.0% 1.3 3.9% 1.6 3.8%
----- ----- ----- ----- ----- -----
Operating income...................................... 1.4 4.8% 4.0 11.9% 8.0 18.7%
Other expense (b)..................................... 0.1 0.4% 0.9 2.6% 0.8 1.8%
----- ----- ----- ----- ----- -----
Income before income tax (expense) benefit............ 1.3 4.4% 3.1 9.3% 7.2 16.9%
Income tax (expense) benefit.......................... 0.2 0.7% (0.8) 2.4% (2.7) 6.4%
----- ----- ----- ----- ----- -----
Net income............................................ $ 1.5 5.1% $ 2.3 6.9% $ 4.5 10.5%
===== ===== ===== ===== ===== =====
- --------------------------
(a) Employee Stock Ownership Plan ("ESOP") contribution expenses represent
American Guidance contributions to its leveraged ESOP plan, primarily used
to repay debt of the ESOP. These contributions ended with the acquisition of
American Guidance by PRIMEDIA and will not recur in the future.
(b) Amounts shown net of interest income.
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
SALES. For the year ended June 30, 1998, sales increased $9.2 million, or
27.5%, to $42.7 million from $33.5 million for the same period in 1997. This
increase was primarily due to revisions of American Guidance products, resulting
in increased sales of testing and assessment products of $4.4 million and
supplemental hard cover textbooks of $2.7 million. In addition, sales of
supplemental instructional materials increased $2.1 million primarily as a
result of increased purchases of some of our products by a provider of
nationwide language education programs and increased sales of new test
preparation materials.
GROSS PROFIT. For the year ended June 30, 1998, gross profit increased
$6.9 million, or 28.8%, to $30.9 million from $24.0 million for the same period
in 1997. The increase in gross profit was primarily due to the increase in
sales. For the year ended June 30, 1998, gross profit as a percentage of sales
increased to 72.4% from 71.6% for the same period in 1997. The increase in gross
profit margin was due to product mix.
EXPENSES. For the year ended June 30, 1998, expenses increased
$2.9 million, or 14.5%, to $22.9 million from $20.0 million for the same period
in 1997. Development expenses increased by
76
$0.9 million as a result of the American Guidance strategy of fueling sales
growth with new and revised products. Sales expenses increased by $1.0 million,
due to expanded marketing campaigns to support new and revised products, and
increased costs related to growth in the sales force. General and administrative
costs increased by $0.7 million while an increase in contribution to the ESOP
accounted for $0.3 million. For the period ended June 30, 1998, expenses as a
percentage of net sales decreased to 53.6% from 59.7% in the same period in
1997. This decrease was primarily due to improved operating margins primarily
resulting from growth in sales exceeding growth rates in expenses.
OPERATING INCOME. For the year ended June 30, 1998, operating income
increased by $4.0 million, or 100.0%, to $8.0 million from $4.0 million for the
same period in 1997 and operating income as a percentage of sales increased to
18.7% from 11.9% for the same period in 1997. These increases were primarily due
to the factors described above.
OTHER EXPENSE. For the year ended June 30, 1998, other expense decreased
$0.1 million, or 11.1% to $0.8 million from $0.9 million for the same period in
1997 and other expense as a percentage of sales decreased to 1.8% from 2.6% for
the same period in 1997. These decreases were primarily due to lower interest
expense related to lower debt.
INCOME TAX EXPENSE. For the years ended June 30, 1998 and 1997, income tax
expense increased by $1.9 million, or 237.5%, to $2.7 million from
$0.8 million. The effective tax rates were 37.5% and 25.8%. The effective tax
rate for the year ended June 30, 1998 is higher than the statutory rate
primarily due to state income taxes. The effective tax rate for the year ended
June 30, 1997, is less than the statutory rate primarily due to the tax benefit
recorded for the reduction of the valuation allowance for net deferred income
tax assets.
NET INCOME. For the year ended June 30, 1998, net income increased
$2.2 million, or 95.7%, to $4.5 million from $2.3 million for the same period in
1997 and net income as a percentage of sales increased to 10.5% from 6.9% for
the same period in 1997. These increases were primarily due to the factors
described above.
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
SALES. For the year ended June 30, 1997, sales increased $4.1 million, or
13.9%, to $33.5 million from $29.4 million in 1996. This increase was primarily
due to a $2.4 million increase in sales of testing and assessment products and a
$0.6 million increase in sales of supplemental instructional materials, in each
case as a result of revisions to existing products. In addition, a nationwide
provider of language education programs adopted one of our language development
products, contributing to a further increase in sales of supplemental
instructional materials of $1.0 million.
GROSS PROFIT. For the year ended June 30, 1997, gross profit increased
$3.2 million, or 15.4%, to $24.0 million from $20.8 million for the same period
in 1996. This increase was primarily due to the sales increase. Gross profit as
a percentage of sales increased to 71.6% from 70.7% for the same period in 1996.
This increase in gross profit margin was primarily due to product mix.
EXPENSES. For the year ended June 30, 1997, operating costs and expenses
increased by $0.6 million, or 3.1%, to $20.0 million from $19.4 million for the
same period in 1996. The increase in expenses was primarily due to a
$0.7 million increase in sales expenses to support expanded marketing campaigns
for new products and a $0.5 million increase in general and administrative
expenses from increased compensation expenses, partially offset by a
$0.5 million decrease in development expense as a result of including the
purchase of copyrights for new product lines in other expenses. For the year
ended June 30, 1997, expenses as a percentage of sales decreased to 59.7% from
66.0% for the same period in 1996. This decrease was primarily due to the sales
growth rate being 13.9% while the growth rate in operating expenses was 3.1%.
77
OPERATING INCOME. For the year ended June 30, 1997, operating income
increased $2.6 million, or 185.7%, to $4.0 million from $1.4 million for the
same period in 1996 and operating income as a percentage of sales increased to
11.9% from 4.8% for the same period in 1996. These increases were primarily a
result of the factors described above.
OTHER EXPENSE. For the year ended June 30, 1997, other expense increased
$0.8 million to $0.9 million from $0.1 million for 1996 and other expense as a
percentage of sales increased to 2.6% from 0.4% for 1996. These increases were
primarily the result of $0.7 million of copyright acquisition costs recorded in
1997.
INCOME TAX (EXPENSE) BENEFIT. For the years ended June 30, 1997 and 1996,
income tax expense increased by $1.0 million to an expense of $0.8 million from
a benefit of $0.2 million from the same period in 1996. The effective tax rate
in 1997, was 25.8% and was less than the statutory rate primarily due to the tax
benefit recorded for the reduction of the valuation allowance for net deferred
income tax assets. The tax benefit for the year ended June 30, 1996 is primarily
due to nontaxable life insurance proceeds and a tax benefit for dividends paid
to the ESOP on allocated shares of common stock.
NET INCOME. For the year ended June 30, 1997, net income increased
$0.8 million, or 53.3%, to $2.3 million from $1.5 million for the same period in
1996 and net income as a percentage of sales increased to 6.9% from 5.1% for the
same period in 1996. These increases were due to the factors described above.
78
RESULTS OF OPERATIONS--WRC MEDIA AND ITS SUBSIDIARY (COMPASSLEARNING)
The following tables set forth, for the periods indicated, statement of
operations data, expressed in millions of dollars and as a percentage of net
revenue:
THREE MONTHS ENDED PERIOD
SEPTEMBER 30 JULY 14-SEPTEMBER 30
-------------------------- --------------------------
1998 1999
-------------------------- --------------------------
% OF % OF
AMOUNT NET REVENUE AMOUNT NET REVENUE
-------- ----------- -------- -----------
(UNAUDITED)
(DOLLARS IN MILLIONS)
NET REVENUE:
Software license................................ $ 6.1 40.0% $ 7.8 52.7%
Service......................................... 7.7 50.9% 6.3 42.4%
Hardware........................................ 1.4 9.1% 0.7 5.0%
----- ----- ------ -----
Net revenue....................................... 15.2 100.0% 14.8 100.0%
COST OF PRODUCTS SOLD:
Software license................................ 0.9 5.8% 1.4 9.3%
Service......................................... 4.1 27.2% 3.6 24.3%
Hardware........................................ 0.9 6.0% 0.3 2.3%
----- ----- ------ -----
Cost of products sold............................. 5.9 39.0% 5.3 35.9%
----- ----- ------ -----
Gross Profit...................................... 9.3 61.0% 9.5 64.1%
SELLING AND ADMINISTRATIVE EXPENSES:
Sales and marketing............................. 5.4 35.1% 5.0 33.5%
Research and development........................ 2.0 13.2% 1.8 12.3%
General and administrative...................... 1.6 10.8% 1.4 9.3%
Restructuring................................... 3.0 19.7% -- --
Write-off of in-process research and
development................................... -- -- 9.0 60.6%
Amortization of intangible assets............... 0.1 0.4% 1.7 11.7%
----- ----- ------ -----
Selling and administrative expenses............. 12.1 79.2% 18.9 127.4%
----- ----- ------ -----
Loss from operations.............................. (2.8) 18.2% (9.4) 63.3%
Interest expense, net............................. (1.3) 8.6% (0.9) 6.2%
Other income...................................... -- 0.2% -- 0.1%
----- ----- ------ -----
Loss before income taxes.......................... (4.1) 26.7% (10.3) 69.3%
Income tax expense................................ -- -- -- --
----- ----- ------ -----
Net loss.......................................... $(4.1) 26.7% $(10.3) 69.3%
===== ===== ====== =====
79
SIX MONTHS ENDED PERIOD
JUNE 30 JANUARY 1-JULY 1
-------------------------- --------------------------
1998 1999
-------------------------- --------------------------
% OF % OF
AMOUNT NET REVENUE AMOUNT NET REVENUE
-------- ----------- -------- -----------
(UNAUDITED)
(DOLLARS IN MILLIONS)
NET REVENUE:
Software license........................... $17.0 46.2% $16.2 47.7%
Service.................................... 18.0 48.8% 16.1 47.4%
Hardware................................... 1.8 5.0% 1.7 4.9%
----- ----- ----- -----
Net revenue.................................. 36.8 100.0% 34.0 100.0%
COST OF PRODUCTS SOLD:
Software license........................... 3.2 8.7% 2.7 8.2%
Service.................................... 10.9 29.6% 9.3 27.3%
Hardware................................... 1.7 4.8% 1.3 3.8%
----- ----- ----- -----
Cost of products sold........................ 15.8 43.0% 13.3 39.3%
----- ----- ----- -----
Gross Profit................................. 21.0 57.0% 20.7 60.7%
SELLING AND ADMINISTRATIVE EXPENSES:
Sales and marketing........................ 14.1 38.4% 11.0 32.4%
Research and development................... 4.4 11.9% 3.8 11.3%
General and administrative................. 4.8 12.9% 4.0 11.7%
Amortization of intangible assets.......... 0.1 0.3% 0.1 0.4%
----- ----- ----- -----
Selling and administrative expenses........ 23.4 63.5% 19.0 55.8%
----- ----- ----- -----
Income (loss) from operations................ (2.4) 6.5% 1.7 4.9%
Interest expense, net........................ (1.9) 5.1% (2.9) 8.4%
Other income................................. -- -- 0.4 1.2%
----- ----- ----- -----
Loss before income taxes..................... (4.3) 11.6% (0.8) 2.3%
Income tax expense........................... -- -- -- --
----- ----- ----- -----
Net loss..................................... $(4.3) 11.6% $(0.8) 2.3%
===== ===== ===== =====
80
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1996 1997 1998
---------------------- ---------------------- ----------------------
% OF % OF % OF
AMOUNT NET REVENUE AMOUNT NET REVENUE AMOUNT NET REVENUE
-------- ----------- -------- ----------- -------- -----------
(DOLLARS IN MILLIONS)
NET REVENUE:
Software.......................... $ 40.4 46.6% $ 29.2 40.6% $ 31.0 44.9%
Service........................... 35.4 40.8% 36.0 50.2% 33.9 49.3%
Hardware.......................... 10.9 12.6% 6.6 9.2% 4.0 5.8%
------ ----- ------ ----- ------ -----
Net revenue......................... 86.7 100.0% 71.8 100.0% 68.9 100.0%
COST OF PRODUCTS SOLD:
Software.......................... 12.9 14.9% 30.4 42.4% 6.9 10.1%
Service........................... 29.0 33.4% 23.4 32.6% 19.3 27.9%
Hardware.......................... 8.3 9.5% 5.6 7.7% 3.2 4.7%
------ ----- ------ ----- ------ -----
Cost of products sold............... 50.2 57.8% 59.4 82.7% 29.4 42.7%
Gross Profit........................ 36.5 42.2% 12.4 17.3% 39.5 57.3%
SELLING AND ADMINISTRATIVE EXPENSES:
Sales and marketing............... 28.0 32.3% 31.4 43.7% 24.0 34.9%
Research and development.......... 11.7 13.5% 11.2 15.6% 8.0 11.6%
General and administrative........ 11.3 13.0% 13.5 18.8% 7.7 11.2%
Amortization of intangibles....... 3.2 3.7% 5.4 7.6% 0.3 0.4%
Restructuring (a)................. -- -- -- -- 3.0 4.4%
------ ----- ------ ----- ------ -----
Income (loss) from operations....... (17.7) 20.4% (49.1) 68.3% (3.5) 5.1%
Interest expense, net............... (4.6) 5.3% (5.0) 7.0% (4.3) 6.2%
Other income (expense).............. -- -- (2.1) 3.0% -- --
------ ----- ------ ----- ------ -----
Loss before income taxes............ (22.3) 25.7% (56.2) 78.3% (7.8) 11.3%
Income tax expense.................. -- -- -- -- -- --
------ ----- ------ ----- ------ -----
Net loss............................ $(22.3) 25.7% $(56.2) 78.3% $ (7.8) 11.3%
====== ===== ====== ===== ====== =====
- ------------------------
(a) In 1998, CompassLearning adopted a formal action plan for restructuring its
operations. The restructuring included a realignment of sale and service
functions, certain on-line training and headcount reductions. See
"--Overview--CompassLearning Restructuring."
PERIOD FROM JULY 14, 1999 TO SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
NET REVENUE. For the period ended September 1999, total revenue decreased
$0.4 million, or 2.7%, to $14.8 million from $15.2 million compared to the
three-month period ending September 30, 1998. This decrease was primarily due to
the decrease in revenues attributable to service contract renewals. Software
revenue increased $1.7 million, or 28.2%, primarily due to higher volume of
sales related to customers migrating to COMPASS and TOMORROW'S PROMISE products.
Services revenue decreased $1.5 million, or 19.1%, to $6.3 million in 1999 from
$7.8 million in 1998, primarily due to the lower renewal sales in 1998 and 1999.
Hardware revenue decreased $0.7 million, or 47.2%, to $0.7 million in 1999 from
$1.4 million consistent with our strategy to exit the hardware business.
GROSS PROFIT. For the period ended September 30, 1999, gross profit
increased $0.2 million, or 2.2%, to $9.5 million from $9.3 million in 1998.
Gross profit as a percentage of net revenue increased to 64.1% in 1999 from
61.0% in 1998. This increase was primarily due to a shift in mix of business
with software gross profit comprising 67.7% of total gross profit in 1999
compared to 55.4% in 1998. This increase was primarily due to the increase in
software revenue described above, which has a higher gross profit percentage and
a decrease in service revenue which has a lower gross profit percentage.
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SELLING AND ADMINISTRATIVE EXPENSES. For the period ended September 30,
1999, selling and administrative expenses increased $6.8 million, or 56.4%, to
$18.9 million from $12.1 million in 1998. This increase was primarily due to a
$9.0 million write-off of in-process research and development and the
$1.7 million increase in amortization of intangibles related to the July 14,
1999 acquisition of CompassLearning, partially offset by a $3.0 million
reduction in restructuring expense from 1998 and the associated effects
including $0.8 million of reduced expenses, primarily in compensation and
outside services.
LOSS FROM OPERATIONS. For the period ended September 30, 1999, loss from
operations increased $6.6 million to $9.4 million from $2.8 million in 1998 and
operating loss as a percentage of net revenue increased to 63.3% from 18.2%.
These increases were primarily due to the factors described above.
INTEREST EXPENSE. For the period ended September 30, 1999, interest expense
decreased by $0.4 million, or 30.4%, to $0.9 million from $1.3 million in 1998
and interest as a percentage of net revenue decreased to 6.2% from 8.6% in 1998.
This decrease was primarily due to lower debt balances in 1999.
NET LOSS. For the period ended September 30, 1999, net loss increased
$6.2 million to $10.3 million from $4.1 million in 1998 and net loss as a
percentage of revenue increased to 69.3% from 26.7% for the same period in 1998.
These increases were primarily due to the factors described above.
PERIOD FROM JANUARY 1, 1999 TO JULY 13, 1999 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1998
NET REVENUE. For the period ended July 13, 1999, total revenue decreased
$2.8 million, or 7.5%, to $34.0 million from $36.8 million in 1998. This
decrease was primarily due to a $1.8 million, or 10.3% decrease in revenues
attributable to service contract renewals. Revenues attributable to service
contract renewals declined primarily due to a reduction in contract renewals in
professional development services, and to a lesser extent in technical support
services, as the decrease in software revenue in prior periods continued to
reduce the number of services contracts available for renewal and the improved
quality of our product offerings and growing familiarity of our long-term
customers with our products reduced the need for such services by such
customers. Additionally, a decrease of $0.8 million, or 4.5%, in software
revenue from the timing of certain large orders which favored revenues in the
1998 period but not in the 1999 period also contributed to this overall
decrease.
GROSS PROFIT. For the period ended July 13, 1999, gross profit decreased
$0.3 million, or 1.5%, to $20.7 million from $21.0 million in 1998. This
decrease was primarily due to the decrease in net revenue discussed above. Gross
profit as a percentage of net revenue increased to 60.7% in the period ended
July 13, 1999 from 57.0% in 1998. This increase was primarily due to:
- an increase in the software gross profit rate to 82.9% from 81.2% in 1998,
as a result of:
-- lower royalty payments to providers of third-party content in our
courseware as such third-party content became a smaller component of
our overall product offerings, and
-- reduced software amortization expense, partially offset by increased
cost of goods sold in connection with sales, typically at a discount,
to existing customers migrating to our new product lines; and
- an increase in the services gross profit rate to 42.3% from 39.4% in 1998
due to the effects of CompassLearning's restructuring efforts, which
included staff reductions and re-tooling to improve productivity.
SELLING AND ADMINISTRATIVE EXPENSES. For the period ended July 13, 1999,
selling and administrative expenses decreased $4.4 million, or 18.8%, to
$19.0 million from $23.4 million in 1998 and selling and
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administrative expenses as a percentage of net revenue decreased to 55.8% from
63.5% for the same period in 1998. These decreases were primarily due to the
effects of CompassLearning's restructuring efforts in all selling and
administrative areas which resulted in:
- $2.6 million reduction compensation and outside services expenses;
- $0.4 million reduction in travel expenses;
- $0.3 million reduction in supplies and telephone expenses;
- $0.5 million reduction in advertising expenses; and
- rent reduction of $0.4 million.
In addition, product development expenses for the period ended July 13, 1999,
were below levels for the same period in 1998 as a result of project timing.
INCOME (LOSS) FROM OPERATIONS. For the period ended July 13, 1999,
operating income increased $4.1 million to $1.7 million from an operating loss
of $2.4 million for the same period in 1998 and operating income as a percentage
of net revenue increased to 4.9% from (6.5)% in 1998. These increases were
primarily due to the factors described above.
INTEREST EXPENSE. For the period ended July 13, 1999, interest expense
increased $1.0 million, or 51.9%, to $2.9 million from $1.9 million for the same
period in 1998 and interest as a percentage of net revenue increased to 8.4%
from 5.1% for the same period in 1998. These increases were primarily due to
higher loan balances on subordinated debt which carried a higher interest rates
and, to a lesser extent, interest attributable to an additional debt instrument
issued in June of 1998 as a payment to a related party.
NET LOSS. For the period ended July 13, 1999, net loss decreased
$3.5 million, or 81.7%, to $0.8 million from $4.3 million for the same period in
1998 and net loss as a percentage of net revenue decreased to 2.3% from 11.6%
for the same period in 1998. These decreases were primarily due to the factors
described above.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUE. For the year ended December 31, 1998, net revenue decreased
$2.9 million, or 4.1%, to $68.9 million from $71.8 million in 1997. This
decrease was primarily due to a $2.6 million, or 39.4%, decrease in hardware net
revenue as a result of CompassLearning's decision to de-emphasize its hardware
sales business. The decrease was also the result of a decline in services net
revenue, primarily in professional development services, and to a lesser extent
in technical support services, of $2.1 million, or 5.8%, due to lower software
sales in 1997 which led to fewer service contracts being signed in that year,
causing fewer service contracts to be available for renewal in 1998. Services
revenue also decreased as a result of reduced customer demand for training and
support services due to improved software product quality and customers'
increasing abilities to provide such services internally. These decreases were
partially offset by a $1.8 million, or 6.1%, increase in software net revenue in
the 1998 period due to an increased number of units sold in this first full year
of COMPASS and TOMORROW'S PROMISE sales.
GROSS PROFIT. For the year ended December 31, 1998, gross profit increased
$27.1 million, or 217.8%, to $39.5 million from $12.4 million for the same
period in 1997 and gross profit as a percentage of net revenue increased to
57.3% from 17.3% for the same period in 1997. These increases were primarily due
to the software gross profit improving to $24.0 million, or 77.6%, in 1998 from
a loss of $1.3 million, or (4.4)%, in 1997. Software gross profit increased
primarily as a result of a $1.8 million increase in revenue and a $23.5 million
reduction in cost of products sold, principally from lower amortization cost due
to amortization of capitalized software declining by $22.6 million in 1998
83
due to the 1997 accelerated amortization charges of $17.3 million for the
reduction of certain capitalized costs to their new net realizable value in
connection with a change in product focus. Services gross profit also increased
to $14.7 million, or 43.3%, in 1998 from $12.6 million, or 35.1%, in 1997. These
increases in services gross profit were primarily the result of:
- $4.2 million, or 17.8%, decrease in services cost of products sold
primarily from a $2.6 million reduction in staffing costs associated with
the delivery of services;
- $1.0 million reduction in travel costs; and
- $0.5 million reduction in third party costs as hardware support revenue
declined.
Many of these cost savings are a direct result of CompassLearning's
restructuring efforts.
These increases were partially offset by a $2.3 million, or 41.8%, decline in
hardware gross profit primarily due to lower sales volume. However, the hardware
gross profit rate improved to 19.6% in 1998 from 16.2% in 1997 primarily as a
result of internal cost reductions.
SELLING AND ADMINISTRATIVE EXPENSES. For the year ended December 31, 1998,
selling and administrative expenses decreased $18.5 million, or 30.0%, to
$43.0 million from $61.5 million in 1997 and selling and administrative expense
as a percentage of net revenue decreased to 62.4% in 1998 from 85.6% in 1997.
Sales and marketing expenses decreased $7.3 million, or 23.4%, to $24.0 million
in 1998 from $31.4 million in 1997 and as a percentage of net revenue decreased
to 34.9% in 1998 from 43.7% in 1997. These decreases were primarily due to:
- $2.7 million reduction resulting from staffing reductions and their
associated expenses;
- $0.8 million reduction in commissions;
- $1.9 million reduction in marketing campaigns and promotional materials;
- $0.9 million reduction in recruiting expenses; and
- $0.3 million decrease in depreciation.
Research and development expenses decreased $3.2 million, or 28.2%, to
$8.0 million in 1998 from $11.2 million in 1997, on a net spending basis, and
$5.5 million, or 40.8%, on a gross spending basis (prior to capitalizing
software development costs). As a percentage of net revenue, research and
development expenses decreased to 11.6% in 1998 from 15.6% in 1997. These
reductions were primarily as a result of a $3.8 million reduction in the use of
temporary employees, a $0.8 million reduction in depreciation and a
$0.3 million reduction in rental expense from reduced space, partially offset by
a $2.4 million increase in software development costs being expensed due to the
fact that in 1998 no software development costs were considered eligible for
capitalization. General and administrative expenses decreased $5.8 million, or
43.0%, to $7.7 million in 1998 from $13.5 million in 1997 and as a percentage of
net revenue decreased to 11.2% in 1998 from 18.8% in 1997. These decreases were
primarily due to:
- $1.4 million reduction in staffing and associated expenses;
- $0.6 million reduction in depreciation;
- $0.7 million reduction in bad debt;
- $0.9 million reduction in rental expense; and
- $0.3 million reduction in telephone expense.
Amortization of intangibles decreased $5.2 million, or 95.5%, to $0.2 million in
1998 from $5.4 million in 1997 primarily as a result of the acceleration of
amortization of intangibles that resulted from a change in product focus in
1997. The above 1998 expense reductions were primarily the result of
84
CompassLearning's restructuring efforts, partially offset by a $3.0 million
charge associated with such restructuring.
LOSS FROM OPERATIONS. For the year ended December 31, 1998, loss from
operations decreased $45.6 million, or 92.8%, to $3.5 million from
$49.1 million for the same period in 1997 and loss from operations as a
percentage of net revenue decreased to 5.1% in 1998 from 68.3% in 1997. These
decreases were primarily due to the factors described above.
INTEREST EXPENSE. For the year ended December 31, 1998, interest expense
decreased $0.7 million, or 14.5%, to $4.3 million from $5.0 million in 1997 and
interest expense as a percentage of net revenue decreased to 6.2% in 1998 from
7.0% in 1997. These decreases were primarily due to lower borrowing levels on
the revolving credit line resulting from shorter average collection periods for
receivables.
NET LOSS. For the year ended December 31, 1998, net loss decreased
$48.4 million, or 86.2%, to $7.8 million from $56.2 million in 1997 and net loss
as a percentage of net revenue decreased to 11.3% in 1998 from 78.3% in 1997.
These decreases were primarily due to the factors described above as well as the
1997 write-off of a $2.2 million investment.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET REVENUE. For the year ended December 31, 1997, net revenue decreased
$14.9 million, or 17.2%, to $71.8 million from $86.7 million in 1996. The
decrease was primarily due to a $11.3 million, or 27.9%, decrease in software
revenue, as a result of:
- the continued effect of the loss of many of CompassLearning's seasoned
sales personnel to a competitor in 1995 and 1996 following the acquisition
of CompassLearning by its former owners;
- a delay in the upgrade of an existing product for compatibility with
current operating systems; and
- the reluctance of customers to migrate to our new products, TOMORROW'S
PROMISE and COMPASS, which were released in stages, until certain features
were available.
In addition, hardware sales declined $4.3 million, or 39.4%, primarily from a
decrease in accompanying software sales and due to CompassLearning's strategy to
be a software and service provider and to only provide hardware on a reseller
basis. Revenues for both professional development services and technical support
services in 1997 remained stable compared with 1996.
GROSS PROFIT. For the year ended December 31, 1997, gross profit decreased
$24.1 million, or 66.0%, to $12.4 million from $36.5 million in 1996 and gross
profit as a percentage of net revenue decreased to 17.3% for 1997 from 42.2% in
1996. These decreases were primarily due to a $28.8 million, or 104.6%, decrease
in software gross profit, as a result of the $11.3 million reduction in software
sales and the $17.3 million acceleration of amortization of capitalized software
to reflect new net realizable value from a change in product focus. In addition,
hardware gross profit decreased $1.6 million, or 59.8%, and the corresponding
profit rate declined to 16.2% in 1997 from 24.5% in 1996, primarily due to the
revenue decline described above. These decreases were partially offset by a
$6.2 million, or 97.0% increase in gross profit on services with the gross
profit rate on services increasing to 35.1% in 1997 from 18.1% in 1996. Gross
profits and gross profit rates improved for both professional development
services and technical support services primarily as a result of a
$5.6 million, or 19.2%, reduction in services cost of products sold resulting
from staffing reductions and reclassifications of training costs to selling and
administrative expense.
SELLING AND ADMINISTRATIVE EXPENSES. For the year ended December 31, 1997,
selling and administrative expenses increased $7.2 million, or 13.3%, to
$61.5 million from $54.2 million in 1996 and selling and administrative expenses
as a percentage of net revenue increased to 85.7% in 1997
85
from 62.6% in 1996. These increases were primarily due to a $3.3 million
increase in sales and marketing expense, principally resulting from:
- a $0.9 million increase in compensation as a result of replacement hiring
to rebuild the sales force following the loss of seasoned sales personnel
discussed above;
- $1.3 million in special compensation programs to increase sales;
- $1.1 million in additional hiring of marketing personnel; and
- $1.4 million in marketing programs to launch new products.
These increases were partially offset by a $1.2 million reduction in selling and
administrative expenses from consolidating certain business lines. General and
administrative expenses increased $2.2 million, or 19.7%, in 1997 primarily from
the establishment of a corporate training department. Also, in connection with
the introduction of TOMORROW'S PROMISE in 1997, amortization of intangibles was
accelerated by $2.4 million, to $5.4 million, in 1997 primarily due to a
revaluation of goodwill, which had been established in connection with the
acquisition of CompassLearning by its prior owners.
LOSS FROM OPERATIONS. For the year ended December 31, 1997, operating loss
increased $31.4 million, or 177.4%, to $49.1 million from $17.7 million for the
same period in 1996 and operating loss as a percentage of net revenue increased
to 68.3% in 1997 from 20.4% in 1996. These increases were primarily due to the
factors described above.
INTEREST EXPENSE. For the year ended December 31, 1997, interest expense
increased $0.4 million, or 9.2%, to $5.0 million from $4.6 million for the same
period in 1996 and interest expense as a percentage of net revenue increased to
7.0% in 1997 from 5.3% in 1996. These increases were primarily due to higher
revolving credit borrowing levels on the revolving credit line to fund working
capital requirements in connection with a major sales contract in 1997.
NET LOSS. For the year ended December 31, 1997, net loss increased
$33.9 million, or 152.3%, to $56.2 million from $22.3 million for the same
period in 1996. These increases were primarily due to the factors described
above as well as the write-off of a $2.2 million investment.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL.
WEEKLY READER. Weekly Reader's principal uses of cash are for debt service,
capital expenditures, working capital and acquisitions. Funds for these purposes
have been principally generated by income from operations and funding from
PRIMEDIA. During the year ended December 31, 1998, Weekly Reader generated net
cash from operating activities of approximately $32.2 million. During the nine
months ended September 30, 1999, Weekly Reader generated net cash from operating
activities of approximately $19.2 million, and for the nine months ended
September 30, 1998, Weekly Reader generated net cash from operating activities
of approximately $12.6 million. Cash flow from operating activities at Weekly
Reader is seasonal primarily because the majority of cash receipts for
periodical subscriptions are received in the fourth quarter, and to a lesser
extent the third quarter, of the year in which such subscriptions were sold.
Funding from PRIMEDIA is reflected on its financial statements as investment by
PRIMEDIA, net and relates to net transfers of cash under the centralized cash
management system of PRIMEDIA and allocations of certain expenses and PRIMEDIA
debt and equity. As of September 30, 1999, the investment by PRIMEDIA, net
balance was $187.3 million.
Weekly Reader made capital expenditures of approximately $4.3 million in
1998 and approximately $2.0 million in the nine-month period ended
September 30, 1998 and $4.1 million in the nine-month period ended
September 30, 1999. Weekly Reader's capital expenditures consist primarily of
property and equipment and prepublication costs for American Guidance.
86
COMPASSLEARNING. CompassLearning's principal uses of cash are for debt
service, capital expenditures, working capital and acquisitions. Funds for these
purposes have been principally generated by income from operations and
borrowings under CompassLearning's old senior credit facilities. During the year
ended December 31, 1998, CompassLearning used net cash of approximately
$0.3 million for operating activities. Furthermore, CompassLearning used net
cash of approximately $2.3 million in the nine-month period ended September 30,
1998 and $3.1 million in the nine-month period ended September 30, 1999 for
operating activities.
CompassLearning made capital expenditures of approximately $0.5 million in
1998 and approximately $0.3 million in the nine-month period ended
September 30, 1998 and $0.3 million in the nine-month period ended
September 30, 1999. CompassLearning's capital expenditures consist primarily of
expenses related to personal computers for the product development team,
mainframe computer upgrades and infrastructure/hardware upgrades.
In order to consummate the acquisition of CompassLearning:
- CompassLearning incurred indebtedness totaling $31.0 million, of which
$12.0 million represented borrowings under old senior credit facilities
and $19.0 million represented senior subordinated notes; and
- Ripplewood Partners, L.P., its affiliates and co-investors made a
$28.7 million cash equity investment in WRC Media.
The loans under CompassLearning's old senior credit facilities bear interest at
a floating rate of LIBOR plus 2.25%, which, as of September 30, 1999, was 7.60%
on a weighted average basis. The CompassLearning senior subordinated notes bear
interest at a fixed rate of 13.38% per annum. CompassLearning's old senior
credit facilities and senior subordinated notes will be repaid and canceled as
part of the transactions described under the "Transactions."
PROSPECTIVE.
As part of the transactions described under "Transactions," Weekly Reader
and CompassLearning entered into a credit agreement relating to the senior
credit facilities pursuant to which $131.0 million of committed senior secured
term loans and a $30.0 million revolving credit facility for general corporate
purposes are available. All of the senior secured term loans were borrowed as
part of the financing for the transactions described under "Transactions." We
have not drawn on the revolving credit facility since the consummation of the
recapitalization and the related transactions. The senior secured term loans
under the senior credit facilities consist of a $31.0 million term loan A
facility that fully amortizes within six years and a $100.0 million term loan B
facility that fully amortizes over seven years. The revolving credit facility
matures on the date that is six years after the date of the initial funding
under the senior credit facilities.
Loans under the senior credit facilities bear interest at a rate per annum
equal to:
(1) for the revolving credit facility and the term loan A facility, the LIBO
rate as defined in the credit agreement, plus 3.25% or the alternate base
rate as defined in the credit agreement, plus 2.25% (subject to
performance based stepdowns); and
(2) for the term loan B facility, the LIBO rate plus 4.00% or the alternate
base rate plus 3.00%.
The senior credit facilities and the new notes offered hereby will, and
other debt instruments of ours may, impose various restrictions and covenants on
us. In addition, both the old and new senior preferred stock will continue to
accrue dividends at 15% payable quarterly in cash, or at the option of WRC Media
and prior to the fifth anniversary of first dividend payment date through
accretion to the liquidation preference of such senior preferred stock. In
addition, prior to the fifth anniversary of the first dividend payment date, at
the election of the senior preferred stockholders, dividends may be
87
payable in additional shares of senior preferred stock, rather than through an
accretion to the liquidation preference. See "Description of Senior Credit
Facilities" and "Description of New Notes."
Our primary future cash needs will continue to be for debt service, capital
expenditures, working capital and acquisitions. Our indebtedness increased
substantially upon consummation of the transactions described under
"Transactions." As a result of the senior credit facilities and the notes, our
liquidity requirements will be significantly increased, primarily due to
increased interest expense obligations and principal payment obligations under
the senior credit facilities and the notes. See "Risk Factors--Substantial
Leverage and Debt Service." In 1999, capital expenditures were $6.4 million, of
which $4.4 million was spent as of September 30, 1999. These primarily consisted
of property, equipment and prepublication costs for American Guidance.
We believe that the net cash generated by operating activities and amounts
available under the $30.0 million revolving credit facility will be sufficient
to fund our debt service requirements under the senior credit facilities and the
new notes offered hereby, to make capital expenditures, to cover working capital
requirements and to fund the implementation of our business strategy for at
least the next few years. To the extent we make future acquisitions, we may
require new sources of funding, including additional debt or equity financing or
some combination thereof. See "Risk Factors--Business Strategy" and "Risk
Factors--Substantial Leverage and Debt Service."
SEASONALITY
Our operating results have varied and are expected to continue to vary from
quarter to quarter as a result of seasonal patterns. Weekly Reader's and
CompassLearning's sales are significantly affected by the school year. Weekly
Reader's sales in the third, and to a lesser extent the fourth, quarter are
generally the strongest as products are shipped for delivery prior to the start
of the school year. CompassLearning's sales are generally strongest in the
second quarter, and to a lesser extent the fourth quarter. CompassLearning's
sales are strong in the second quarter generally because schools frequently
combine funds from two budget years, which typically end on June 30 of each
year, to make significant purchases, such as purchases of CompassLearning's
electronic courseware, and because by purchasing in the second quarter, schools
are able to have the software products purchased installed over the summer and
ready to train teachers when they return from summer vacation. CompassLearning's
fourth-quarter sales are strong as a result of sales patterns driven in part by
its commissioned sales force seeking to meet year-end sales goals as well as by
schools purchasing software to be installed in time for teachers to be trained
prior to the end of the school year in June.
WORKING CAPITAL
As of September 30, 1999, working capital for Weekly Reader was composed of
$0.8 million. As of September 30, 1999, working capital for WRC Media and its
subsidiary, CompassLearning, was composed of a deficit of $9.7 million. There
are no unusual registrant or industry practices or requirements relating to
working capital items.
MARKET RISK
We are exposed to market risk. Market risk, with respect to our business, is
the potential loss arising from adverse changes in interest rates. We manage our
exposure to this market risk through regular operating and financing activities,
and, when deemed appropriate, through the use of derivatives. We use derivatives
as risk management tools and not for trading purposes.
88
We will be subject to market risk exposure related to changes in interest
rates on the senior credit facilities. Interest on borrowings under the senior
credit facilities will bear interest at a rate per annum equal to:
(1) for the $30.0 million revolving credit facility maturing in six years
and the $31.0 million secured term loan A facility maturing in six years,
the LIBO rate as defined in the credit agreement, plus 3.25% or the
alternate base rate as defined in the credit agreement, plus 2.25%
(subject to performance-based step downs); and
(2) for the $100.0 million term loan B facility maturing in seven years, the
LIBO rate plus 4.00% or the alternate base rate plus 3.00%.
Under the senior credit facilities, within 170 days of the consummation of the
transactions described under "Transactions," we are required to obtain interest
rate protection for at least 50% of the senior secured term loans for the
duration of the senior credit facilities. Historically, we have, on occasion,
entered into interest rate swap agreements to exchange fixed and variable
interest rates based on agreed upon notional amounts and have entered into
interest rate lock contracts to hedge the interest rate of an anticipated debt
issue. As of the date of this prospectus, no derivative financial instruments
were outstanding to hedge interest rate risk.
INFLATION
We do not believe that inflation has had a material impact on its financial
position or results of operations for the periods discussed above. Although
inflationary increases in paper, postage, labor or operating costs could
adversely affect operations, we have generally been able to offset increases in
costs through price increases, labor scheduling and other management actions.
YEAR 2000 RISK
To date, we have not experienced any problem in light of Year 2000
information processing issues. All products and services were provided through
January 1, 2000 without any interruption or loss. However, it is still too early
to assess whether we will experience any of the potential Year 2000 information
processing problems. Significant Year 2000 information processing problems which
may yet be encountered by us or certain of our customers or suppliers could have
an adverse effect on our business.
RISKS. Our operations may be affected by Year 2000-related risks resulting
from:
- noncompliance in our own products or facilities;
- noncompliance in hardware and software systems used in conjunction with
our products or interacting with our products; or
- noncompliance in the products or services of significant suppliers of
goods and services.
Such Year 2000-related defects could result in disruption in our operations,
damage to our reputation, possible litigation and significant losses in revenue,
all or any of which could have a significant adverse effect on our future
results of operations, financial position or cash flow.
The majority of CompassLearning's products and some of World Almanac's
computer-based products operate in complex computer networked environments and
directly or indirectly interact with a number of our customers' or potential
customers' hardware and software systems. Furthermore, some of CompassLearning's
computer-based products are designed to operate in conjunction with hardware and
software systems designed by third parties, such as Apple and Novell. These
third-party hardware and software systems may contain errors or defects
associated with Year 2000 date functions. We are
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presently unable to predict to what extent our business may be affected if such
third-party hardware or software systems contain errors or defects associated
with Year 2000 date functions.
In addition, all of our products and operations are subject to Year
2000-related risks that may be caused by the noncompliance of the products or
services of third-party suppliers. We rely on a broad range of suppliers to
deliver goods and services such as:
- utilities;
- pre-press operations;
- printing services;
- paper;
- wholesale distribution; and
- mailings and banking services.
Although we have communicated with suppliers, financial institutions and other
third parties we do business with to obtain reasonable assurance that their
products and services were Year 2000 compliant, we cannot assure you that their
responses are reliable or that the Year 2000-compliance programs of such third
parties were effective or completed by December 31, 1999.
STATE OF READINESS. All of Weekly Reader's (not including American Guidance
or World Almanac) critical business systems which were subject to Year 2000
problems were replaced or upgraded pursuant to a Year 2000-compliance project
undertaken by its information technology department. Order fulfillment and
marketing systems that had been running on mainframe technology were replaced
with Year 2000-compliant client server technology. Hardware and software systems
running the finance infrastructure of Weekly Reader (not including American
Guidance or World Almanac) were upgraded to be Year 2000 compliant. All of
Weekly Reader's (not including American Guidance or World Almanac) desktop
publishing hardware and the related critical application software were tested
and are Year 2000 compliant. In addition, we have communicated with our
significant third-party printers, World Color Press and Quad/Graphics, and
pre-press service provider, TypeHouse, and each of them has informed us that
they expected to be Year 2000 compliant.
American Guidance undertook a rigorous evaluation and testing program to
prevent Year 2000 problems from having a material adverse impact on business
operations. During 1994 and 1995, American Guidance replaced all of its order
fulfillment and business-related systems, migrating from a mainframe system to a
Year 2000 compliant client server environment. Software running the internal
telephone system also was upgraded in December 1998 to be Year 2000 compliant.
American Guidance believes that all of its information systems, as a result of
the testing and necessary upgrading and replacements, are Year 2000 ready. In
addition, inquiries were made to all significant vendors to ensure uninterrupted
business operations and we believe that each of these vendors will be capable of
providing services in 2000 without interruption.
CompassLearning has a Year 2000 and product life cycle process that tests
all of its actively sold and serviced electronic courseware and management
products. Since the design of some of CompassLearning's products depend on
date-sensitive information, CompassLearning has certified as Year 2000 compliant
all versions of its software products currently being marketed.
CompassLearning's software products are reviewed on an annual basis for their
End-of-Life status. End-of-Life process is a two-phased process for "obsoleting"
a product: first by discontinuing the sale of the product and second, in the
subsequent year, by discontinuing technical support services for such product.
Customers are generally notified 90 days prior to the commencement of the first
phase of the End-of-Life process regarding the End-of-Life status of a product
which they own and for which they receive technical support services. Some of
CompassLearning's older products which are not, and will not be, Year 2000
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compliant are in the first phase of the End-of-Life process. Alterations have
been made to these noncompliant products to accommodate some of the Year 2000
issues, so that customers may continue to use some of them for some time.
Customers with inquiries concerning Year 2000 compliance are referred to the
CompassLearning website, where up-to-date, product-specific, Year 2000
information is available. In addition to preparations relating to its product
offerings, CompassLearning has substantially completed preparing its
administrative information systems for 2000. All hardware and software systems
relating to critical business applications, including finance, sales order and
inventory processing and reporting, have either been replaced with Year
2000-compliant systems or upgraded to be Year 2000 compliant.
World Almanac has established internal task forces consisting of management
information systems and finance personnel at each of its operating sites. These
task forces have identified and implemented solutions to address any of World
Almanac's Year 2000-related problems, and have also sought assurances from
significant vendors as to their respective Year 2000 compliance efforts.
Although we believe, based on efforts to date, that our products and
facilities are substantially Year 2000 compliant, any inability to remedy
unforeseen Year 2000 problems or the failure of third parties to do so may cause
business interruptions or shutdown, financial loss, regulatory actions, damage
to our reputation or legal liability. We cannot assure you that our Year 2000
program or the programs of third parties doing business with us were effective.
COSTS. As of December 31, 1999, the aggregate amount of Year 2000-related
expenses incurred by Weekly Reader, American Guidance, CompassLearning and World
Almanac was approximately $4.4 million. We do not expect to incur any additional
Year 2000 related expenses in 2000. However, we may incur presently
unanticipated material Year 2000-related expenses that could seriously harm our
business. Such expenses have been, and in the future will be, funded through
cash flows from operations.
RECENT ACCOUNTING PRONOUNCEMENTS
WEEKLY READER
In 1998, Weekly Reader adopted the American Institute of Certified Public
Accountants' ("AICPA") Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." Under Weekly
Reader's previous accounting policy, internal use software costs, whether
developed or obtained, were generally expensed as incurred. In compliance with
SOP 98-1, Weekly Reader expenses costs incurred in the preliminary project stage
and, thereafter, capitalizes costs incurred in the developing or obtaining of
internal use software. Some costs, such as maintenance and training, are
expensed as incurred. Capitalized costs are amortized over a period of not more
than five years and are subject to impairment evaluation in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." The adoption of SOP 98-1, which primarily related to the
non-recurring replacement of a marketing and fulfillment system at Weekly
Reader, resulted in an increase in net income of approximately $0.7 million for
the year ended December 31, 1998.
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which becomes
effective for Weekly Reader's 2001 consolidated financial statements. SFAS
No. 133 requires that derivative instruments be measured at fair value and
recognized as assets or liabilities in a company's balance sheet. Weekly Reader
is currently evaluating the effect, if any, that SFAS No. 133 will have on its
consolidated financial statements.
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In 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up
Activities," which requires that costs of start-up activities, including
organizational costs, be expensed as incurred. This SOP will be effective for
Weekly Reader's 1999 consolidated financial statements. In the opinion of Weekly
Reader management it is not anticipated that the adoption of SOP 98-5 will have
a material effect on the consolidated financial statements of Weekly Reader.
COMPASSLEARNING
CompassLearning adopted SFAS No. 130, "Reporting Comprehensive Income" for
the year ended December 31, 1998. SFAS 130 requires CompassLearning to measure
and disclose all elements of comprehensive income that result from recognized
transactions and other events in the financial statements. Accordingly,
CompassLearning has reported unrealized gains on marketable securities as a
separate component of stockholders' deficit.
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INDUSTRY
THE PRE K PORTION OF THE EDUCATION MATERIALS MARKET DESCRIBED IN THIS
SECTION REFERS TO PRE-KINDERGARTEN CLASSES HELD AT K-12 PUBLIC OR PRIVATE
SCHOOLS AND DOES NOT INCLUDE SALES TO PRE-KINDERGARTEN FACILITIES SEPARATE FROM
K-12 PUBLIC OR PRIVATE SCHOOLS SUCH AS DAY CARE FACILITIES.
Unless otherwise specified, all industry and market data, including industry
data concerning the size of the industry, numbers of schools, teachers and
libraries, our share of sales in any market and the numbers of schools, school
districts and libraries that use our products, are based on management
estimates, market research, publicly available sources, industry experts and a
variety of industry publications. The statements made in this prospectus
concerning the size of the supplemental education materials market (as defined
herein) and the size of the four components thereof are management estimates
based on a review of available information, and are not derived from any single
industry source. Industry publications generally state that the information
contained therein has been obtained from sources believed to be reliable, but
that the accuracy and completeness of such information is not guaranteed.
Similarly, management estimates, market research, industry experts and publicly
available sources, while believed to be reliable, have not been independently
verified, and no representations as to the accuracy or completeness of such
information are being made. Unless otherwise indicated, "schools" refers to all
public and private schools for all K-12 students in the United States and
"teachers" refers to teachers in those schools.
We estimate, based on various industry sources, that the Pre K-12 education
materials market had approximately $6.2 billion in sales of products and related
services in 1998. Sales of our products and services are included in the rapidly
growing supplemental education materials segment of the overall education
materials market. We estimate this segment had approximately $3.6 billion in
sales in 1998, representing 58% of the overall Pre K-12 education materials
market, with the remainder consisting of the approximately $2.6 billion basal
materials segment. The supplemental education materials segment consists of:
- print and electronic instructional materials;
- testing and assessment products; and
- materials for school libraries.
The basal materials segment, in which we do not compete, consists primarily of
textbook programs that include student editions, teacher editions and companion
materials to teach particular subject areas, with each program offering a grade
specific textbook in the subject area for a span of grades.
According to Simba, Simba Information Inc.'s Print Publishing for the School
Market, 1999-2000 and Simba Information Inc.'s Print Publishing for the School
Market, 1997-1998 (a publisher of news, analysis, statistics and forecasts,
including in the education market, and a subsidiary of PRIMEDIA), the
supplemental education materials segment (excluding the supplemental education
materials described below) has grown from approximately $1.4 billion in sales in
1993, to $2.3 billion in 1998, representing a compound annual growth rate of
10.7%. Simba Information Inc. does not report statistics for some supplemental
education materials included in this segment, consisting primarily of some
testing and assessment products and some library materials, which we estimate
accounted for approximately $1.3 billion in sales during 1998.
Growth in the education materials market is expected to continue to be
driven by several factors, including:
- increasing Pre K-12 student enrollment;
- a rise in the number of Pre K-12 teachers;
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- additional educational spending fueled by public concern over the quality
of education in the United States; and
- the growing installed base of personal computers in libraries, labs,
classrooms and homes.
In addition to the growth factors that affect the overall education materials
market, growth in the supplemental education materials segment is driven by:
- the increasingly diverse sources of education funding;
- teachers and school and school district-level administrators using a
greater amount of supplemental education materials to improve student
performance, as they are increasingly held accountable for student
achievement; and
- a growing acceptance among teachers of theories of teaching that support
the use of different instructional methods to accommodate the many ways in
which students learn.
PRE K-12 EDUCATION MATERIALS MARKET
The Pre K-12 education materials market serves the approximately 108,000
public and private Pre K-12 schools and school libraries in the United States.
Purchasing decisions for supplemental education materials are primarily made by
teachers and school-level administrators, as opposed to the basal materials
segment where such decisions are typically made at the school district level.
Funding for education materials comes from a variety of Federal, state and local
sources. Some of these sources are allocated for specific uses, such as to
improve reading or increase access to technology, depending on the policy
objectives of the funding source.
The Pre K-12 education materials market has grown and is expected to
continue to grow, due to a number of factors, including the factors described
below.
INCREASING STUDENT ENROLLMENT. As student enrollment rises, schools must
increase their expenditures to purchase education materials for their new
students. Student enrollment in K-12 grades has grown from approximately
49 million students in the 1993-94 school year to approximately 52 million in
the 1997-98 school year. The National Center for Educational Statistics
estimates student enrollment will continue to grow every year until at least
2009.
GROWING NUMBER OF NEW TEACHERS. According to a report by the 1997
President's Committee of Advisors on Science and Technology, Panel on
Educational Technology (the "President's Committee Report"), over 200,000 new
teachers will enter the profession each year for the next 15 years. Many states
are accelerating their recruitment efforts to increase the size of the teacher
workforce and replace exiting teachers. New teachers typically must purchase new
education materials and are often more open to new methods of teaching and types
of instructional materials. For example, younger teachers are often familiar
with the use of personal computers and the Internet, making them more open to
using supplemental electronic instructional materials. The number of new
teachers in any year is due to both an increase in the number of teachers and to
turnover among current teachers. The number of K-12 teachers has grown from
approximately 2.9 million in the 1993-94 school year to approximately
3.1 million in the 1997-98 school year. The National Center for Educational
Statistics estimates the number will continue to increase each year through at
least the 2005-2006 school year. This growth has been driven by increasing
student enrollment and, to a lesser extent, by recent initiatives to maintain or
decrease the student to teacher ratio in elementary schools, generally in
kindergarten through third grade. In addition, the President's Committee Report
estimates that approximately 50% of the teacher workforce will turnover in the
next 15 years.
INCREASING SPENDING/FUNDING. Partially as a response to a growing
dissatisfaction among parents with the quality of education, average spending
per pupil for educational materials, as well as the type
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and amount of funding, has been increasing and is expected to continue to
increase, particularly for supplemental education materials. In recent years,
GALLUP polls have indicated that lack of financial support and quality of
education have been among the top concerns of the general public regarding
education. The average spending per student for educational materials in
elementary, middle and secondary schools has grown from $5,584 per student in
1993 to $6,562 in 1998. The National Center for Educational Statistics estimates
average spending per pupil will grow to $7,927 in 2003. Growth in the number of
students up to 21 years old who are classified as special education students
also has contributed to the increase in per pupil spending in the United States.
A school, by law, must expend the resources necessary to provide an equivalent
educational environment for these students, including individualized educational
programs for each such student. The number of students classified for special
education has increased to 2.6 million in the 1996-97 school year from
2.4 million in the 1993-94 school year and is expected to continue to grow in
the future. The amount and types of funding also have been increasing. For
example, since the early 1990s, government policy and funding has supported the
increased use of technology in education, a key driver of growth in the
supplemental education materials segment. One of the results of this policy was
The Technology Literacy Challenge Fund, a five-year, $2.0 billion Federal fund
initiated in 1995, that has been providing grants to state education agencies to
support grassroots efforts at the state and local levels to meet national
education goals.
INCREASING TEACHER ACCOUNTABILITY. Parents and policy makers are exerting
greater pressure to hold teachers and school administrators accountable for poor
student performance. Many different teacher and school administrator
accountability mechanisms have been implemented. Examples include:
- requiring schools to issue "school report cards" indicating student
performance on achievement tests;
- financial incentives based on student, school or school district
attainment of specified objectives; and
- states taking control of seriously under performing schools.
Greater accountability has helped increase the use of supplemental education
materials to help students improve learning and performance.
One area of particular note is the use of supplemental education materials that
enhance performance on achievement tests. Achievement tests are used by states
and school districts as a method of evaluating student progress. There are two
types of achievement tests: criterion reference tests, which are based on a
state or district standard of learning and norm reference tests, such as the
Iowa Test of Basic Skills, which are designed to produce statistics to compare
to the national population. Currently 40 states have mandated or are in the
process of mandating state-specific standards of learning which are evaluated
through statewide criterion reference testing, typically at the fourth, eighth
and eleventh grade levels.
INCREASING SCHOOL-LEVEL DECISION MAKING. Generally, there has been a trend
toward more school-level decision making for the supplemental education
materials segment. This trend is a result of the belief that such localized
decision making is better able to match students' needs with the materials being
provided. This trend is consistent with the increased accountability being
demanded of schools and teachers, each of whom are increasingly being given the
right to make decisions but also are being held responsible for the results.
INCREASED ACCESS TO TECHNOLOGY. One of the most rapidly growing categories
of the supplemental education materials segment is electronic instructional
materials. This growth has been fueled by increased access by schools and
libraries to technology. There has been widespread introduction of computers
into elementary and secondary schools in recent years. In the 1993-1994 school
year, the installed base of computers in U.S. schools was approximately
4.1 million. This number rose to
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7.4 million in the 1997-1998 school year. In addition there was an average of
seven students per computer in the 1997-1998 school year compared to an average
of 12 students per computer in the 1993-1994 school year. One important
technological innovation that has become available to schools following the
introduction of computers is the Internet. The percentage of schools with
Internet access has increased rapidly from 35% in 1994 to 89% in 1998. Many of
those schools provide Internet access primarily in their school libraries or
media centers, rather than classrooms. We expect the rate at which schools are
connected to the Internet to continue to grow, due in part to the funds
available through the Education rate program, which was established by the
Telecommunications Act of 1996 to help make telecommunications services and
technologies available to schools and libraries at discount rates.
DECREASING CLASS SIZES. Seventeen states have mandated and funded a reduced
student/teacher ratio at the elementary school level. In addition to the hiring
of new teachers, the demand for teachers imposed by these reduced ratios has
been partially satisfied by a shift in teachers from middle and secondary
schools to elementary school classrooms (generally kindergarten through third
grade), with larger classroom sizes after elementary school. New teachers and
teachers undergoing such a shift generally need to purchase new education
materials designed for elementary school students.
INCREASING LENGTH OF SCHOOL DAY. Over 30% of school districts in the United
States have extended day programs, a high percentage of which are located in
urban schools, and an increasing number of these programs include an
instructional component. Such programs lengthen the school day and require the
expenditure of additional funds for their operation, including for education
materials.
GROWTH IN CHARTER SCHOOLS. Charter schools typically receive state and
local funding and are an alternative form of schooling to traditional public and
private schools, usually with a distinct mission such as a school focused on the
basics or science. Charter schools began in 1991, with the passage of charter
legislation at the state level and the number of charter schools has grown to
over 1,000 in 1998. As with the opening of any new school, charter schools
typically purchase substantial amounts of education materials before they become
operational.
DEVELOPING PARENT MARKET. Due to the growing dissatisfaction among parents
with public schools and increasing interest in education, there is a rapidly
developing market of parents seeking education materials, which we believe will
contribute to future growth in this market. A significant part of this
developing market is due to parents of children in public and private schools
buying supplemental instructional materials to use in their homes to augment
their children's education. In addition, part of this developing market is due
to the trend toward more home schooling. In 1993, it became legal in all 50
states for parents to teach their children themselves at home. In the 1997-1998
school year, there were an estimated 800,000 to 1.0 million children receiving
home schooling.
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The following table sets forth some of the trends described above. Unless
otherwise specified, the statistics in the following table are for the school
year ending in such year.
HISTORICAL ESTIMATED PROJECTED
---------------------------------------------------- ------------------- --------
1993 1994 1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- -------- -------- --------
K-12 student enrollment(a)(b).............. N/A 48.9 49.7 50.5 51.4 51.8 52.7 53.1
Number of K-12 teachers(a)................. N/A 2.9 2.9 3.0 3.1 3.0 3.1 3.1
Students classified as special ed(a)(c).... N/A 2.4 2.5 2.6 2.7 N/A N/A N/A
Number of public K-12 schools(d)........... N/A 85,393 86,221 87,125 88,223 N/A N/A N/A
Total number of charter schools(e)......... 2 36 100 254 432 721 1050 N/A
Current expenditure per student in average
daily attendance, public K-12(f)......... $5,584 $5,767 $5,989 $6,146 $6,378 $6,562 $6,771 $7,053
PROJECTED
------------------------------
2001 2002 2003
-------- -------- --------
K-12 student enrollment(a)(b).............. 53.5 53.7 54.0
Number of K-12 teachers(a)................. 3.1 3.1 3.1
Students classified as special ed(a)(c).... N/A N/A N/A
Number of public K-12 schools(d)........... N/A N/A N/A
Total number of charter schools(e)......... N/A N/A N/A
Current expenditure per student in average
daily attendance, public K-12(f)......... $7,305 $7,640 $7,927
- ------------------------------
(a) Numbers in millions.
(b) Includes most kindergarten and some nursery school enrollment.
(c) Students classified in this category are students with learning disabilities
receiving additional school supplied resources.
(d) Number of private schools for each year is not available. For the 1993-94
and 1995-96 school years, there were 26,093 and 27,686, respectively,
private K-12 schools.
(e) The 1999 figure represents the total number of charter schools operating as
of September 1998.
(f) Numbers are for the calendar year.
Sources: National Center for Education Statistics, PROJECTIONS OF EDUCATION
STATISTICS TO 2009 and DIGEST OF EDUCATION STATISTICS, 1998 and U.S.
Department of Education, Office of Educational Research and
Improvement, THE STATE OF CHARTER SCHOOLS (1999).
SUPPLEMENTAL EDUCATION MATERIALS
We compete in the approximately $3.6 billion supplemental education
materials segment of the education materials market. The supplemental education
materials segment benefits not only from increases in total educational spending
but from the variety of funding sources with money targeted to specific
programs. Virtually any instructional materials or supplies funds not designated
for textbooks can be used to purchase supplemental education materials. An
increasing number of these funding sources have targeted dollars to specific
programs and initiatives. One example of targeted funding is Title I, the
largest elementary, middle and secondary school Federal education program, which
accounted for $7.8 billion of Federal educational spending in 1998. Title I
supplements state and local funding for low-performing children, particularly in
economically deprived schools. The program finances the additional academic
support and learning opportunities that are often required to help disadvantaged
students achieve the same level of progress as their classmates. Two other
examples of targeted funding are the Technology Literacy Challenge Fund and the
National Challenge Grants for Technology in Education. These Federal programs
are designed to foster growth and development of technology in the classroom.
The supplemental education materials segment has four categories of
materials:
- print instructional materials;
- electronic instructional materials;
- testing and assessment products; and
- materials for school libraries.
Growth in the supplemental education materials segment is driven by the factors
influencing the overall market, some of which we believe are having a greater
effect on this particular segment.
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SUPPLEMENTAL PRINT INSTRUCTIONAL MATERIALS
We estimate that supplemental print instructional materials accounted for
approximately $1.6 billion of the supplemental education materials segment in
1998. The supplemental print instructional materials category consists of the
following:
- supplementary texts and workbooks;
- magazines/periodicals;
- manipulatives;
- teaching aids and guides;
- games/puzzles; and
- trade books.
Manipulatives are instructional materials designed to provide concrete, tactile
learning experiences, such as blocks used to teach the base ten math system and
materials used for scientific experiments. Of this approximately $1.6 billion
category, approximately $585 million consists primarily of manipulatives, trade
books and games/puzzles, which are products that we do not offer but which we
consider to be alternatives to certain of our supplemental print instructional
materials.
Purchase decisions for supplemental print instructional materials are made
primarily by individual teachers. These decisions are generally based on the
product's quality, price, educational content, consistency and its ease of
integration into the school curriculum. Strong brand names and long histories
are important for companies serving this category to better address teachers'
purchasing criteria.
SUPPLEMENTAL ELECTRONIC INSTRUCTIONAL MATERIALS
We estimate that sales of supplemental electronic instructional materials
accounted for approximately $870 million of the supplemental education materials
segment in 1998. The supplemental electronic instructional materials category is
comprised of the following:
- comprehensive courseware and modular courseware;
- stand-alone/non-networked software (e.g., CD-ROMs);
- Internet/browser-based products;
- TV satellite distance learning; and
- video cassettes and video disks.
Of the $870 million supplemental electronic instructional materials category,
approximately $230 million is comprised of TV satellite distance learning and
video disks, which are products that we do not offer.
The success of companies competing in the supplemental electronic
instructional materials segment is based on their ability to deliver engaging,
effective, pedagogically sound content that is easy for students and teachers to
use. A recognized brand name and references and testimonials from product users
are important, particularly to help purchasers distinguish among a variety of
offerings which, because of their electronic format, are not as easy to review
for content. Unlike other categories of the supplemental education materials
segment, the purchasing decisions for electronic instructional materials, other
than stand-alone/non-networked software, are primarily made by school
district-level administrators, including superintendents, curriculum directors
and technology directors. Sales also are made, however, at the state and local
level. In addition, although individual teachers do not typically make final
purchasing decisions, they frequently have substantial input in the decision
making process.
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Electronic instructional materials, which were infrequently used in the
early 1990s, have shown the most growth in the supplemental education materials
market. In 1998, at least one-third of elementary, middle and secondary school
teachers used some form of electronic delivery of instruction. Although
electronic delivery through mainframe computers as a medium for the transmission
of educational materials has existed for over thirty years, the introduction of
the personal computer in the early 1980s, and more importantly, its widespread
use over the past decade have changed the landscape for instructional providers.
The use of electronic instructional materials is expected to continue to rapidly
grow. Fueling this growth are four national technology goals set by the Federal
government for schools:
- universal student accessibility to modern computers;
- the inclusion of engaging, educationally sound software in school
curriculums;
- teachers ready to use and teach with technology; and
- classrooms electronically connected to one another and the Internet.
Government policy and funding have supported these goals. In addition to The
Technology Literacy Challenge Fund, the National Challenge Grants for Technology
in Education, a Federal initiative beginning in 1995, challenges communities to
form partnerships among local schools, students, colleges, universities and
private businesses to develop new ways to use technology in learning. Since
1995, the National Challenge Grants program has funded 62 projects in 33 states
including over 500 school districts. These government policies have led to
increased technology spending, with approximately $5 billion expected to be
spent by schools on educational technology infrastructure, including hardware,
in 1999. Furthermore, the Education rate program is expected to continue to fund
the connection of schools and libraries to the Internet.
TESTING AND ASSESSMENT PRODUCTS
We estimate that testing and assessment products accounted for approximately
$600 million of the supplemental education materials segment in 1998. This
category consists of two primary groups of products and related services:
- an approximately $525 million to $550 million group of testing products
and related scoring and reporting services used to determine entrance to
post-secondary schools such as the American College Testing Assessment
(ACT) or the Scholastic Aptitude Test (SAT), achievement tests that assess
the academic performance of individuals or groups against a normed
population and related scoring and reporting services, and some other
similar tests (collectively, "Academic Assessment Products"); and
- an approximately $50 million to $75 million group of testing and
assessment products that are individually administered to assess the
progress of individuals and provide counseling on a course of study to
achieve a set of learning objectives ("Academic Guidance Testing
Products").
We compete in the Academic Guidance Testing Products group. In addition,
some of our testing and assessment products are also used by clinical
professionals for both children and adults in settings such as clinics,
hospitals and community mental health centers as well as in correctional
facilities. We estimate that the combined supplemental and other testing and
assessment products markets in which we compete had total sales of products and
related services in 1998 of approximately $125 million.
Purchasing decisions for Academic Assessment Products are typically made by
individuals, in the case of tests used to determine entrance to post-secondary
schools, and by school districts in the case of achievement and other tests.
Purchasing decisions for Academic Guidance Testing Products are made by a wide
variety of professionals, including school district administrators, guidance
counselors, speech pathologists and psychologists. These professionals generally
purchase products from several different developers and use them as appropriate.
In order to compare performance of their student
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populations over time, these professionals tend to use the same tests
repeatedly. These products do not tend to be particularly price sensitive
because of their specialized nature. Competition for all testing and assessment
products is based primarily on quality and reputation.
Criterion reference tests are usually commissioned, and paid for, by the
state. Because these tests are paid for by the state, they have not been
included in the $600 million testing and assessment products category described
above. The size of this market changes each year depending on the number of new
state criterion testing programs commissioned in such year.
LIBRARY MATERIALS
According to Publishing for Library Markets, 1999 by Simba
Information Inc., libraries in the United States spent $5.1 billion in 1998 on
information both print and electronic. In addition, in Publishing for Library
Markets, 1999, Simba Information Inc. estimates that, spending in the United
States library materials segment will experience a compound annual growth rate
from 1997 to 1999 of 6.5%. There were over 139,000 libraries in the United
States in 1998, consisting of four types: academic (college and other higher
education libraries), public, school (K-12) and special (corporate, government,
legal and medical). Of these libraries, approximately 108,000 were K-12 school
libraries, approximately 16,000 were public libraries and the remainder were
academic and special libraries. Approximately $600 million of the $5.1 billion
in sales in the library materials market in 1998 were made to school libraries
for print materials. We include library materials targeted to school libraries
in the supplemental education materials market because students often use these
materials to complete homework assignments and school reports. We sell products
to school libraries and to a lesser extent to public, academic and special
libraries.
School libraries are primarily funded by state and local sources and to a
lesser extent Federal sources. Public libraries are primarily funded by local
sources and to a lesser extent state and Federal sources. Academic and special
libraries have a variety of funding sources, both public and private.
Libraries generally are becoming multimedia centers, providing both print
and electronic information. Although libraries have rapidly increased spending
on electronic information, print remains the dominant medium in libraries. Print
information (books, periodicals, audiovisual and microform products), accounted
for approximately 73% of sales to libraries in 1998 and in Publishing for
Library Markets, 1999, Simba Information Inc. estimates that sales of print
information, including books and periodicals, will continue to experience
moderate growth. Books were the leading source of revenue for products in print
format, followed by periodicals and journals. In Publishing for Library Markets,
1999, Simba Information Inc. estimates that by 2003, electronic materials will
generate 32% of information sales to all libraries. Within electronic
information, Internet delivery of library materials is the fastest growing
medium, while spending for CD-ROMs and software is showing a decline after
leading growth during the early 1990s. The majority of libraries in public
schools have Internet access. As the amount of online materials has increased,
there has been a trend, which is expected to continue, away from information on
CD-ROMs.
The number of competitors in the library materials market varies depending
on the category of products involved. Competition is primarily based on
reputation and brand names of products, the length of time products have been on
the market, the uniqueness of a product and suitability for libraries (e.g.,
libraries primarily buy hardcover books). Therefore, products in this library
materials market tend to be less price sensitive than in other consumer markets.
The primary distribution channel for libraries is wholesalers. Libraries also
often purchase through catalogs, direct mail packages and brochures and to a
lesser extent from direct sales or telemarketing.
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BASAL MATERIALS
The approximately $2.6 billion basal materials segment of the overall
education materials market primarily consists of textbook programs that include
student editions, teacher editions and companion materials to teach particular
subject areas, with each program offering a grade specific textbook in the
subject area for a span of grades. Basal materials are generally designed to be
useful for a period of five to seven years before requiring a major revision.
Basal textbooks are typically purchased at the school district level, often
using textbook selection committees that include administrators, teachers and,
occasionally, parents. School districts may purchase textbooks in any given
subject area for one or more of the grades for which textbooks in a program are
available. School districts usually employ a selection process that can be
lengthy and time consuming for publishers. Most states and districts earmark a
certain portion of their education funds specifically for textbooks.
The processes and practices used in selecting and adopting textbooks vary by
state. Twenty-two states, mostly in the Southern and Western United States, make
available all or a portion of their textbook funds only for approved textbooks.
These states have statutes that provide procedures for the approval and
selection of textbooks for use in each state school. In general, most states
with statutes governing adoption of textbooks use textbook selection committees
to approve textbooks. These committees typically include teachers and
administrators, and sometimes parents. Textbooks are reviewed according to a
list of specific curricular requirements developed by the state and made
available to publishers well before the selection process begins. Once the
review is concluded, the committee "lists" approved textbooks. The actual
selection of textbooks is left to individual districts. School districts may
purchase "off-list" texts, but may receive reduced or no funding from the state
textbook funding source for such purchases. In states without statutes governing
the approval and selection of textbooks, each school district generally selects
and adopts textbooks for such school district without using any approved list.
Because a significant number of states require that textbooks satisfy
certain criteria, textbook publishers must incur significant up-front costs to
produce materials that meet these standards before they know whether their
products will be adopted and purchased. Because supplemental education materials
are intended to address individual needs or to supplement parts of the
curriculum, they have not been the subject of the kind of approval process that
adoption states use for textbooks, which are focused on standards for the entire
population of students.
Textbook funds in both states with and without statutes governing the
approval and selection of textbooks are usually used to purchase basal textbooks
and companion materials. For adoption states, basal material publishers are
typically the publishers willing to incur the significant up-front costs
described above. In states without adoption statutes, basal materials also are
usually purchased with textbooks funding because basal materials are correlated
to accepted scope and sequencing (i.e., the order in which a subject is taught)
of a course. Some publishers, however, do sell their products in both the basal
and supplemental education materials segments.
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BUSINESS
OVERVIEW
We are a leading publisher of supplemental education materials for the Pre
K-12 market. Our portfolio of products includes a broad range of print and
electronic supplemental instructional materials, testing and assessment products
and library materials. Our products have well-known brand names and we believe
they are recognized by our customers for their effectiveness and consistent,
high quality educational content. Our strong brand names, several of which have
been published for over 40 years, include:
- WEEKLY READER;
- TEEN NEWSWEEK;
- THE PEABODY PICTURE VOCABULARY TEST;
- TOMORROW'S PROMISE;
- THE WORLD ALMANAC AND BOOK OF FACTS; and
- FACTS ON FILE WORLD NEWS DIGEST.
Utilizing sophisticated sales and marketing methods, which include the use of
proprietary databases, we have established long standing customer relationships
and an extensive network with direct distribution channels. Our targeted
customers are:
- teachers;
- school and school district-level administrators;
- librarians;
- other educational professionals; and
- parents.
One or more of our products are used in over 90% of the school districts and
over 80,000, or approximately 75%, of the elementary, middle and secondary
schools in the United States.
We sell our products and services in the rapidly growing supplemental
education materials segment of the education materials market. We estimate this
segment had approximately $3.6 billion in sales in 1998, representing 58% of the
overall Pre K-12 education materials market. The supplemental education
materials segment consists of:
- print and electronic instructional materials;
- testing and assessment products; and
- materials for school libraries.
Growth in the education materials market has been, and is expected to continue
to be, driven by several factors, including:
- increasing Pre K-12 student enrollment;
- a rise in the number of Pre K-12 teachers;
- additional educational spending fueled by public concern over the quality
of education in the United States; and
- the growing installed base of personal computers in libraries, labs,
classrooms and homes.
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In addition to the growth factors that affect the overall education materials
market, growth in the supplemental education materials segment is driven by:
- increasingly diverse sources of education funding;
- teachers and school and school district-level administrators using a
greater amount of supplemental education materials to improve student
performance, as they are increasingly held accountable for student
achievement; and
- a growing acceptance among teachers of theories of teaching that support
the use of different instructional methods to accommodate the many ways in
which students learn.
Together, Simba Information Inc.'s Print Publishing for the School Market,
1999-2000 and Simba Information Inc.'s Print Publishing for the School Market,
1999-1998, show that the supplemental education materials segment, (excluding
the materials described immediately below) has grown at a compound annual growth
rate of 10.7% during the five-year period ending December 31, 1998. Simba
Information Inc. does not report statistics for some supplemental education
materials included in this segment, consisting primarily of some testing and
assessment products and library materials, which we estimate accounted for
approximately $1.3 billion in sales during 1998.
Our operations are conducted primarily through the following four operating
subsidiaries, each of which is a market leader in its respective product
categories.
WEEKLY READER. Weekly Reader has been a leading publisher of classroom
periodicals for Pre K-12 students for over 70 years. We were the largest
publisher of classroom periodicals during the 1997-1998 school year in terms of
total circulation with over 8.7 million subscribers, more than the other two
primary competitors in this market combined. Many of our periodicals experience
high rates of renewal. In each of the last ten years, approximately 80% of
elementary, middle and secondary schools at which subscriptions to one or more
of our periodicals were sold in the previous year subscribed to one or more of
our periodicals in the following year. In addition to our well recognized
classroom periodicals, such as WEEKLY READER, TEEN NEWSWEEK and CURRENT EVENTS,
we publish 177 distinct, grade-specific basic and life skills workbooks. We also
publish instructional materials paid for by various sponsors, such as Chrysler
and the American Health Foundation, which are distributed for free primarily to
K-12 students throughout the United States. For the twelve months ended
June 30, 1999, Weekly Reader (not including American Guidance or World Almanac)
had net revenue of $43.7 million, representing approximately 21% of our total
pro forma net revenue during such period.
AMERICAN GUIDANCE. American Guidance has been a leading publisher of
individually administered testing and assessment products and supplemental
instructional materials for over 35 years. American Guidance's testing and
assessment products are primarily for K-12 students and its supplemental
instructional materials are primarily for low-performing students in middle and
secondary schools. One or more of American Guidance's testing and assessment
products or supplemental instructional materials are used in over 12,000 school
districts, or approximately 80% of the school districts in the United States.
Our testing and assessment products are used to diagnose learning disabilities
and measure the cognitive ability, educational achievement or personal and
social adjustment of individual students. American Guidance's supplemental
instructional materials include various textbooks and worktexts, many of which
we believe set the standard for quality in their respective product categories,
with full color content and accompanying extensive teacher support materials.
For the twelve months ended June 30, 1999, American Guidance had net revenue of
$50.3 million, representing approximately 24% of our total pro forma net revenue
during such period.
COMPASSLEARNING. CompassLearning is a leading publisher of electronically
delivered supplemental instructional materials and teacher management and
student assessment products for the K-12 market. CompassLearning has been
serving this market for over 20 years and one or more of its
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products have been sold to more than 20,000 K-12 schools, representing
approximately 19% of all schools in the United States. We have approximately
7,000 hours of proprietary electronic courseware providing interactive
curriculum lessons for K-12 students. Our electronic courseware primarily covers
reading, math and language arts, is generally correlated to the five leading
achievement tests for K-12 students, and can be customized to correlate with
specific state tests or school district standards. Our management and assessment
tools and services are integrated with our courseware and assess and report each
student's progress, assist the teacher in developing the appropriate response to
each student's performance and allow the teacher to incorporate our products
into his or her specific lesson plan. For the twelve months ended June 30, 1999,
CompassLearning had net revenue of $64.5 million, representing approximately 31%
of our total pro forma net revenue during such period.
WORLD ALMANAC. World Almanac has been a leading publisher of reference and
informational materials targeted to K-12 students, as well as other well-known
general reference and informational materials, for over 40 years. During the
past three years, over 55% of the approximately 124,000 school and public
libraries in the United States have purchased products from World Almanac. World
Almanac publishes well-known print reference materials, such as THE WORLD
ALMANAC AND BOOK OF FACTS and nonfiction and fiction books for K-6 students
under the GARETH STEVENS brand. In addition, World Almanac publishes electronic
reference materials such as the FUNK & WAGNALLS ENCYCLOPEDIA database and CD-ROM
and Internet-based versions of FACTS ON FILE WORLD NEWS DIGEST, which in its
print version is World Almanac's leading subscription-based product with renewal
rates averaging approximately 90% from 1996 through 1998. World Almanac also
distributes third-party products that are targeted for K-12 students through its
World Almanac Education catalogs. For the twelve months ended June 30, 1999,
World Almanac had net revenue of $49.4 million, representing approximately 24%
of our total pro forma net revenue during such period.
COMPETITIVE STRENGTHS
A number of competitive strengths have contributed to our leading market
positions, including:
BROAD PRODUCT PORTFOLIO. We are a leading publisher in the supplemental
education materials market and one of the few companies with a comprehensive
portfolio of products covering all the major segments of this market. We offer a
wide range of products to our customers which consists of:
- 25 periodicals;
- 310 instructional books and workbooks;
- approximately 7,000 hours of proprietary electronic courseware;
- 29 testing and assessment products;
- six reference products;
- over 1,000 nonfiction and fiction books and videos; and
- over 3,750 books and other products that we distribute for third parties.
This broad product portfolio allows us to address the most attractive segments
of the market and respond to emerging trends and funding sources, including the
rapidly developing market of parents seeking to buy supplemental education
materials.
STRONG, WELL-ESTABLISHED BRAND NAMES. We have strong brand names in each of
the market segments we serve. Several of our most recognized print titles have
been in circulation for over 40 years, including WEEKLY READER, which was first
published in 1928, the PEABODY PICTURE VOCABULARY TEST, which was first
published in 1959, and THE WORLD ALMANAC AND BOOK OF FACTS, which was first
published in 1868. We believe that our products are well-known and trusted by
teachers, other
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educational professionals and parents for their effectiveness and consistent,
high quality educational content. Brand name and reputation are significant
criteria in the purchasing decision process for supplemental education materials
as they are usually selected at the discretion of individual teachers, school
and school district-level administrators or parents.
STABLE REVENUE BASE. We have a significant base of long-term customers who
have exhibited substantial product loyalty, resulting in a consistent level of
revenues from recurring sales to such customers. In our experience, once a
teacher or administrator is familiar with and accustomed to using a supplemental
instructional product and has developed lesson plans using the product, it is
difficult to convince that teacher to switch to new products. In addition, we
believe there is an important component of trust in the quality, consistency and
support of many of our products which makes it difficult for a competitor to
introduce new products for the same subject area without significant investment
and the support of key opinion makers in the industry. As a result of this
loyalty, many of our products enjoy long customer histories with high renewal
rates. For example, in each of the last ten years, over 80% of elementary,
middle and secondary schools at which subscriptions to one or more of our
periodicals were sold in the previous year subscribed to one or more of our
periodicals in the following year. In addition, six of our top ten testing and
assessment products, based on net revenues, have been published for over
25 years.
SUBSTANTIAL ELECTRONIC DELIVERY PLATFORM. At CompassLearning, we have over
20 years of experience in developing and providing electronically delivered
supplemental instructional materials and are well positioned to capitalize on
this rapidly growing market segment. One or more of CompassLearning's products
have been sold to over 20,000 K-12 schools in the United States, more schools
than have been reached by any other publisher of comprehensive electronic
courseware. In addition, each of our primary operating subsidiaries have web
sites that promote their respective products, provide product information and,
in some cases, enable users to order products over the Internet. Given the
importance of quality and name recognition to the development of Internet-based
business, we believe that the strength of our brands and our direct distribution
channels position us well for significant growth in this area.
STRONG DISTRIBUTION CHANNELS. Our products are used in over 80,000 schools,
by over ten million students, in over 6.5 million homes (through Weekly Reader
periodicals being taken home) and in over 68,000 school and public libraries. We
have an extensive network with direct distribution channels into these end user
markets. Some of our products are sold using direct field and telephone sales,
emphasizing personal relationships with teachers, school and school
district-level administrators and other educational professionals.
CompassLearning, for example, uses a three-pronged approach that provides every
customer a sales contact, an educational consultant and a technology support
person, for comprehensive customer service. We also utilize sophisticated direct
mail campaigns, which at Weekly Reader and World Almanac are enhanced by our
proprietary databases. These databases track the purchasing habits of teachers,
schools and/or librarians for many of our products as well as certain
demographic and other factors we believe affect purchasing habits.
EXPERIENCED MANAGEMENT TEAM. We have assembled an experienced management
team at both the administrative and the operating levels. This management team
is led by Martin E. Kenney, Jr., our Chief Executive Officer, who has over
25 years of experience in educational publishing and electronic courseware.
Prior to joining WRC Media, Mr. Kenney was Executive Vice President of the
Educational Publishing Group and President of the Education Technology Group at
Simon & Schuster, the world's largest educational publisher at that time. The
top 11 members of our management team have an average of approximately 15 years
of experience in the educational publishing industry.
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BUSINESS STRATEGY
Our objective is to become the leading publisher of supplemental education
materials in the United States by using our competitive strengths to maintain
and solidify our leading market positions as well as to selectively emphasize
those market segments which demonstrate sustainable and high rates of growth and
return. To achieve this objective, we are focusing on the following strategies:
CAPITALIZE ON THE GROWING SUPPLEMENTAL EDUCATION MATERIALS MARKET. We are a
leading publisher in the supplemental education materials market and one of the
few companies with a comprehensive portfolio of products covering all the major
market segments. This market has experienced strong growth in recent years, and
we believe that usage of supplemental education materials will continue to
increase and that the breadth of our product portfolio and our leading market
positions will allow us to continue to benefit from this market growth. As
educational priorities and funding shift over time, we intend to focus on the
growth segments of the market, which we believe will generate high returns on
investment, by selectively allocating resources to products and services in
response to industry trends.
EXTEND OUR STRONG BRAND NAMES INTO NEW PRODUCTS, SERVICES AND END-USER
MARKETS. We intend to use our strong brand names, significant market presence
and extensive base of existing customers to extend our brands into new products
and services and to expand into new end-user markets. We believe that the home
market will be an important market for our products in the future because of the
heightened awareness, interest and concern among parents for education and the
increasing number of home computers. Charter schools are also an attractive
emerging segment because these new schools start without any supplemental
education materials or instructional materials and are growing at a rapid rate.
The number of charter schools has grown from less than ten in 1993 to over 1,000
in 1998.
EXPAND THROUGH ELECTRONIC DELIVERY CAPABILITIES. We intend to focus on the
rapidly growing electronic delivery segments of our market. Although delivery of
supplemental education materials over the Internet currently accounts for a
small segment of our market, it constitutes one of the most rapidly growing
areas and provides significant expansion potential for each of our primary
operating subsidiaries through brand extension and continuing conversion of our
print materials for electronic delivery. In the 1993-1994 school year, there was
an average of 12 students per computer as compared to seven students per
computer in the 1997-1998 school year. Furthermore, the number of schools with
Internet access has increased significantly from 35% in 1994 to 89% in 1998. We
are well-positioned to expand in this area because of our significant experience
in electronic delivery of materials, strong brand names and extensive
educational content. In addition, we developed our existing electronic
courseware products using a standardized authoring tool which facilitates,
expedites and reduces the cost to convert such products into a format for
delivery over the Internet.
SELL ACROSS DISTRIBUTION CHANNELS. We intend to leverage the experience,
market contacts, installed base and distribution channels that our four primary
operating subsidiaries have developed in their respective market segments to
increase sales to new and existing customers. For example, we may conduct
cooperative direct marketing of multiple product lines. In addition, we intend
to bundle or repackage different products together, such as linking electronic
reference materials with electronic courseware or bundling periodicals with
supplemental instructional materials in social studies.
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PRODUCTS AND SERVICES
The following chart outlines our product offerings by primary operating
subsidiary in each of the segments of the supplemental education market in which
we compete:
WEEKLY READER AMERICAN GUIDANCE COMPASSLEARNING
PRINT AND ELECTRONIC PERIODICALS: 20 grade or BASIC SKILLS: Supplemental ELECTRONIC COURSEWARE:
INSTRUCTIONAL MATERIALS subject- specific periodicals textbooks and worktexts Approximately 7,000 hours of
for Pre K-12 students, targeted for low-performing proprietary electronic
including Weekly Reader, Teen students in middle and courseware for K-12 students,
Newsweek and Current Events. secondary schools covering primarily for reading, math
SKILLS BOOKS: 177 distinct, core curriculum subjects. and language arts, including
grade specific, workbooks for TEST PREPARATION: TOMORROW'S PROMISE.
K-9 students that build and Instructional materials to MANAGEMENT SYSTEMS: COMPASS
reinforce basic skills, prepare for three of the management system enables
including the Map Skills leading achievement tests for teachers to track student
series, or focus on current K-12 students. performance, record grades,
topics such as health issues PERSONAL GROWTH: Various report on progress and
or upcoming Presidential personal growth materials prescribe lessons based on
elections. covering topics such as drug results.
SPONSORED INSTRUCTIONAL use prevention and career INTERNET-BASED PRODUCTS:
MATERIALS: A variety of free education targeted for K-12 Worldware software integrates
instructional materials, students. more than 400 pre-selected
including print and video "safe" web sites into the
products, paid for by curriculum and is also a web
corporate, trade association site with educational
and/or not-for-profit sponsors activities for students.
primarily for K-12 students. Compass Virtual Classroom
allows teachers and students
to access Compass through the
Internet.
TESTING AND ASSESSMENT N/A INDIVIDUALLY ADMINISTERED COMPUTERIZED ASSESSMENT TESTS:
PRODUCTS TESTS: Assessment products for COMPASS COMPREHENSIVE
K-12 students and adults ASSESSMENT TESTS, electronic
including the PEABODY PICTURE tests based on the test items
VOCABULARY TEST, KAUFMAN TEST in the five leading
OF EDUCATIONAL ACHIEVEMENT AND achievement tests. Based on
BEHAVIOR ASSESSMENT SYSTEM FOR COMPASS COMPREHENSIVE
CHILDREN. ASSESSMENT TESTS evaluations,
electronic courseware can be
assigned to students.
LIBRARY MATERIALS N/A N/A N/A
WORLD ALMANAC
PRINT AND ELECTRONIC TEACHING KITS: Kits developed
INSTRUCTIONAL MATERIALS by World Almanac Education
used to teach a variety of
skills including research
skills, map skills and
Internet skills.
TESTING AND ASSESSMENT N/A
PRODUCTS
LIBRARY MATERIALS K-12 REFERENCE AND OTHER
INFORMATIONAL MATERIALS:
Materials developed by us
targeted to K-12 students such
as THE WORLD ALMANAC FOR KIDS
AND GARETH STEVENS, INC.
products as well as materials
developed by third parties and
distributed by us.
GENERAL REFERENCE AND OTHER
INFORMATION MATERIALS:
Materials developed by us,
such as THE WORLD ALMANAC AND
BOOK OF FACTS, FUNK & WAGNALLS
ENCYCLOPEDIA database and
FACTS ON FILE WORLD NEWS
DIGEST.
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WEEKLY READER.
Weekly Reader has four primary product lines:
- elementary school periodicals;
- middle and secondary school periodicals;
- sponsored instructional materials published by its subsidiary, Lifetime
Learning Systems, Inc.; and
- skills books.
In addition, Weekly Reader licenses the content of certain of its publications
for commercial use by third parties and sells advertising space in some of its
publications and on its WEEKLY READER GALAXY web site.
ELEMENTARY SCHOOL PERIODICALS. WEEKLY READER, first published in 1928, has
established itself as a leading source for current events information for
students in grades Pre K-6. WEEKLY READER features seven grade-specific editions
for students, with between 25 and 32 issues per school year for each edition.
Weekly Reader also offers two optional monthly supplements, SCIENCESPIN and
GEOSPIN and SUMMER WEEKLY READER, an additional periodical targeted for use at
home. The following table lists each edition of the WEEKLY READER and our other
elementary school periodicals indicating issues per subscription and
subscription price.
ISSUES PER 1999 SUBSCRIPTION PRICE
PUBLICATION SUBSCRIPTION (PER STUDENT, PER YEAR)(A)
- ----------- ------------ --------------------------
WEEKLY READER:
Pre K..................................................... 28 $5.20
K......................................................... 28 4.36
Grade 1................................................... 32 3.10
Grade 2................................................... 25 3.10
Grade 3................................................... 25 3.52
Grade 4................................................... 25 3.52
Grades 5-6................................................ 25 3.83
SCIENCESPIN................................................. 7 1.00
GEOSPIN..................................................... 7 1.00
SUMMER WEEKLY READER........................................ 3 5.00
- ------------------------
(a) Includes shipping and handling costs.
Subscriptions to Weekly Reader elementary school periodicals in the
1997-1998 school year represented approximately 54.5% of all elementary school
periodical subscriptions circulated in that year by the three major publishers
of these periodicals which we believe together account for virtually all such
periodicals targeted for classrooms. Weekly Reader's periodicals had the highest
total circulation of elementary school periodicals in the 1997-1998 school year,
totaling approximately 7.1 million subscriptions (including approximately
0.5 million unpaid (promotional or teacher reference) subscriptions).
Subscriptions to Weekly Reader's elementary school periodicals have a high
rate of renewal. In each of the last ten years, over 80% of elementary schools
that have subscribed to one or more of our elementary school periodicals
subscribed to one or more of our periodicals in the following year. We believe
our school renewal rates are important because of the value we place on ensuring
that our periodicals remain available within any given school, providing us with
a base on which to further penetrate that school.
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Each edition of WEEKLY READER is specifically written and designed for
particular grade levels in order to bring information on current events to
elementary school students at a conceptually appropriate level. The editions for
younger audiences contain "soft" news focusing on topics such as fire prevention
and animals. Higher grade level editions contain "hard" news concerning topics
such as world news and current events, including, for example, the Kosovo
conflict, the 2000 Presidential elections and the Olympics bribery scandal. A
teacher's guide with background information, discussion topics and follow-up
questions is included with each issue of each edition.
To capitalize on our large customer base of elementary school teachers and
schools, in the 1997-1998 school year, we launched SCIENCESPIN, an optional
monthly science news supplement to WEEKLY READER. Each edition of SCIENCESPIN
contains science news tailored to student reading levels and school curriculum.
In the summer of 1998, we followed the successful launch of SCIENCESPIN with
SUMMER WEEKLY READER, a new periodical targeted at K-3 students for use at home,
which focuses on entertainment and other non-academic subjects. In addition, in
the fall of 1999, we launched GEOSPIN, our additional monthly geography news
supplement to our WEEKLY READER periodicals.
MIDDLE AND SECONDARY SCHOOL PERIODICALS. We publish ten subject-specific
periodicals covering six subject areas for students in middle and secondary
schools, with between six and 30 issues per school year per periodical. For
example, CURRENT EVENTS, one of our most popular periodicals for middle school
students, provides information on current events tailored to the reading levels
and school curriculum of students in the sixth through ninth grades. The
following table lists each of our middle and secondary school periodicals
indicating target grades, issues per subscription, subject area and subscription
price.
1999 SUBSCRIPTION PRICE
ISSUES PER (PER STUDENT, PER
PUBLICATION GRADE SUBSCRIPTION SUBJECT AREA YEAR)(A)
- ----------- -------- ------------ -------------------------- -----------------------
CURRENT EVENTS............ 6-9 25 Social Studies $8.85
CURRENT SCIENCE........... 6-9 16 Science 9.49
READ...................... 6-9 18 Language Arts 9.49
WRITING................... 7-10 6 Language Arts 9.28
EXTRA..................... 5-9 12 Remedial Reading 10.55
CAREER WORLD.............. 7-12 6 Career Guidance 9.81
CURRENT HEALTH 1.......... 5-6 8 Health 9.49
CURRENT HEALTH 2.......... 7-12 8 Health 9.49
HUMAN SEXUALITY........... 7-12 8 Health 3.45
TEEN NEWSWEEK............. 6-9 30 Social Studies 5.95
- ------------------------
(a) Includes shipping and handling costs.
Weekly Reader's middle and secondary school periodical subscriptions in the
1997-1998 school year represented approximately 39.9% of all middle and
secondary school periodical subscriptions circulated that year by the three
major publishers which we believe account for virtually all such periodicals
targeted for classrooms. Weekly Reader's middle and secondary school periodicals
had the second highest total circulation of periodicals for these schools in the
1997-1998 school year with approximately 1.6 million subscriptions (including
approximately 0.2 million unpaid (promotional or teacher reference)
subscriptions). In each of the last ten years, over 70% of middle and secondary
schools that have subscribed to one or more of our middle or secondary school
periodicals subscribed to one or more of our middle or secondary school
periodicals in the following year.
To specifically target the growing sixth to ninth grade market, Weekly
Reader recently entered into a partnership with NEWSWEEK magazine to create TEEN
NEWSWEEK, which was launched in September 1999. TEEN NEWSWEEK focuses on social
studies and current events and contains grade-appropriate news stories that link
history, geography, government and cultures to the news stories. The
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partnership is intended to capitalize on Weekly Reader's expertise in publishing
and marketing materials for classroom use and NEWSWEEK's strong news image,
rapid distribution capabilities and experience in advertising sales.
LIFETIME LEARNING SYSTEMS, INC. Our Lifetime Learning Systems, Inc.
business is a leader in the creation and distribution of a variety of
supplemental education materials which are paid for by corporate, trade
association and/or not-for-profit sponsors and are distributed free to a target
audience. The materials produced focus on topics chosen by the sponsor and are
typically targeted for use in K-12 classrooms. Lifetime Learning Systems, Inc.
also produces sponsored supplemental education materials targeted for the
college and senior citizen markets. Lifetime Learning Systems, Inc. has created
a variety of formats for supplemental education materials over the years,
ranging from:
- posters, teacher's guides and reproducible student activities;
- audio and video tapes; and
- web sites.
Sponsors of Lifetime Learning Systems, Inc. projects have included corporate
sponsors such as Chrysler, Home Box Office, ABC-TV and Ford as well as
not-for-profit sponsors such as the American Health Foundation, the Tennessee
Valley Authority and Save the Children.
SKILLS BOOKS. We offer skills books, a line of workbooks and other
supplemental education materials that build and reinforce students' basic skills
in curriculum areas such as math or language arts as well as other titles which
focus on life issues, such as current events or health. The skills book product
line includes 30 different series of workbooks including 177 distinct,
grade-specific titles spanning K-9 grades. For example, the highly successful
Map Skills series builds geographic literacy by teaching students basic
map-reading concepts and skills. The success of this series is attributable to a
proven sequential approach to teaching map skills that matches the curriculum
established by many school systems. Additional products include series covering
topics such as AIDS and Presidential elections.
WEEKLY READER GALAXY. In addition to our presence in the classroom through
printed materials, in 1996 we launched our web site, WEEKLY READER GALAXY, with
the goal of strengthening the brand image of our print products and positioning
Weekly Reader to capitalize on electronic distribution opportunities. WEEKLY
READER GALAXY is a free web site with pages specifically addressing students,
teachers and parents. It offers materials, in the form of puzzles, experiments
and games, which correlate with the content of Weekly Reader periodicals. The
web site is also connected to various other resources such as the "world's
largest classroom key pal network," which connects classrooms from 103
countries. In addition, the WEEKLY READER GALAXY web site informs users about
our periodicals and allows them to subscribe over the Internet. For the twelve
months ended December, 1999, the web site had approximately 36 million page
views with the average user spending approximately nine minutes on the site per
visit.
OTHER PRODUCTS AND SERVICES. Weekly Reader also licenses the content of
some of its publications, promotes other products in its publications and
provides its "seal of approval" to various products. For example, Weekly Reader
is one of several educational publishers providing content to JUNIORNET, a
subscription based web site launched in March 1999 targeted to children ages
3-12. Weekly Reader licenses the content of certain of its publications for use
on JUNIORNET and is compensated for the use of such content based upon the
amount of time visitors to the web site spend viewing Weekly Reader's licensed
content. In addition, in November 1998, Weekly Reader began its "Weekly Reader
Seal of Approval" program. Pursuant to this program, producers of educational
products submit their products to Weekly Reader for review and, if approved by
Weekly Reader based upon the educational value of the product, these products
are granted the Weekly Reader Seal of Approval. Producers of the products pay
Weekly Reader an annual licensing fee in exchange for such endorsement.
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AMERICAN GUIDANCE.
American Guidance has two product lines:
- testing and assessment products; and
- supplemental instructional materials.
Our testing and assessment products and supplemental instructional materials
are primarily used in K-12 schools. In addition to K-12 schools, American
Guidance's testing and assessment products and supplemental instructional
materials are used in:
- community health centers;
- clinics;
- hospitals;
- correctional facilities;
- community colleges; and
- other adult education programs.
Approximately 16% of American Guidance's net revenue for the twelve months ended
June 30, 1999 were from sales of testing and assessment products and
supplemental instructional materials in which the end users were not K-12
schools. This percentage is consistent with the percentage of net revenue for
sales of these products in 1996 through 1998.
TESTING AND ASSESSMENT PRODUCTS. American Guidance's testing and assessment
products provide educators and clinicians, including school psychologists,
guidance counselors, special education teachers, speech pathologists and other
similar school or district-level specialists with reliable individually
administered tests and manuals explaining how to administer our tests. The
testing and assessment products also include related third-party professional
development books covering various theories of testing which we offer through
our catalogs. American Guidance's testing and assessment products are used to
diagnose learning disabilities and measure the cognitive ability, educational
achievement and personal and social adjustment of students, for example:
- the PEABODY PICTURE VOCABULARY TEST (PPVT) measures a student's listening
comprehension for "Standard American English" and screens for verbal
ability;
- the KAUFMAN TEST OF EDUCATIONAL ACHIEVEMENT (KTEA) measures a student's
reading, mathematics and spelling skills; and
- the BEHAVIOR ASSESSMENT SYSTEM FOR CHILDREN (BASC) test assesses the
behaviors and emotions of children and is used, among other things, to
assess whether a student has attention deficit hyperactivity disorder.
American Guidance currently publishes over 25 testing and assessment
products. Six of American Guidance's top ten testing products (based on sales)
have been published for over 25 years and its leading testing publication, the
PEABODY PICTURE VOCABULARY TEST, was initially developed in 1959 and continues
to rank among American Guidance's top selling products. American Guidance's
tests are revised periodically to ensure that they reliably measure existing
populations. Achievement tests generally require revisions every eight to ten
years while tests that measure personal and social adjustment or cognitive
ability in certain cases do not require revision for as long as 15 years.
American Guidance's tests are generally sold as part of a test kit. Test
kits typically contain the test, test record forms, "easels" used to administer
the test, scoring sheets used to score the test and a manual describing the
proper method to score and evaluate the particular test. Test kits range in
price
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from $80 to $600 depending on the content of the test kit and the demand for the
test. Each test uses a different test record form which must be reordered from
us. Test record forms are generally sold in packages of 25 with an average price
range of $25 to $40 per package. A test kit usually contains one package of 25
test record forms. Sales from our top ten testing and assessment products and
related materials (e.g., easels and scoring sheets) represented approximately
71.5% of American Guidance's total net revenue from testing and assessment
products for the twelve months ended June 30, 1999, with no individual set of
testing products accounting for more than 12%.
Educators and clinicians apply American Guidance's testing and assessment
products on an individual basis to understand a student's particular educational
needs. The need for our testing and assessment products generally arises after
someone close to the student, either a parent or teacher, determines that the
student is having behavioral or academic difficulty. The student is then
referred to the appropriate clinician or educator at the school who has
responsibility for determining what test or tests should be administered in
order to correctly diagnose the student's problem.
In our experience, once the validity and effectiveness of a test is
established and accepted in the educational community, educators',
psychologists' and clinicians' familiarity with the product grows along with
their reluctance to change suppliers and learn different assessment content,
administration approaches and scoring techniques. These professionals often
prefer to use the same tests over a long period of time in order to compare
performance of their student populations.
SUPPLEMENTAL INSTRUCTIONAL MATERIALS. American Guidance's supplemental
instructional materials consist of curriculum-based instructional materials,
many of which are for low-performing students. Low-performing students are
defined as those students scoring in the lower 50th percentile of the student
population at a particular grade level. We focus primarily on serving middle and
secondary schools with additional sales to post-secondary markets, such as
community colleges and correctional facilities. We generally produce four types
of instructional materials:
- supplemental hardcover textbooks in core curriculum areas for
low-performing students, with related products such as workbooks;
- softcover worktexts in core curriculum areas for low-performing students;
- test preparation materials which can be used to prepare all students for
leading achievement tests; and
- personal growth products.
American Guidance's supplemental hardcover textbooks are designed to provide
comprehensive coverage of skills and concepts in short, concise lessons. They
are geared to a fourth grade reading level or below with photography and content
that are appropriate for middle and secondary school students as well as adults.
American Guidance's current catalog offers supplemental hardcover textbooks in
the following subject areas:
Basic English Grammar General Science
Basic English Composition Earth Science
English for the World of Work Physical Science
English to Use United States Government
Life Skills English United States History
Life Skills Math World History
Algebra World Literature
Pre-Algebra Exploring Literature
Geometry American Literature
Consumer Mathematics Life Skills Health
Basic Math Skills Discover Health
Biology
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We believe American Guidance's supplemental hardcover textbooks set the
standard for quality in the market, with full-color content and accompanying
extensive teacher support materials. Each textbook has a wrap-around teacher's
edition that reproduces the student edition with notes for the teacher indicated
next to the text such as overviews for each new lesson, alternative questions a
teacher may ask and answers to questions in the text. Each textbook has
available a set of quizzes, worksheets, problem sets and other materials that
teachers are permitted to reproduce for their classes. These materials also are
available on CD-ROM. Most of American Guidance's supplemental hardcover
textbooks have related softcover workbooks (generally 50 to 60 pages in length),
activity books and study guide programs (sometimes including videos) available
in print and on CD-ROM for self-guided learning. Pricing for American Guidance's
hardcover textbooks ranges from $33 to $40 dollars each; workbooks range from $7
to $10 each; and the CD-ROMs containing the quizzes, worksheets, problem sets
and other materials are approximately $160 each.
American Guidance's softcover worktexts also cover core curriculum areas.
These worktexts (generally 90 to 120 pages in length) are designed as
stand-alone products so that a teacher may use them to supplement any textbook.
These softcover worktexts cover smaller portions of any given curriculum area
than our supplemental hardcover textbooks. For example, we have a softcover
worktext on how to balance a checkbook which is only one topic of many that are
covered in our hardcover Life Skills Math textbook. Pricing for our softcover
worktexts ranges from $6 to $13 each.
American Guidance also publishes a rapidly growing line of test-preparation
materials developed to assist students preparing to take three of the leading
achievement tests:
- Stanford Achievement Test (SAT9);
- Iowa Test of Basic Skills (ITBS); and
- TERRANOVA (Comprehensive Test of Basic Skills (CTBS) and Multiple
Assessments tests).
American Guidance's test preparation materials are sold in package format and
generally contain 25 activity books per package covering one subject area.
Prices for test preparation packages range from $40 to $90 each. The emphasis in
education on accountability for teachers and school administrators for the
performance of their students on these achievement tests has helped make this a
rapidly growing segment for our business.
American Guidance also markets a full line of personal growth products aimed
at:
- developing behavior skills;
- parenting training;
- drug use prevention and anti-violence training;
- self-esteem; and
- career education.
These materials have differing audiences ranging from the entire K-12 student
population to teachers and adults, and are produced using various formats
including print, computer software and video.
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COMPASSLEARNING.
CompassLearning derives revenues from three sources:
- software products;
- professional development services and technical support services; and
- sales of hardware.
CompassLearning's electronic courseware, assessment software and management
systems products are purchased pursuant to perpetual license agreements between
CompassLearning and the applicable purchaser. Courseware products sell for an
average of approximately $120 per subject per grade level plus $100 per
workstation for simultaneous access. The COMPASS management system sells for
$3,500 and the assessment software sells for $2,000, subject to any applicable
discount. Electronic courseware, assessment software and a management system are
typically sold as a package, together with certain professional development and
technical support services. These packages sell for an average of approximately
$25,000 per school. CompassLearning's professional development services range in
price from $850 per day for a standard course to $1,000 per day for a customized
training session. These services are typically purchased under a contract for a
certain number of days of service to be provided over a period of up to one
year. Technical support services are typically purchased under one year
contracts for an average cost of $5,500 per year. After the expiration of any
service contract, such services may be purchased on an ongoing basis.
SOFTWARE PRODUCTS. CompassLearning's software products consist of
electronic courseware, assessment software, management systems and
Internet-based products. Most of CompassLearning's current electronic
courseware, assessment software and management systems operate in:
- a networked environment with file servers and several student stations;
- a peer-to-peer environment connecting several student stations in a
"mini-network;" and
- a stand-alone CD-ROM environment.
These products are typically compatible with both Windows and Macintosh
operating systems. CompassLearning also has two products that are
Internet-based, which were introduced in 1996 and 1999, respectively. In
addition, CompassLearning distributes a small amount of third-party products,
typically bundled with its own products.
Electronic Courseware: CompassLearning's primary product line is its
proprietary electronic courseware. CompassLearning has approximately
7,000 hours of such courseware, including TOMORROW'S PROMISE, a comprehensive
library of over 3,600 hours of electronic courseware with complete correlation
to major national and state educational standards. The content of
CompassLearning's electronic courseware curriculum is grade-specific and focuses
on core curriculum topics such as reading, spelling, math, science and language
arts, as well as emphasizing higher-order thinking and problem solving skills.
Most of our current courseware is available in a networked, peer-to-peer or
CD-ROM environment. In addition, our existing electronic courseware products
have been developed using a standardized authoring tool which facilitates,
expedites and reduces the cost to convert such products into a format for
delivery over the Internet.
Most of CompassLearning's electronic courseware covering core curriculum
topics such as reading, math and language arts, is available in comprehensive,
modular or stand-alone formats. In the comprehensive format, which accounted for
approximately 60% of CompassLearning's sales of electronic courseware for the
twelve months ended June 30, 1999, customers purchase all current electronic
courseware for a particular subject in each of the grades offered by
CompassLearning (typically K-6 or K-8). The remaining 40% of CompassLearning's
electronic courseware sales were made in the modular and stand-alone formats. In
the modular format, customers purchase grade and/or
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subject specific electronic courseware according to their specific needs. The
modular format allows, for example, a school to add courseware over the years as
additional funds become available or to buy courseware to address a specific
need or implementation plan. Typically, schools intending to use courseware in a
computer lab often purchase courseware in a comprehensive format while schools
intending to use courseware in a classroom often purchase courseware in a
modular format. Finally, in the stand-alone format, customers purchase
courseware on stand-alone CD-ROMs for use without the need for a computer
connected to file servers running CompassLearning's system software.
Assessment Software: CompassLearning offers a series of comprehensive
assessment tests referred to as Compass Comprehensive Assessment Test. Compass
Comprehensive Assessment Test is a series of computerized achievement tests
based on the subjects typically tested in the following five leading achievement
tests for K-12 students:
- the Iowa Test of Basic Skills examination (ITBS);
- Metropolitan Achievement Test examination (MAT);
- Stanford Achievement Test examination (SAT9);
- California Achievement Test examination (CAT); and
- TERRANOVA examination (Comprehensive Test of Basic Skills (CTBS) and
Multiple Assessments tests).
The computerized tests seek to establish the test taker's knowledge of subject
matters that are typically tested on the achievement tests mentioned above, with
a computerized test emulating each of the five achievement tests. In addition,
the computerized test items can be customized by teachers to reflect other
tests, subjects or testing strategies. CompassLearning's assessment software has
been customized for educational requirements in states such as Florida and
Texas. CompassLearning's assessment software scores the computerized tests and
determines whether the test taker possesses the particular skills tested. If a
test taker fails any particular subject on the computerized test, the assessment
software prescribes lessons found in CompassLearning's electronic courseware.
Management Systems: CompassLearning offers the COMPASS management program.
COMPASS is a computerized management system that enables teachers with students
using CompassLearning's electronic courseware to:
- create student lesson plans;
- track student performance;
- record grades;
- report on progress; and
- assess results against major state, national or self-defined standards.
Using the COMPASS system, a teacher is able to directly assess an individual
student's performance on CompassLearning's electronic courseware and assessment
software products and devise individualized learning paths for each student.
Internet-based Products: WORLDWARE is an Internet-based classroom
integration product for use with our electronic courseware, assessment software
and management systems, which we introduced in 1996. WORLDWARE has two parts:
the software and the web site. The WORLDWARE software enables teachers to
integrate a comprehensive collection of more than 400 pre-selected "safe" web
sites into their daily lessons in a controlled manner by providing web controls
limiting students' access to other Internet sites. The WORLDWARE web site
features educational activities for students and resources for parents and
teachers. In addition, CompassLearning now offers COMPASS VIRTUAL CLASSROOM,
with the first
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installations made in September 1999. COMPASS VIRTUAL CLASSROOM works with our
electronic courseware, assessment software and management systems by allowing
students and teachers working on computers at home to access COMPASS functions
through the Internet. Students can have at-home access to assessment tests and
electronic courseware for self-paced learning. Teachers can have full access
from remote computers to all COMPASS functions from creating assignments to
reviewing results.
SERVICES. CompassLearning provides professional development services and
technical support services. CompassLearning has a team of over 90 full-time
educational consultants providing professional development services to teachers,
ranging from basic software training to services designed to assist teachers in
implementing and integrating technology into the classroom. These services are
provided in connection with our software products as well as third-party
products. An initial buyer of our software products typically purchases eight
days of professional development services for training on the software
purchased, to be provided over a period of up to one year. Following the
completion of the eight days of training, our customers can purchase additional
days of professional development services. In 1998, we were chosen as the leader
in customer training according to a survey by Education Market Research. In
addition, in October 1998, we began to offer a series of training courses for
teachers that address topics such as productivity, leadership, parental
involvement and Internet use and implementation.
CompassLearning offers various technical support services in connection with
the purchase and ongoing use of its software products. An initial buyer of our
software products typically purchases one year of toll-free telephone help line
services, on-site system engineer services and software updates. Following the
expiration of the initial technical support services contract, our customers can
purchase continuing support at varying levels, ranging from limited telephone
help line services to priority systems engineer dispatching. We also offer our
customers hardware support services, which we provide through a contract with a
third party.
HARDWARE. In 1994, we essentially exited the business of selling hardware
due to the lower profitability of such business compared to our other segments,
high inventory requirements and the risk of obsolescence associated with such
products. Today, upon request, we resell hardware to customers who request a
package of hardware and software.
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WORLD ALMANAC.
World Almanac's operations are divided into five divisions. The following
table describes the product lines and their prices for each of its divisions.
DIVISION PRODUCT LINES PRICING
- -------- ------------- -------
World Almanac Books............ Publishes:
THE WORLD ALMANAC AND BOOK OF FACTS $11
THE WORLD ALMANAC FOR KIDS $11
THE WORLD ALMANAC OF U.S. POLITICS various prices
World Almanac Education........ Catalog-based distribution of:
Third-party and World Almanac $5-$475
publications targeted for the K-12 market
Gareth Stevens, Inc............ Publishes:
K-6 nonfiction and fiction books $13-$20
Distributes:
Two nonfiction book product lines of a $12-$20
third-party publisher
Facts On File News Services.... Publishes:
FACTS ON FILE WORLD NEWS DIGEST $480-$795 print;
$595-$1,150 CD-ROM;
$1,350 Internet
ISSUES AND CONTROVERSIES ON FILE $375
TODAY'S SCIENCE ON FILE $225
EDITORIALS ON FILE $495
SOFTWARE AND CD-ROM REVIEWS ON FILE $295
Funk & Wagnalls................ Publishes:
Electronic FUNK & WAGNALLS ENCYCLOPEDIA various prices
database
A general yearbook $24
A science yearbook $23
WORLD ALMANAC BOOKS. THE WORLD ALMANAC AND BOOK OF FACTS is, we believe,
one of the most widely used and well-respected general reference publications in
the United States. In 1998, the American Library Association named it one of the
three most important information sources found in libraries and the best almanac
overall. In 1998, market research was completed that indicated that 56% of those
surveyed who purchase the almanac purchase it on an annual basis. We believe THE
WORLD ALMANAC AND BOOK OF FACTS provides more complete and up-to-date
information than competing almanacs. Its comprehensiveness and brand identity
are critical assets. In print for over 130 years, THE WORLD ALMANAC AND BOOK OF
FACTS perennially makes the NEW YORK TIMES' bestseller list. World Almanac Books
also licenses the content of THE WORLD ALMANAC AND BOOK OF FACTS to third
parties for inclusion in their products. Since 1995, World Almanac Books has
also published THE WORLD ALMANAC FOR KIDS, with over 1,000,000 copies sold to
date.
WORLD ALMANAC EDUCATION. World Almanac Education is a niche distributor of
reference and informational materials, which it targets primarily to K-12 school
and public libraries. This market segment is especially attractive because of
the large number of such libraries (approximately 108,000 K-12 school and 16,000
public libraries) in the United States. World Almanac Education reviews and
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selects materials from third-party publishers for inclusion in its nine
catalogs. The catalogs also include THE WORLD ALMANAC AND BOOK OF FACTS, THE
WORLD ALMANAC FOR KIDS and certain Gareth Stevens, Inc. products. World Almanac
Education mails a total of approximately 1.6 million catalogs annually. World
Almanac Education also publishes a small amount of proprietary teaching kits,
including kits covering research skills, map skills and Internet skills, which
include items such as lesson plans for certain books to encourage multiple-copy
sales.
GARETH STEVENS, INC. Gareth Stevens, Inc. publishes nonfiction and fiction
books for K-6 students. These books cover a broad spectrum of topics including
nature, science, social studies and the arts. Approximately 83% of Gareth
Stevens, Inc.'s sales are derived from books that are published under the GARETH
STEVENS imprint. A majority of these titles are sourced from domestic and
international third parties for which Gareth Stevens, Inc. holds exclusive
distribution rights for K-12 school and public libraries in North America. The
remaining approximately 17% of Gareth Stevens, Inc.'s sales are derived from the
distribution of two product lines from Rosen Publishing, with one line targeted
for secondary school students and the other targeted for K-6 students.
FACTS ON FILE NEWS SERVICES. World Almanac, through Facts On File News
Services, publishes and sells subscription news reference products in print,
CD-ROM and Internet formats. There are five products:
- FACTS ON FILE WORLD NEWS DIGEST;
- ISSUES AND CONTROVERSIES ON FILE;
- TODAY'S SCIENCE ON FILE;
- EDITORIALS ON FILE; and
- SOFTWARE AND CD-ROM REVIEWS ON FILE.
Its core product, FACTS ON FILE WORLD NEWS DIGEST, is a highly respected
publication used by libraries as a comprehensive index of world events beginning
in 1940 (print version) and 1988 (electronic version). Librarians, journalists
and library patrons typically use Facts On File News Services products to
research historical events. The in-house editorial staff of FACTS ON FILE WORLD
NEWS DIGEST distills key news information from more than 100 different
newspapers, periodicals, journals and government Internet sources and uses it to
update the product weekly in the print and Internet formats and quarterly for
the CD-ROM format. The core print product has an annual subscription list price
of $795, which is discounted for public and school libraries. The print edition
of FACTS ON FILE WORLD NEWS DIGEST sold over 5,400 subscriptions in 1998 and
continues to meet with great acceptance, as evidenced by renewal rates averaging
approximately 90% from 1996 through 1998. Subscriptions to the print edition,
however, are expected to decline gradually as it is replaced by Internet-based
versions of the product described below.
To take advantage of accelerated library spending on electronic delivery of
reference materials, in 1997 we developed a Windows compatible CD-ROM version of
FACTS ON FILE WORLD NEWS DIGEST. In April 1999, World Almanac launched an
Internet version of FACTS ON FILE WORLD NEWS DIGEST which currently has 1,720
subscribers, or 23% of the total number of print and CD-ROM subscribers for this
product. The increased functionality of the Internet version allows World
Almanac to price this product higher than the print or CD-ROM versions. The
Internet version has a list price of $1,350 for a single-site installation, with
price discounts per site for multiple-site installation. By the end of the first
quarter of 2000, we expect to have launched three additional World Almanac
databases as part of the Facts On File News Services web site.
FUNK & WAGNALLS. World Almanac operates in the electronic encyclopedia
business through Funk & Wagnalls. Although the FUNK & WAGNALLS ENCYCLOPEDIA is
no longer published in print format,
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Funk & Wagnalls licenses an electronic version of its encyclopedic database to
various third parties. Funk & Wagnalls also annually publishes a general
yearbook containing a review of the major news events that transpired in the
previous year and a science yearbook containing a review of the major scientific
events in the previous year. The general yearbook is licensed from World Book
Encyclopedia, Inc. and the science yearbook is licensed from Grolier
Enterprises Inc. The active subscriber list for these two publications, which
primarily consists of former subscribers to the print edition of the FUNK &
WAGNALLS ENCYCLOPEDIA, is approximately 80,000 for the general yearbook and
39,000 for the science yearbook. Most science yearbook subscribers are also
general yearbook subscribers. We do not target new subscribers for these
yearbooks; however, renewal rates have averaged approximately 78% for the
general yearbook and 75% for the science yearbook from 1996 through 1998.
PRODUCT AND CONTENT DEVELOPMENT
WEEKLY READER. Weekly Reader has a team of 62 people working in product and
content development. This team includes:
- editors and writers, who are typically grade and subject specialists with
journalism or teaching experience; and
- designers, who are responsible for the "look and feel" of the products,
including the layout of each publication.
Editors, writers and designers work in teams on any particular project
including planning meetings used for determining content and educational focus,
the selection of appropriate graphics and photographs and final editing before
submission for printing. The time it takes to develop our products varies
substantially according to the type of product. Product development for a new
periodical typically takes approximately nine months from concept to initial
marketing, whereas new issues of our existing periodicals typically take
approximately one to two weeks from conception to printing. Our skills books
typically take approximately eight to twelve months from concept to initial
marketing for an entirely new title, and approximately four to six months for
updated versions of existing titles. Development times for Lifetime Learning
Systems, Inc.'s products vary substantially depending upon the type of product
involved, but typically take approximately three to four months from concept to
distribution.
Weekly Reader's periodicals are written by a combination of staff and
freelance writers. WEEKLY READER, for example, is written internally. Our staff
of editors, writers and designers determine the subject matter for the
particular edition after which the content is written and edited by Weekly
Reader's employees. For SCIENCESPIN, however, once the content and educational
focus for a particular issue is determined internally, the writing is contracted
out to third parties with the relevant scientific knowledge and the ability to
write for the applicable target audience. TEEN NEWSWEEK is written internally
based upon content from upcoming stories in NEWSWEEK made available to our
writers prior to NEWSWEEK'S publication, and our own internally created content.
The TEEN NEWSWEEK writers determine which stories are appropriate for the
targeted audience and then rewrite the stories with age appropriate information
and language. TEEN NEWSWEEK'S content is subject, in all cases, to NEWSWEEK'S
approval.
Weekly Reader's skills books are typically written by freelance writers at
the direction of Weekly Reader's editors. Lifetime Learning Systems, Inc.'s
products are developed in a variety of formats by an in-house editorial and
design staff with varying degrees of direction provided by the applicable
sponsor. In the past, certain sponsors of Lifetime Learning Systems, Inc.
projects have approached Lifetime Learning Systems, Inc. with a definitive
concept for which they are seeking implementation and production, while other
sponsors simply have a message they wish to get across to a target audience and
request proposals as how best to accomplish that goal.
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Prior to distribution, whether created internally or externally, all of
Weekly Reader's products are reviewed by either the Editor in Chief of Weekly
Reader or one or more Senior Managing Editors to ensure that the content of the
applicable product is appropriate for the age group targeted by the product,
according to standards developed by Weekly Reader. Lifetime Learning
Systems, Inc.'s products are reviewed by its editorial director for their age
and content appropriateness.
AMERICAN GUIDANCE. American Guidance's new testing and assessment products
and revisions to existing products are developed internally by in-house
personnel which include 27 full-time employees, most of whom are trained in one
or more specialties including psychology, education, early childhood development
and speech/language, among other disciplines.
Our testing and assessment products are firmly rooted in established
psychological and pedagogic theory, and our product development philosophy is
customer-focused. New test concepts are usually derived from the marketplace,
often from our sales representatives who are in contact with:
- teachers;
- guidance counselors;
- school psychologists;
- school administrators; and
- other professionals who identify a testing need.
We also develop new products through a systematic review of industry trends,
including emerging trends in the education community, or in conversations with
educators and other professionals who attend various trade and professional
conferences where we are an exhibitor or attendee. Occasionally, we will be
approached by an author with a new test concept, which we will then evaluate in
terms of its overall market potential.
After we have created a test, we then subject it to field tests. Once field
testing and any indicated adjustments are complete, the test undergoes
standardization, generally being tested on 200 students per age year targeted by
the test and covering a broad range of demographic characteristics. In addition,
we seek support for the test from key opinion makers in the subject area of the
test. Only at this stage do we begin to market the test. The process is similar
for most revisions of existing tests because when a test is updated, the new
content similarly must be field-tested and then the revised test must undergo
standardization. The development cycle for a new test or to make revisions to an
existing test is typically five years from concept through the launch of the new
or revised test. The life cycle for the new or revised test can be up to
15 years or more. We are continuously working on new products or product
concepts or revisions of existing products. For example, in June 1999, we
released a new test, CASL (COMPREHENSIVE ASSESSMENT OF SPOKEN LANGUAGE), an
in-depth assessment of oral language skills.
We develop supplemental instructional products internally and externally
with developers and in close consultation with outside authors, on a royalty
basis or on a fee-for-service arrangement. Our in-house development team for
supplemental instructional materials consists of eight full-time employees. New
product concepts are derived from various sources, including:
- our in-house development staff;
- outside authors; and
- our sales force based on their regular meetings with educators and
administrators.
Most of these products have a development cycle of approximately one year. In
general, we solicit bids for our new products from outside developers and award
the contract based on price and other factors relating to the developer's
ability to deliver the finished product according to our exact specifications.
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We continuously work on product development for existing supplemental
instructional materials in addition to development of new products. Our
1999-2000 supplemental instructional materials catalog offers new textbooks in
four different subject areas. In 1997 and 1998, we released a total of 14 new
and revised hardcover supplemental texts in language arts, math, science and
social studies, as well as 21 softcover worktexts and three parent training
programs.
Our product and content development staff includes eight Ph.D.s and 23
former certified teachers. We supplement our product development with selective
acquisitions of product lines. For example, in October 1997, we acquired a line
of test preparation materials for achievement tests from Craig-Hart Publishing
Company. In March 1997, we acquired a line of grade equivalency diploma and
pre-grade equivalency diploma test preparation materials along with a line of
life skills worktexts from International Thompson Publishing Inc. In
April 1996, we acquired a line of paperback fiction books for low-level readers
from Lake Publishing Company.
COMPASSLEARNING. CompassLearning has a product development team of 83
employees, including 22 individuals with state issued teaching credentials and
an average of nine years of teaching experience. These 83 employees also have on
average nine years of software development experience and have been working for
CompassLearning for an average of six years. In addition, CompassLearning
periodically hires temporary employees or outsources work to supplement its
in-house product development team. These temporary employees and third-party
contractors are generally used for functions such as product testing, while
CompassLearning employees perform the core competency functions necessary for
the development of its products. The time it takes to develop our products
varies according to the type of product, but typically ranges from
12-18 months.
CompassLearning's product development team is divided into the following
four groups:
- the curriculum and assessment design group;
- the integration and management systems group;
- the quality assurance group; and
- the documentation group.
The curriculum and assessment design group develops the content and
functionality for the curriculum lessons and assessment components of
CompassLearning products. This group is responsible for designing products which
meet the educational objectives for the curriculum or assessment element being
addressed. They use an "authoring tool," a computer program which enables the
curriculum and assessment design group to choose from a variety of standardized
computer program features, such as lesson templates, without the need to write
extensive source code in order to create the basic computer program for the new
product. The integration and management systems group is responsible for
developing current and future management programs and the integration of the
management programs with the curriculum and assessment offerings. This group
also is responsible for maintaining all of the source code for CompassLearning's
products and addressing any problems which arise within the code. The quality
assurance group tests all of our new products. The documentation group is
responsible for the documentation that accompanies the new product offerings.
WORLD ALMANAC. World Almanac has a 51 person in-house editorial staff that:
- in the case of the World Almanac Books and Funk & Wagnalls, works in
conjunction with outside work-for-hire editors to develop its content; and
- in the case of the Facts On File New Services products, develops the
content of these products.
Individual members of the in-house editorial staff are generally responsible for
only one of the product lines. The content of our Funk & Wagnalls yearbooks are
licensed from third parties. The Gareth Stevens, Inc. nonfiction and fiction
books are comprised of either content licensed from third parties
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and repackaged and/or rewritten for the K-12 market in the United States or
content written by in-house staff or freelance writers. World Almanac Education
has a 3 person creative staff which designs the layout for the catalogs and
selects the reference and informational materials which will be included in the
catalogs.
World Almanac Education updates its catalogs twice each year. New editions
of THE WORLD ALMANAC AND BOOK OF FACTS and THE WORLD ALMANAC FOR KIDS are
published each year. New product development is currently focused on offering
certain products through Internet delivery such as the expected launch by the
end of 1999 of two additional World Almanac databases on the Facts On File News
Services web site.
CUSTOMERS
Our targeted customers, which vary depending on the product line, are
teachers, school and school district-level administrators, librarians, other
educational professionals and parents.
Weekly Reader's periodicals and other instructional materials are purchased
mainly by teachers, as well as by school and school district-level
administrators. In addition, schools sometimes ask parents of students to pay
for their children's subscriptions to Weekly Reader periodicals. The SUMMER
WEEKLY READER, which has been published for the last two summers, is targeted to
parents for home use. Weekly Reader was the largest publisher of classroom
periodicals in terms of total circulation in the 1997-1998 school year with over
8.7 million subscribers, more than our two primary competitors in this market
combined.
Customers of Lifetime Learning System, Inc.'s products generally are:
- corporations;
- trade associations;
- not-for-profit organizations; and
- government agencies.
Customers of American Guidance's testing products generally are:
- guidance counselors;
- school psychologists;
- speech pathologists;
- special education teachers; and
- other similar school and school district-level specialists.
Customers of American Guidance's supplemental instructional materials generally
are teachers and school-level administrators as well as school district-level
administrators. American Guidance also has customers outside of K-12 schools for
its testing and assessment products and supplemental instructional materials
which include:
- clinical psychologists;
- community colleges;
- adult educational programs; and
- correctional facilities.
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One or more of American Guidance's testing and assessment or supplemental
instructional products are used in over 12,000 school districts, or
approximately 80% of the school districts in the United States.
CompassLearning's customers consist primarily of school and school
district-level administrators, including:
- superintendents;
- curriculum directors;
- technology directors; and
- principals.
Although individual teachers do not typically make final purchasing decisions,
they frequently have substantial input in the decision making process. One or
more of CompassLearning's products has been sold to more than 20,000 K-12
schools, representing approximately 19% of all schools in the United States.
In 1998, approximately 77% of World Almanac's sales were to schools and
libraries. The remaining 23% of its sales consisted of sales of yearbooks to
former encyclopedia purchasers and sales of THE WORLD ALMANAC AND BOOK OF FACTS
and THE WORLD ALMANAC FOR KIDS. The World Almanac products were sold through:
- independent and chain bookstores through trade channels;
- supermarkets and newsstands through mass-market/wholesale channels; and
- other customers, such as book clubs and fairs, through speciality sales
channels (other direct marketing channels and resellers).
Funk & Wagnalls licenses its electronic encyclopedia database to various
licensees, the largest of which is Versaware Technologies Inc., and sells its
yearbooks primarily to former print encyclopedia purchasers. Facts On File News
Services sells FACTS ON FILE WORLD NEWS DIGEST and its other publications to
libraries of all types. World Almanac Education and Gareth Stevens, Inc. sell
their products primarily to school libraries and to a lesser extent to public
libraries. In the last three years, over 55% of the approximately 124,000 school
and public libraries in the United States have purchased products from World
Almanac.
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SALES, MARKETING AND DISTRIBUTION
We have an extensive network with direct distribution channels to reach our
primary customers. Our four primary operating subsidiaries use one or more of
the following methods to sell and market our products: direct mail, direct
sales, telemarketing and distribution through retail channels. The chart set
forth below contains information regarding sales, marketing and distribution by
Weekly Reader, American Guidance, CompassLearning and World Almanac, including
their primary distribution channels.
WEEKLY READER AMERICAN GUIDANCE COMPASSLEARNING WORLD ALMANAC
PRIMARY METHOD OF Direct Mail Direct Sales Force Direct Sales Force Direct Mail: Facts On File News Services,
SALES AND MARKETING (field and World Almanac Education and Funk &
telesales) Wagnalls
Telemarketing: Gareth Stevens, Inc. and
Facts On File News Services
Retail Marketing: World Almanac Books
SIZE OF STAFF 10 38 65 115
NUMBER OF MAILINGS IN 2 (in February and 3 (in March, August N/A Facts On File News Services generally
1998 August) and December or mails twice a year; World Almanac
January) Education generally mails four times a
year; Yearbook mail campaigns once a year
NUMBER OF SCHOOLS/ 108,000 schools; 250,000 customer N/A Approximately 103,800 schools, 16,500
TEACHERS/LIBRARIES IN 2.7 million locations school districts, 15,700 public
DATABASE teachers libraries, 4,600 academic libraries
ESTIMATED NUMBER OF 75,000 schools Over 12,000 school Over 20,000 schools Over 68,000 school and public libraries
SCHOOLS/ SCHOOL districts have purchased our have purchased products from World
DISTRICTS/LIBRARIES products Almanac in the past three years
WITH OUR PRODUCTS AS
OF SUMMER, 1999
DIRECT MAIL. Direct mail consists mainly of well-planned mailings that
target current and prospective customers, often with enclosed product samples
and catalogs, which are used to generate product sales. This marketing technique
is utilized to a significant extent by Weekly Reader, World Almanac's Facts On
File News Services and World Almanac Education, and to a lesser extent by
American Guidance, CompassLearning and World Almanac's Funk & Wagnalls.
Weekly Reader's classroom periodicals are marketed primarily through the use
of direct mailings. Its experienced and skilled marketing staff of ten people
has developed detailed mailing schedules and marketing strategies to reach
current and prospective customers. In the marketing of its classroom
periodicals, Weekly Reader has developed and maintained a valuable and
proprietary database tracing the purchasing habits of approximately 2.7 million
individual teachers and administrators and approximately 108,000 schools over
the past five years as well as certain demographic factors in each locale. In
1998, Weekly Reader mailed over 0.4 million catalogs and 6.9 million direct mail
pieces primarily to teachers as well as to school and school district-level
administrators, librarians and parents. Schools are segmented for mailings
according to "purchasing" and "non-purchasing" status, with marketing campaigns
based on purchasing history specifically targeted to teachers, who are typically
the key decision makers in connection with the purchase of Weekly Reader's
classroom periodicals. Schools that currently purchase Weekly Reader's classroom
periodicals are then further segmented according to penetration levels for each
elementary school grade or middle or secondary school subject area. The timing
of mailings, inclusion of product samples and timing and amount of discounts
offered, among other things, vary depending on which segment is being targeted.
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World Almanac also uses direct mail to generate sales. For example, Facts On
File News Services uses direct mailings for general product announcements, to
generate sales leads and for order procurement from new customers. The strategy
for attracting new customers consists of using targeted direct mail, followed by
telesales calls from representatives who are recruited and trained by Facts On
File News Services. World Almanac's World Almanac Education also uses direct
mail to sell its products. This division of World Almanac has developed a
sophisticated database over five years that tracks customers and purchasing
habits, including monetary value of an average purchase and other relevant
factors, which it uses to target customers with the appropriate catalogs. Most
of World Almanac Education's sales are generated from mailings of its main
catalog, which is sent to existing customers, and its prospect catalog, which is
mailed to prospective customers. World Almanac mailed approximately 1.9 million
direct mail pieces in 1998, including 1.6 million catalogs.
American Guidance printed and mailed more than one million promotional
pieces and 1.6 million catalogs in 1998, aimed at developing customer leads,
spurring direct-response sales and building overall marketplace awareness of its
brand and products. CompassLearning also sells its products with the aid of
mailings and catalogs targeted at smaller schools and school districts. World
Almanac's Funk & Wagnalls primarily markets its yearbooks to former subscribers
of its previously published print format encyclopedia using direct mail.
TELEMARKETING. Telemarketing involves the use of the telephone to contact
current and prospective customers as a means of generating sales. World
Almanac's Gareth Stevens, Inc. and Facts On File News Services utilize this
marketing technique to a significant extent, while CompassLearning, Weekly
Reader and World Almanac Education use it to a lesser extent.
Gareth Stevens, Inc.'s marketing strategy consists primarily of selling
products through its active and growing telemarketing program. Telemarketing
representatives generate approximately 57% of all Gareth Stevens, Inc. sales by
contacting existing and prospective accounts to solicit commitments to preview
Gareth Stevens, Inc. titles. Through the preview process, librarians are invited
to receive copies of Gareth Stevens, Inc. titles or the third-party titles it
distributes. The librarians then have the opportunity to review actual copies of
the selected titles at their convenience. Gareth Stevens, Inc. telemarketers
follow up with these librarians over a specified time period to ensure that the
product has been received and reviewed. Librarians have purchased an average of
23% of the titles they previewed for the period 1996 to 1998. Any titles not
selected for purchase are picked up from the librarian's location, with all
postage and handling expenses borne by Gareth Stevens, Inc.
CompassLearning's telemarketing group, comprised of ten people, assists its
direct sales force by pursuing sales leads generated at educational conferences
or through other means and also promotes renewal sales of professional
development and technical support services contracts. World Almanac's Facts On
File News Services' strategy for attracting new customers consists of using
targeted direct mail, followed by telemarketing calls from representatives who
are recruited and trained by Facts On File News Services. World Almanac
Education also has recently begun using telemarketing to promote its products.
Weekly Reader's telemarketing efforts, conducted externally by contractors, are
used to assist in the generation of renewal sales.
DIRECT SALES FORCES. American Guidance, CompassLearning and Weekly Reader's
Lifetime Learning Systems, Inc. each primarily use a direct sales force to sell
and market their products.
To market its testing and supplemental instructional materials, American
Guidance pursues a strategy of developing strong relationships with its current
and prospective customers primarily by using its sales organization, consisting
of:
- 21 field sales representatives;
- 13 telephone sales representatives; and
- four managers.
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These representatives work closely with schools to determine which of American
Guidance's products best serve the needs of a specific school's student body.
Unlike traditional telemarketing, American Guidance's telephone sales
representatives develop relationships with customers and occasionally make field
visits. All of American Guidance's sales representatives go through a training
process with defined objectives that they must satisfy during the initial six
months of their employment and each year thereafter. In addition, American
Guidance enlists professionals on a per diem basis to provide instruction to
educators concerning test administration, scoring and other professional
training such as disciplinary methods and substance abuse and violence
prevention techniques.
CompassLearning uses a three-pronged approach to sales and service that
provides every customer with a sales contact, an educational consultant and a
technology support person for comprehensive customer service. It maintains a
direct sales force of 65 sales representatives. The sales representatives are
each assigned to a sales region within the United States. Each member of the
direct sales force has access to CompassLearning's database of detailed
information concerning the school districts, current customers, school funding
and other data for its sales territories. On the basis of this information, the
sales representatives seek to establish relationships with, and brand awareness
for, CompassLearning's products among existing and potential customers in their
respective districts by making personal sales visits to the schools or school
administrators.
Weekly Reader's Lifetime Learning Systems, Inc. has a dedicated marketing
and sales team of eight people who make presentations directly to potential
corporate, trade association and not-for-profit organization clients.
Presentations generally consist of proposals for education materials and
programs to be shipped free to teachers and schools under the client's
sponsorship.
RETAIL MARKETING/WHOLESALERS. Approximately 66% of World Almanac Books'
products are sold through retail bookstores or through wholesalers into
mass-market locations such as supermarkets and newsstands. World Almanac Books'
products are also sold to book clubs and other resellers as well as into
libraries through World Almanac Education. In addition, Gareth Stevens, Inc.
distributes approximately 30% of its products through its network of wholesalers
to libraries.
INTERNET WEB SITES. Each of Weekly Reader, American Guidance and World
Almanac have free Internet web sites, which allow customers to order their
products. The Weekly Reader web site:
- features pages specifically addressing students, teachers, and parents;
and
- offers materials in the form of puzzles, experiments and games that
correlate with the content of Weekly Reader periodicals.
The American Guidance web site, launched in 1996, provides extensive company
information, customer service information, order placement information and a
complete description of its products. The World Almanac web site offers Internet
ordering for World Almanac Education.
SHIPMENT. Our periodicals are typically shipped second class mail directly
from the location at which they were printed. TEEN NEWSWEEK, however, is
delivered by truck and/or air directly to United States Postal Service bulk mail
centers to speed delivery using NEWSWEEK'Sdistribution network. Our other print
materials are typically delivered by fourth class mail or, in some cases, by the
United Parcel Service or other courier services. Since 1986, we have distributed
FACTS ON FILE WORLD NEWS DIGEST through third parties which provide electronic
on-line delivery of databases to libraries and have paid such distributors a
royalty for each subscription. Because we have now developed our own Internet
delivery format, we expect our use of these distributors to decline.
COMPETITION
WEEKLY READER. Our primary competitors in the Pre K-12 classroom
periodicals market are Scholastic Inc. and Time, Inc. These publishers together
with Weekly Reader constitute virtually the
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entire market of periodicals targeted for Pre K-12 classrooms. Scholastic Inc.
publishes six editions in the elementary school market and eight editions in the
middle and secondary school market. Time, Inc. publishes two editions in the
elementary school market and no editions in the middle and secondary school
market. Competition in the school periodicals market is based primarily on:
- content;
- reputation; and
- customer service.
In skills books we compete with many large and small publishers, primarily on
the basis of:
- subject matter expertise;
- breadth of offerings; and
- price.
Finally, in the Lifetime Learning Systems, Inc. business, we compete primarily
with Scholastic Inc., as well as with other regional competitors. Competition in
this business is based primarily on distribution capability and cost.
AMERICAN GUIDANCE. In the assessment area, our principal competitors are
The Psychological Corporation, The Riverside Publishing Company and
CTB/McGraw-Hill. These companies focus mainly on norm reference achievement
tests, which are administered in large groups, while individually administered
assessment tests, our target market, represent a secondary product line. In the
individually administered assessment test market, where quality and reputation
are the primary decision criteria, we have been providing market leading
materials for over 35 years. In the supplemental print instructional materials
market, we compete directly with Globe-Fearon Inc., which also targets
low-performing students. Other competitors include Steck-Vaughn Company,
Scholastic Inc., NTC/Contemporary Publishing Group, Inc. and other large and
small publishers which have some products for low-performing students, but none
of these large publishers focus exclusively on low-performing students as we do.
COMPASSLEARNING. Within the supplemental electronic instructional materials
market, we compete primarily with other providers of integrated curriculum
software and, to a lesser extent, with independent software vendors and
traditional print education publishers. Our primary competitors are:
- Pearson Education;
- TRO Learning Inc.;
- Broderbund Software, Inc.;
- Educational Resources;
- McGraw-Hill School Division;
- Edmark Corporation;
- American Education Company;
- Knowledge Adventure, Inc.; and
- Advantage Learning Systems, Inc.
Competition in the supplemental electronic instructional materials market is
based primarily upon product effectiveness, design flexibility and relationships
with customers.
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WORLD ALMANAC. World Almanac Education is a niche player in the school and
public library distribution business. Competitors range from full service
distributors, such as Follet Library Resources and Baker & Taylor Corporation,
to smaller ones such as Gumdrop Books, Inc. and Davidson Publishing, Inc. World
Almanac Education competes with larger distributors by providing:
- more product information;
- better customer service; and
- a pre-screened selection of the season's titles.
Gareth Stevens, Inc. competes in the K-12 nonfiction and fiction publishing
segment of this market which is highly fragmented with many competitors ranging
from small publishers focused exclusively on the library market to large
publishers which also sell into the trade market. Competition in the electronic
reference materials category is somewhat more concentrated. Some of the larger
competitors in this category include The Gale Group, Inc., EBSCO
Industries, Inc., Online Computer Library Center, Incorporated (a not-for-profit
organization) and UMI Company. Products sold to school and public libraries tend
to be less price sensitive than in a consumer market. The WORLD ALMANAC AND BOOK
OF FACTS competes primarily with the three other almanacs currently available:
- THE TIME/INFORMATION PLEASE ALMANAC;
- THE NEW YORK TIMES ALMANAC; and
- THE WALL STREET JOURNAL ALMANAC.
We believe that our almanac has a market share greater than 70%. THE WORLD
ALMANAC FOR KIDS competes primarily with SCHOLASTIC KID'S ALMANAC FOR THE 21ST
CENTURY, which was introduced in 1999. We believe our almanac for kids has a
market share greater than 70%. Competition in all of these segments is primarily
based on reputation and brand names of products, the length of time products
have been on the market and the uniqueness of a product.
PRODUCTION, FULFILLMENT AND CUSTOMER SERVICE
All of our print products are printed and bound by third parties with whom
we have contracts. We believe that outside printing and binding services at
competitive prices are available, and we currently use a different printer for
each product line. Most of our pre-press production, typesetting, layout and
design functions are conducted in-house, with the exception of American Guidance
where some pre-press and product assembly is conducted by third-party vendors.
Our non-print products, such as Lifetime Learning Systems, Inc.'s videos and
CompassLearning's CD-ROMs, are produced internally and, if necessary, replicated
by third parties. Certain of World Almanac's divisions rely on internal
production capabilities while others utilize third-party manufacturers.
The principal raw materials utilized in our products are paper and ink.
Paper is purchased by Weekly Reader and several of World Almanac's divisions
from suppliers directly based on pricing and, to a lesser extent, availability,
while American Guidance purchases paper from the printers of its publications.
Ink utilized by our publications is provided by the respective printers of our
publications and included in the cost of print production. Both paper and ink
are commodity products which are affected by demand, capacity and economic
conditions. We believe that adequate sources of supply are, and will continue to
be, available to fulfill our requirements.
Order processing, customer service, cash application, collection functions
and fulfillment are typically performed at separate locations for each of our
operating subsidiaries, including at:
- Delran, New Jersey for Weekly Reader;
- Circle Pines, Minnesota for American Guidance;
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- Phoenix, Arizona, Springfield, Illinois and San Diego, California for
CompassLearning; and
- Mahwah, New Jersey, Milwaukee, Wisconsin, New York, New York and
Cleveland, Ohio for World Almanac.
However, fulfillment and customer service for some of World Almanac's products
are conducted by third parties. In 1998, a new and improved fulfillment system
was installed for Weekly Reader in Delran, New Jersey at a cost of
$1.5 million. This system is client server based, reducing maintenance and
operating costs, and provides electronic access to customer information,
including past purchases, as well as automated cash application and improved
collection processes.
SEASONALITY
Our operating results have varied and are expected to continue to vary from
quarter to quarter as a result of seasonal patterns. Weekly Reader's and
CompassLearning's sales are significantly affected by the school year. Weekly
Reader's sales in the third, and to a lesser extent the fourth, quarter are
typically the strongest as products are shipped for delivery prior to the start
of the school year. CompassLearning's sales are typically strongest in the
second quarter, and to a lesser extent the fourth quarter. CompassLearning's
sales are generally strongest in the second quarter because schools frequently
couple funds from two budget years, which typically end on June 30 of each year,
to make significant purchases, such as purchases of CompassLearning's electronic
courseware, and because by purchasing in the second quarter, schools are able to
have the software products purchased installed over the summer and ready to
train teachers when they return from summer vacation. CompassLearning's fourth
quarter sales are strong as a result of sales patterns driven in part by its
commissioned sales force seeking to meet year end sales goals as well as by
schools purchasing software to be installed in time for teachers to be trained
prior to the end of the school year in June.
INTELLECTUAL PROPERTY
WEEKLY READER. Each printed periodical or skills book is copyrighted by
Weekly Reader, including any materials written by freelance or third-party
contract writers. Photographs or artwork used in our products are typically used
pursuant to one-time licenses which grant us the right to use the photograph or
artwork in the particular product and within the United States only. Some
material from third parties is reprinted with permission for one-time use.
Ownership of the intellectual property rights in the materials produced by
Lifetime Learning Systems, Inc. are negotiated on a case by case basis with each
sponsor.
AMERICAN GUIDANCE. Our tests, the accompanying score sheets and test record
forms, and supplemental instructional materials all have registered copyrights.
Some material from third parties is reprinted with permission for one-time use.
In addition, certain products use registered trademarks.
COMPASSLEARNING. CompassLearning's computer software products are
copyrighted by CompassLearning. In addition, we periodically obtain permission
to use excerpts of third-party materials on an ongoing basis in certain of our
products or obtain a license from such parties to act as a distributor of their
products. Furthermore, in connection with WRC Media's acquisition of
CompassLearning, it was granted an exclusive license to use certain trademarks
owned by Jostens, Inc., the former parent company of CompassLearning, including
"Jostens Learning" and "Jostens Learning Corporation." Pursuant to the terms of
the license agreement, our right to use these trademarks expires on
December 31, 2000. In connection with the expiration of these licenses, we
intend to change the name of CompassLearning and are currently considering
potential names. We do not believe that the loss of these trademarks or the
change of name will have a material adverse effect on our business.
WORLD ALMANAC. World Almanac has registered copyrights for THE WORLD
ALMANAC AND BOOK OF FACTS, THE WORLD ALMANAC FOR KIDS, all Facts On File News
Services products other than EDITORIALS ON
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FILE (which consists of editorials reprinted with permission), all Gareth
Stevens, Inc. books which are written in-house or with outside work-for-hire
authors, the FUNK & WAGNALLS ENCYCLOPEDIA database and the World Almanac
Education catalogs. World Almanac is typically a licensee of the content of the
remainder of its products, other than products it solely distributes, in which
it has no intellectual property rights. With respect to all other products,
World Almanac is the distributor only with no rights with respect to the content
of the products.
OTHER. From 1991 until November 1999, Weekly Reader and World Almanac were
owned by PRIMEDIA. Subsequent to its acquisition in 1998 and through
November 1999, American Guidance was owned by PRIMEDIA. Under the
recapitalization agreement with PRIMEDIA described under "Transactions," we must
cease any use of PRIMEDIA name in connection with any of our operations. As a
result, we changed the name of PRIMEDIA Reference Inc. to World Almanac
Education Group, Inc. on December 23, 1999 which we refer to as "World Almanac"
throughout this prospectus. Similarly, prior to July 1999, CompassLearning was
owned by Jostens, Inc. Under the trademark license agreement dated June 2, 1999
with Jostens, Inc., we must cease any use of the name "Jostens" among other
trademarks, in connection with our operations by December 31, 2000. As a result,
we changed the name of JLC Learning Corporation to CompassLearning, Inc. as of
January 24, 2000, which we refer to as "CompassLearning" throughout this
prospectus. We do not believe that the change of the name under which World
Almanac or CompassLearning conduct business, or any other effect of ceasing to
use PRIMEDIA's or Josten's name in connection with our business, will have a
material adverse affect on our business.
ENVIRONMENTAL MATTERS
We are subject to environmental laws and regulations relating to the
protection of the environment, including those that regulate the generation and
disposal of hazardous materials and worker health and safety. We believe that we
currently conduct our operations in substantial compliance with applicable
environmental laws and regulations. Based on our experience to date, the nature
of our operations and our environmental indemnity from PRIMEDIA, we believe that
the future cost of compliance with existing environmental laws and regulations
and liability for known environmental claims will not have a material adverse
effect on our financial condition or results of operations.
EMPLOYEES
We have a total of approximately 1,100 employees. None of our employees are
represented by any union or other labor organization, and we have had no recent
strikes or work stoppages and believe our relations with our employees are good.
PROPERTIES
We own 10,000 square feet of office space in Minnesota. In addition to our
owned property, we will lease an aggregate of approximately 446,000 square feet
of office, warehouse and mixed use space in New York, Connecticut, Kentucky,
California, Arizona, Illinois, Minnesota, Georgia, West Virginia, Florida, New
Jersey, Ohio and Wisconsin.
LITIGATION
From time to time, we are involved in litigation that we consider to be in
the normal course of business. However, we are not presently involved in any
legal proceedings which we expect individually or in the aggregate to have a
material adverse effect on our financial condition, results of operations or
liquidity.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to the persons who,
as of the date of this prospectus, were serving as Directors and executive
officers of each of WRC Media, Weekly Reader and CompassLearning, as well as
those executive officers and employees of American Guidance, World Almanac,
Lifetime Learning Systems, Inc. and Gareth Stevens, Inc. who make significant
contributions to our business. Each Director will hold office until the next
annual meeting of shareholders or until his successor has been elected and
qualified.
NAME AGE POSITION
- ---- -------- --------
Timothy C. Collins........................ 43 Director, WRC Media, Weekly Reader and
CompassLearning
D. Ronald Daniel.......................... 69 Non-Executive Chairman, WRC Media, Weekly
Reader and CompassLearning
Ralph D. Caulo............................ 61 Non-Executive Vice-Chairman, WRC Media
Charles L. Laurey......................... 29 Director, WRC Media, Weekly Reader and
CompassLearning; and Secretary, WRC Media,
Weekly Reader and CompassLearning
Robert S. Lynch........................... 42 Director, WRC Media, Weekly Reader and
CompassLearning; Vice President, WRC Media
and CompassLearning; and Treasurer, WRC
Media, Weekly Reader and CompassLearning
Martin E. Kenney, Jr...................... 52 Director, WRC Media, Weekly Reader and
CompassLearning; Chief Executive Officer,
WRC Media; Executive Vice President,
Weekly Reader and CompassLearning
James N. Lane............................. 48 Director, WRC Media, Weekly Reader and
CompassLearning
William F. Dawson, Jr..................... 35 Director, WRC Media, Weekly Reader and
CompassLearning
Peter E. Bergen........................... 47 President and Chief Executive Officer,
Weekly Reader
Robert J. Jackson......................... 45 Executive Vice President, Weekly Reader
Lester Rackoff............................ 50 Executive Vice President and Chief
Financial Officer, Weekly Reader
Kenneth P. Slivken........................ 45 Senior Vice President, Weekly Reader
Sandra F. Maccarone....................... 61 Senior Vice President and Editor in Chief,
Weekly Reader
Thaddeus C. Kozlowski..................... 47 Senior Vice President and Group Product
Director, Elementary, Weekly Reader
Eric M. Ecker............................. 47 Vice President and Group Product Director,
Secondary, Weekly Reader
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NAME AGE POSITION
- ---- -------- --------
Dr. Therese K. Crane...................... 49 President, CompassLearning
Joyce F. Russell.......................... 47 Senior Vice President and Chief Financial
Officer, CompassLearning
Timothy Conroy............................ 41 Executive Vice President and General
Manager, CompassLearning
Michael W. DePasquale..................... 45 Senior Vice President, Sales,
CompassLearning
Nancy G. Lockwood......................... 52 Senior Vice President, Product
Development, CompassLearning
C. Michael Hayes.......................... 50 Senior Divisional Sales Vice President,
CompassLearning
R. Alfred Knechel......................... 47 Regional Vice President, CompassLearning
Edward P. Ponikvar, Jr.................... 31 Regional Marketing Executive,
CompassLearning
Larry J. Rutkowski........................ 51 President and Chief Executive Officer,
American Guidance
Gerald G. Adams........................... 51 Executive Vice President Finance and Chief
Financial Officer, American Guidance
Alfred De Seta............................ 37 President, World Almanac
Janice P. Bailey.......................... 35 Vice President and Chief Financial
Officer, World Almanac
Terry Bromberg............................ 48 President, Lifetime Learning Systems, Inc.
Leigh Ann Price........................... 41 Director, Client Services, Lifetime
Learning Systems, Inc.
TIMOTHY C. COLLINS, DIRECTOR, WRC MEDIA, WEEKLY READER AND
COMPASSLEARNING. Since June 2, 1999, Timothy C. Collins has served as a
Director of WRC Media and CompassLearning. Mr. Collins was named a Director of
Weekly Reader as of November 17, 1999. Since October 1995, he has served as
Senior Managing Director and Chief Executive Officer of Ripplewood Holdings
L.L.C., which specializes in private equity investments, and is the general
partner of Ripplewood Partners, L.P. which controls EAC III, the majority owner
of WRC Media. He currently serves as Co-head of RHJ Industrial Partners, an
investment fund managed by Ripplewood Holdings L.L.C., with which he has been
affiliated since November 1999. In October 1995, he founded Ripplewood Holdings
L.L.C., to continue the industrial partnership approach to leveraged
acquisitions pioneered at Onex Corporation where he served as Senior Managing
Director from January, 1990 until September, 1995. Prior to joining Onex
Corporation, he was a Vice President at Lazard Freres & Company.
D. RONALD DANIEL, NON-EXECUTIVE CHAIRMAN, WRC MEDIA, WEEKLY READER AND
COMPASSLEARNING. As of November 17, 1999, Mr. Daniel was named Non-Executive
Chairman of WRC Media, Weekly Reader and CompassLearning. Mr. Daniel is a
Director of McKinsey & Company, Inc., having served as Managing Director from
1976 to 1988. He has been a management consultant for over 42 years. He serves
as the non-executive chairman of Ripplewood Holdings L.L.C., which specializes
in private equity investments, and is the general partner of Ripplewood
Partners, L.P., which controls EAC III, the majority owner of WRC Media. Since
September 1998, he has served as an advisory board member of IMG Chase Sports
Capital, LLC. Since October 1997, Mr. Daniel has served on the Board of
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Directors of TRICON Global Restaurants, Inc. He has also served on the Board of
Directors of Alliant FoodService since 1996. In addition, he serves as Treasurer
of Harvard University, a member of Harvard University's seven-person
Corporation, a member of the Harvard University Board of Overseers, Chairman of
the Harvard Management Company and Chairman of the Board of Fellows of the
Harvard Medical School.
RALPH D. CAULO, NON-EXECUTIVE VICE-CHAIRMAN, WRC MEDIA. As of January 15,
2000, Mr. Ralph D. Caulo was named Non-Executive Vice-Chairman of WRC Media.
Since 1998, Mr. Caulo has served as an outside consultant at Ripplewood Holdings
L.L.C., which specializes in private equity investments, and is the general
partner of Ripplewood Partners, L.P. which controls EAC III, the majority owner
of WRC Media. From 1991 to 1998, Ralph Caulo held the dual position of Executive
Vice President of Simon & Schuster and President of its Educational Publishing
Group. In this position, Mr. Caulo oversaw one of the world's largest
educational publishers and its Allyn & Bacon, Prentice Hall, Silver Burdett
Ginn, Modern Curriculum, Computer Curriculum Corporation (CCC) and Educational
Management Group (EMG) imprints. From 1989 until 1991, Mr. Caulo was President
and Chief Executive Officer of Harcourt Brace Jovanovich. He began his career at
Harcourt Brace Jovanovich in sales in 1974, and then moved through marketing,
editorial, development and senior management to become President and Chief
Operating Officer in 1988. See "Certain Relationships and Related
Transactions--Other Transactions."
CHARLES L. LAUREY, DIRECTOR, WRC MEDIA, WEEKLY READER AND COMPASSLEARNING
AND SECRETARY, WRC MEDIA, WEEKLY READER AND COMPASSLEARNING. Since June 2,
1999, Charles L. Laurey has served as a Director of WRC Media and
CompassLearning. As of November 17, 1999, Mr. Laurey was named a Director of
Weekly Reader and Secretary of CompassLearning and Weekly Reader. In
October 1997, he joined Ripplewood Holdings L.L.C., which specializes in private
equity investments and is the general partner of Ripplewood Partners, L.P. which
controls EAC III, the majority owner of WRC Media. Prior to joining Ripplewood
Holdings L.L.C., Mr. Laurey worked from August 1994 until September 1997 in
Morgan Stanley & Co.'s Corporate Finance Department in New York and in the
Mergers, Acquisitions and Restructurings Department in London, most recently as
an associate. He started his career as a strategy consultant in The Hague, The
Netherlands.
ROBERT S. LYNCH, DIRECTOR, WRC MEDIA, WEEKLY READER AND COMPASSLEARNING,
VICE PRESIDENT, WRC MEDIA AND COMPASSLEARNING, AND TREASURER, WRC MEDIA, WEEKLY
READER AND COMPASSLEARNING. Since June 2, 1999, Robert S. Lynch has served as a
Director of WRC Media and CompassLearning. As of November 17, 1999, Mr. Lynch
was named a Director of Weekly Reader, Vice President of WRC Media and
CompassLearning and Treasurer of WRC Media, Weekly Reader and CompassLearning.
Mr. Lynch joined Ripplewood Holdings L.L.C., which specializes in private equity
investments and is the general partner of Ripplewood Partners, L.P. which
controls EAC III, the majority owner of WRC Media, in April 1998 where he serves
as Chief Financial Officer. He was a partner at Arthur Andersen L.L.P. where he
was in charge of the Metropolitan New York Industrial Products Industry Program
from 1990 until April 1998.
MARTIN E. KENNEY, JR., DIRECTOR, WRC MEDIA, WEEKLY READER AND
COMPASSLEARNING, CHIEF EXECUTIVE OFFICER, WRC MEDIA, AND EXECUTIVE VICE
PRESIDENT, WEEKLY READER AND COMPASSLEARNING. Since July 13, 1999 Martin E.
Kenney, Jr. has served as a Director of WRC Media and CompassLearning. As of
November 17, 1999, Mr. Kenney was named Chief Executive Officer of WRC Media, a
Director of Weekly Reader and Executive Vice President of Weekly Reader and
CompassLearning. He has held several executive and management positions,
including serving as Executive Vice President of the Education Publishing Group
and President of the Education Technology Group both from May 1995 to
December 1998 at Simon & Schuster. From May 1994 to May 1995, he held the dual
positions of President of the Business, Training and Healthcare Group and Senior
Vice President of Marketing at Simon & Schuster.
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JAMES N. LANE, DIRECTOR, WRC MEDIA, WEEKLY READER AND
COMPASSLEARNING. Since July 13, 1999, James N. Lane has served as a Director of
WRC Media. As of November 17, 1999, Mr. Lane was named a Director of Weekly
Reader and CompassLearning. Since August 1998, he has served as President and
Chief Executive Officer of SG Capital Partners LLC which is the general partner
of SG Merchant Banking Fund L.P. which controls SGC Partners II LLC, which in
turn owns 24.7% of WRC Media common stock. He has also served as the Head of
Merchant Banking for Societe Generale Groupe in the Americas since March 1997.
Prior to joining Societe Generale, his career spanned approximately 20 years at
Goldman Sachs & Co., where he was a General Partner, a founding member and
co-head of the Principal Investment Area, and managed the Leveraged Finance
Group in New York and the European Corporate Finance and Merchant Banking
businesses in London.
WILLIAM F. DAWSON, JR., DIRECTOR, WRC MEDIA, WEEKLY READER AND
COMPASSLEARNING. As of November 17, 1999, William F. Dawson, Jr., was named a
Director of WRC Media, Weekly Reader and CompassLearning. Since January 2000,
Mr. Dawson has been a Managing Director of DLJ Merchant Banking Partners II,
L.P., an equity investment fund which acquired 37.8% of the old senior preferred
stock pursuant to the transactions described under "Transactions." From August
1997, to January 2000, he was a principal of DLJ Merchant Banking Partners II,
L.P. From December 1995 to August 1997, he was a Senior Vice President in
Donaldson Lufkin & Jenrette, Inc.'s high yield capital markets group. Prior to
that time, Mr. Dawson was a Vice President in the leveraged finance group within
Donaldson, Lufkin & Jenrette, Inc.'s investment banking group. Mr. Dawson serves
as Director of Thermadyne Holdings Corporation, Von Hoffmann Press, Inc. and
Insilco Corporation.
PETER E. BERGEN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, WEEKLY
READER. Peter E. Bergen was named President and Chief Executive Officer of
Weekly Reader in April 1998. He has held several executive and management
positions, including serving as Chief Executive Officer from March, 1992 to
October, 1997 at Krames Communications, Inc., a publishing company, which
PRIMEDIA owned until 1997. From 1989 to 1992, he held positions at Newbridge
Communications, Inc., a book club and continuity publisher, where he helped
start Newbridge Educational Publishing, serving as Vice President of New Member
Marketing and Senior Vice President of Marketing. From 1979 to 1989, he served
as Advertising Manager and Director of Advertising at Macmillan Book
Clubs, Inc., a publishing company. He began his career at publisher Doubleday
and Company.
ROBERT J. JACKSON, EXECUTIVE VICE PRESIDENT, WEEKLY READER. As of
November 17, 1999, Robert J. Jackson was named Executive Vice President of
Weekly Reader. Since 1974, when he joined Funk & Wagnalls Yearbook Corp., now a
subsidiary of World Almanac, he has held several executive and management
positions, including serving as Vice President and Chief Financial Officer of
PRIMEDIA's Supplemental Education Group during 1998 and 1999 and as Chief
Operating Officer of World Almanac from November, 1995 to December, 1997.
LESTER RACKOFF, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, WEEKLY
READER. Lester Rackoff was hired as Senior Vice President and Chief Financial
Officer of Weekly Reader in August 1998. In January, 2000 he was promoted to
Executive Vice President and Chief Financial Officer. He has held several
executive and management positions, including serving as Chief Financial Officer
at Grolier, Inc., a publisher, from May, 1994 to February, 1998 and Chief
Financial Officer at Macmillan Publishing Co., a publisher, from 1991 to 1994.
Since leaving public accounting twenty-five years ago to join Macmillan
Publishing Co., he has spent virtually his entire career in publishing.
KENNETH P. SLIVKEN, SENIOR VICE PRESIDENT, WEEKLY READER. As of
November 17, 1999, Kenneth P. Slivken was named Senior Vice President of Group
Human Resources of Weekly Reader. From 1996, when he joined PRIMEDIA, until
November 1999, he held several executive and management positions, including
Vice President of Human Resources for PRIMEDIA's Information Group, Vice
President of Human Resources for PRIMEDIA's Supplemental Education Group and
Director of Employee Benefits. Before joining PRIMEDIA, he was Vice President of
Human Resources and Corporate Secretary for Brooks Fashion Stores, a retailer,
from 1987 to 1996.
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SANDRA F. MACCARONE, SENIOR VICE PRESIDENT AND EDITOR IN CHIEF, WEEKLY
READER. In February, 1998 Sandy Maccarone was appointed Senior Vice President
and Editor in Chief of Weekly Reader. From May, 1992 when she joined Weekly
Reader until February, 1998, Ms. Maccarone served as Vice President and Editor
in Chief of Weekly Reader.
THADDEUS C. KOZLOWSKI, SENIOR VICE PRESIDENT AND GROUP PRODUCT DIRECTOR,
WEEKLY READER. On June 6, 1998, Thaddeus Kozlowski was named Senior Vice
President and Group Product Director of Weekly Reader. From June 28, 1993 when
Mr. Kozlowski joined the company, until June 22, 1998 he served as a Vice
President and Group Product Director of Weekly Reader.
ERIC M. ECKER, VICE PRESIDENT AND GROUP PRODUCT DIRECTOR, SECONDARY, WEEKLY
READER. Eric Ecker has served as Vice President of Weekly Reader since
July 1993. He has held a number of increasingly responsible management
positions, including Marketing Director and Group Product Manager, since he
joined Weekly Reader in 1980. Prior to joining Weekly Reader, he worked for
Hearst Magazines as Circulation Marketing Manager.
DR. THERESE K. CRANE, PRESIDENT, COMPASSLEARNING. Dr. Therese K. Crane has
been President of CompassLearning since 1997. She has more than 25 years of
experience as an educator (teacher and principal) and as a business executive.
Prior to joining CompassLearning, she led Apple Computer Inc.'s
multibillion-dollar education division from July, 1994 to June, 1996. She was
also the 1998 Co-Chairman of the National CEO Forum for Education and Technology
and Chairman of the National School Boards Foundation Board of Trustees.
JOYCE F. RUSSELL, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER,
COMPASSLEARNING. As of November 17, 1999, Joyce F. Russell was named Senior
Vice President, Finance and Administration, and Chief Financial Officer of
CompassLearning. She has been Chief Financial Officer of CompassLearning since
1995. Ms. Russell served as Vice President of CompassLearning from July, 1997 to
November, 1999 and as Secretary from July, 1996 to July, 1999. She joined
CompassLearning in August, 1994 as Chief Administrative Officer, a position she
held until October, 1995. Prior to joining CompassLearning, Ms. Russell held
several executive and management positions, including serving as Controller of
the U.S. Engineering and Product Management Division from 1990 to 1994, the
Director of Administrative Operations from 1989 to 1990 and the Manager of
Financial Operations in the South Central/West from 1987 to 1989, in each case
at Bull HN Information Systems Inc./ Honeywell, an information technology
company.
TIMOTHY CONROY, EXECUTIVE VICE PRESIDENT AND GENERAL MANAGER,
COMPASSLEARNING. On January 24, 1999, Timothy Conroy began work as Executive
Vice President and General Manager of CompassLearning. Prior to joining
CompassLearning, he held several senior management positions with Simon &
Schuster Education Group including, from February 1995 to July 1999, Chief
Financial Officer--Educational Management Group and, from November 1990 to
February 1995, Corporate Controller--Computer Curriculum Corporation.
MICHAEL W. DEPASQUALE, SENIOR VICE PRESIDENT, SALES,
COMPASSLEARNING. Michael DePasquale has been Senior Vice President, Sales, of
CompassLearning since December, 1996. From December 1994 until joining
CompassLearning, Mr. DePasquale served as a Senior Vice President responsible
for sales and marketing at The McGraw Hill Companies, a publishing company.
NANCY G. LOCKWOOD, SENIOR VICE PRESIDENT, PRODUCT DEVELOPMENT,
COMPASSLEARNING. Nancy Lockwood has served as Senior Vice President, Product
Development of CompassLearning since December 1995. From December 1992 until
joining CompassLearning, she served as Senior Vice President in charge of
software development for The McGraw-Hill Companies, a publishing company.
C. MICHAEL HAYES, SENIOR DIVISIONAL SALES VICE PRESIDENT,
COMPASSLEARNING. Michael Hayes has served CompassLearning for over twelve
years. Mr. Hayes joined CompassLearning in February 1988 as the Vice President
of Educational Technology. From September, 1994 to August, 1995 he served as the
135
Area Vice President of Sales. From August, 1995 to July, 1997 he served as the
Regional Vice President of Sales. In July, 1997 he became the Senior Divisional
Sales Vice President.
R. ALFRED KNECHEL, REGIONAL VICE PRESIDENT, COMPASSLEARNING. R. Alfred
Knechel has served as Regional Vice President of CompassLearning since
January 2000. From October 1984 to January 2000, he served as Area Vice
President. In these positions, he has concentrated on sales.
EDWARD P. PONIKVAR, JR., REGIONAL MARKETING EXECUTIVE,
COMPASSLEARNING. Edward P. Ponikvar, Jr. has served as Regional Marketing
Executive of CompassLearning since 1998. Serving as such, Mr. Ponikvar has
generated more revenue for CompassLearning than any other employee. Since he
began his career at CompassLearning in 1988 until his appointment to Regional
Marketing Executive, Mr. Ponikvar held several positions at CompassLearning
including Technician, System Engineer, Project Manager and Regional Marketing
Manager.
LARRY J. RUTKOWSKI, PRESIDENT AND CHIEF EXECUTIVE OFFICER, AMERICAN
GUIDANCE. Larry Rutkowski has been President and Chief Executive Officer of
American Guidance since January 1999. Since joining American Guidance in 1993 as
Vice President of Sales and Marketing, he also served as Vice President and
Publisher from January 1996 to January 1999, pursuant to which he was
responsible for development, marketing and sale of all products. Prior to
joining American Guidance, he served as Vice President and Director of Sales at
NTC Publishing Group where he was responsible for school, college, library,
trade, business-to-business, special markets and international sales. He has
also been a teacher and principal.
GERALD G. ADAMS, EXECUTIVE VICE PRESIDENT FINANCE AND CHIEF FINANCIAL
OFFICER, AMERICAN GUIDANCE. Gerald G. Adams has been Executive Vice President
Finance and Chief Financial Officer of American Guidance since July, 1996. He
joined American Guidance as its Controller in April, 1992. Prior to joining
American Guidance, he served as Division Controller and Operations Finance
Director for Honeywell, Inc., a technology and manufacturing company, and as an
audit manager at Deloitte & Touche LLP, certified public accountants.
ALFRED DE SETA, PRESIDENT, WORLD ALMANAC. As of November 17, 1999, Alfred
De Seta was named President of World Almanac. Since joining World Almanac in
1993, he served as Director from 1993 to 1995, Vice President from 1995 to 1997
and General Manager and Senior Vice President from 1998 until November 1999.
Mr. De Seta played a key role in the acquisitions of Facts On File News Services
and Gareth Stevens, Inc. He also has had operational responsibility for World
Almanac Education, Facts On File News Services, World Almanac Books and, most
recently, Gareth Stevens, Inc. Prior to joining PRIMEDIA, he held several
positions at AT&T Bell Laboratories including Strategic Planning Manager,
Product Manager, and Systems Engineer.
JANICE P. BAILEY, VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, WORLD
ALMANAC. Janice P. Bailey has been Vice President and Chief Financial Officer
of World Almanac since June 1997. Since joining World Almanac in January 1995,
she has held several management and executive positions, including Director,
Corporate Finance from January, 1995 to February, 1996 and Director of Corporate
Operations and Strategy from February, 1996 to June, 1997. Prior to joining
PRIMEDIA, she worked for General Motors, Inc. as a Senior Financial Analyst from
August, 1991 to January, 1995.
TERRY BROMBERG, PRESIDENT, LIFETIME LEARNING SYSTEMS, INC. Terry Bromberg
has been President of Lifetime Learning Systems, Inc. since January 1, 2000.
Since joining Lifetime Learning Systems, Inc. in May 1995, he has served in
several management positions including Sales Director from May 1995 to
January 1998, Vice President from January 1998 to September 1998 and Senior Vice
President from September 1998 to December 1999.
LEIGH ANN PRICE, DIRECTOR, CLIENT SERVICES, LIFETIME LEARNING
SYSTEMS, INC. Leigh Ann Price has been Director of Client Services of Lifetime
Learning Systems, Inc. since January 15, 1991. Prior to joining Lifetime
Learning Systems, Inc., she worked for the Zimmerman Group as a Senior Account
Executive from December, 1987 to July, 1990.
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EXECUTIVE COMPENSATION
The following table summarizes, for the fiscal year ended the last day of
December 1999, all plan and non-plan compensation awarded to, earned by, or paid
to (i) the chief executive officer of each registrant for fiscal year 1999,
(ii) the six most highly compensated executive officers other than the CEO of
Weekly Reader serving at the end of December 1999 in all capacities in which
they served (including those executive officers of World Almanac, American
Guidance, Gareth Stevens, Inc. and Lifetime Learning Systems, Inc. who performed
policy making functions for Weekly Reader and were serving as such at the end of
December 1999 in all capacities in which they served), (iii) the four most
highly compensated executive officers other than the president of
CompassLearning serving at the end of December 1999 in all capacities in which
they served and (iv) up to two additional individuals employed by each
registrant who were not serving as executive officers at the end of
December 1999 but received at least as much compensation as the fourth most
highly compensated executive officer of the registrant for whom they were
employed:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
------------------------------------ -----------------------------------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
COMPENSATION OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(A) ($) SARS (#)(B) ($)
- --------------------------- -------- ---------- ------------ ------------ ----------- ------------
Martin E. Kenney, Jr........ 1999 209,983(c) 112,500(d) -- 204,294 765,000(e)
Chief Executive Officer
WRC Media, Executive Vice
President, Weekly Reader,
Executive Vice President,
CompassLearning
Dr. Therese K. Crane........ 1999 319,179(f) 109,890(g) -- 150,000 350,000(h)
President, CompassLearning
Peter E. Bergen............. 1999 250,000 100,922 -- 5,376 10,400(i)
President and Chief
Executive Officer, Weekly
Reader
Robert J. Jackson........... 1999 30,220(j) 114,400 -- 7,168 14,394(k)
Executive Vice President,
Weekly Reader
Lester Rackoff.............. 1999 175,000 60,553 -- 2,688 3,450(l)
Executive Vice President
and Chief Financial
Officer, Weekly Reader
Sandra F. Maccarone......... 1999 182,537(m) 41,480 -- 358 10,185(n)
Senior Vice President and
Editor in Chief, Weekly
Reader
Larry J. Rutkowski.......... 1999 260,000 182,650 11,507(o) 8,064 4,800(p)
President and Chief
Executive Officer,
American Guidance
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ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
------------------------------------ -----------------------------------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
COMPENSATION OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(A) ($) SARS (#)(B) ($)
- --------------------------- -------- ---------- ------------ ------------ ----------- ------------
Alfred De Seta.............. 1999 173,036(q) 83,793 -- 7,706 10,400(r)
President, World Almanac
Terry Bromberg.............. 1999 120,000 36,000 6,378(o) 358 7,501(s)
President, Lifetime
Learning Systems, Inc.
Gary Spears................. 1999 242,912(t) 55,391 5,755(o) -- 10,400(u)
President and Chief
Executive Officer, Gareth
Stevens, Inc.
Gerald G. Adams............. 1999 180,000 126,450 5,736(o) 717 4,800(p)
Executive Vice President
Finance and Chief
Financial Officer,
American Guidance
Leigh Ann Price............. 1999 62,928 -- -- -- 283,388(v)
Director, Client Services,
Lifetime Learning Systems,
Inc.
Joyce F. Russell............ 1999 191,611(w) 50,000 -- 62,500 240,000(x)
Senior Vice President and
Chief Financial Officer,
CompassLearning
Michael W. DePasquale....... 1999 180,007 25,000(y) -- 62,500 318,168(z)
Senior Vice President,
Sales, CompassLearning
Nancy G. Lockwood........... 1999 178,090(aa) 47,500(bb) -- 62,500 113,168(cc)
Senior Vice President,
Product Development,
CompassLearning
C. Michael Hayes............ 1999 150,006 -- -- 62,500 209,418(dd)
Senior Divisional Sales
Vice President,
CompassLearning
R. Alfred Knechel........... 1999 80,003 37,500(y) -- 17,500 288,146(ee)
Regional Vice President,
CompassLearning
Edward P. Ponikvar, Jr...... 1999 53,960 35,073(y) -- 5,000 333,913(ff)
Regional Marketing
Executive, CompassLearning
- ------------------------
(a) Represent bonuses accrued in fiscal year 1999. Such bonuses will not be paid
until fiscal year 2000.
(b) See "--Option/SAR Grants in Last Fiscal Year".
(c) Mr. Kenney earned $151,644 during the period from July 16, 1999 until
November 16, 1999 for services provided to CompassLearning as Chief
Executive Officer based on an annual salary of $450,000. He earned $58,249
during the period from November 16 until December 31, 1999 for
138
services provided as Chief Executive Officer of WRC Media, as Executive Vice
President of Weekly Reader and as Executive Vice President of
CompassLearning, based on an annual salary of $480,000.
(d) Represents a guaranteed bonus of $100,000 and an estimated additional bonus
payment of $12,500 based on the realization of performance targets still
subject to calculation as of the date of this prospectus.
(e) Represents a consulting fee of $140,000 and transaction fee of $625,000,
$300,000 of which was used to purchase 16,128 shares of WRC Media common
stock, realized in connection with the transactions described under
"Transactions."
(f) Ms. Crane earned $165,000 during the period from January 1, 1999 until
July 14, 1999 based on an annual salary of $310,000. She earned $153,959
during the period from July 15, 1999 until December 31, 1999 based on an
annual salary of $330,000.
(g) Represents a guaranteed bonus of $40,000 and an estimated additional bonus
payment of $69,890 based on the realization of performance targets still
subject to calculation as of the date of this prospectus.
(h) Represents a fixed sale bonus of $200,000 realized in connection with the
transactions described under "Transactions" and a retention bonus of
$150,000.
(i) Represents the fiscal year 1999 contribution by Weekly Reader to its 401(k)
plan of $4,800 and to a vested retirement plan of $5,600.
(j) Mr. Jackson began working for Weekly Reader on November 17, 1999, at an
annual salary of $250,000.
(k) Represents the contribution by Weekly Reader to PRIMEDIA's 401(k) plan of
$4,800 to PRIMEDIA's vested retirement plan of $5,600 and to PRIMEDIA's
Supplemental Employee Retirement Plan of $3,994.
(l) Represents the contributions by Weekly Reader to its 401(k) plan of $1,615
and to a vested retirement plan of $1,885.
(m) Ms. Maccarone earned $107,677 during the period from January 1, 1999 until
August 9, 1999 based on an annual salary of $177,100. She earned $74,860
during the period from August 10, 1999 until December 31, 1999 based on an
annual salary of $190,000.
(n) Represents the contributions by Weekly Reader to its 401(k) plan of $4,585
and to a vested retirement plan of $5,600.
(o) Represents an auto allowance.
(p) Represents the contribution by American Guidance to its 401(k) plan.
(q) Mr. De Seta earned $144,602 during the period from January 1, 1999 until
November 16, 1999 based on an annual salary of $165,000. He earned $28,434
during the period from November 17, 1999 until December 31, 1999, based on
an annual salary of $230,000.
(r) Represents contributions by World Almanac to its 401(k) plan of $4,800 and
to a vested retirement plan of $5,600.
(s) Represents the contributions by Weekly Reader to its 401(k) plan of $3,462
and to a vested retirement plan of $4,039.
(t) Mr. Spears earned $23,489 during the period from January 1, 1999 until
February 7, 1999 based on an annual salary of $225,000. He earned $219,423
during the period from February 8, 1999 until December 31, 1999 based on an
annual salary of $245,000.
(u) Represents the contributions by Gareth Stevens, Inc. to its 401(k) plan of
$4,800 and to a vested retirement plan of $5,600.
(v) Represents commissions paid by Weekly Reader.
139
(w) Ms. Russell earned $98,332 during the period from January 1, 1999 until
July 14, 1999 based on an annual salary of $184,500. She earned $93,279
during the period from July 15, 1999 until December 31, 1999 based on an
annual salary of $200,000.
(x) Represents a fixed sale bonus of $120,000 realized in connection with the
transaction described under "Transactions" and a retention bonus of
$120,000.
(y) Represents a bonus based on realization of quarterly performance targets.
(z) Represents estimated total commissions of 240,000 due for sales in 1999 a
fixed sale bonus of $75,000 and the contribution by CompassLearning to its
401(k) plan of $3,168. Some commissions will actually be paid in fiscal
2000.
(aa) Ms. Lockwood earned $89,539 during the period from January 1, 1999 until
July 14, 1999 based on an annual salary of $168,000. She earned $88,736
during the period from July 15, 1999 until December 31, 1999 based on an
annual salary of $190,000.
(bb) Represents a guaranteed bonus of $18,000 and an estimated additional bonus
payment of $29,500 based on the realization of performance targets still
subject to calculation.
(cc) Represents a fixed sale bonus of $50,000 realized in connection with the
transactions described under "Transactions," a retention bonus of $60,000
and the contribution by CompassLearning to its 401(k) plan of $3,168.
(dd) Represents estimated total commissions of $131,250 due for sales in 1999, a
fixed sale bonus of $75,000 realized in connection with the transactions
described under "Transactions" and the contribution by CompassLearning to
its 401(k) plan of $3,168.
(ee) Represents estimated total commissions of $260,100 due for sales in 1999, a
fixed sale bonus of $25,000 and the contribution by CompassLearning to its
401(k) plan of $3,046. Some commissions will actually be paid in fiscal
2000.
(ff) Represents estimated total commissions of $330,745 due for sales in 1999 as
well as the contribution by CompassLearning to its 401(k) plan of $3,168.
Some commissions will actually be paid in fiscal 2000.
140
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- --------------------------------------------------------------------------------
POTENTIAL REALIZED
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (A)
- ------------------------------------------------------------------------------------------ ---------------------
(1) (2) (3) (4) (5) (6) (7)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ------------ ------------ -------- ---------- --------- ---------
Martin E. Kenney, Jr............. 204,294(b)(c) 67.7% 18.60065 --(a) 1,049,870 2,319,939
Chief Executive Officer, WRC
Media, Executive Vice
President, Weekly Reader,
Executive Vice President,
CompassLearning
Dr. Therese K. Crane............. 150,000(d) 14.8% 4.0 --(e) (f) (f)
President, CompassLearning
Peter E. Bergen.................. 5,376(b)(g) 1.8% 18.60065 --(a) 27,627 61,049
President and Chief Executive
Officer, Weekly Reader
Robert J. Jackson................ 7,168(b)(g) 2.4% 18.60065 --(a) 36,836 81,399
Executive Vice President,
Weekly Reader
Lester Rackoff................... 2,688(b)(g) 0.9% 18.60065 --(a) 13,814 30,525
Executive Vice President and
Chief Financial Officer, Weekly
Reader
Sandra F. Maccarone.............. 358(b)(g) 0.1% 18.60065 --(a) 1,840 4,065
Senior Vice President and
Editor in Chief Weekly Reader
Larry J. Rutkowski............... 8,064(b)(g) 2.7% 18.60065 --(a) 41,441 91,574
President and Chief Executive
Officer, American Guidance
Alfred De Seta................... 7,706(b)(g) 2.6% 18.60065 --(a) 39,601 87,508
President, World Almanac
Terry Bromberg................... 358(b)(g) 0.1% 18.60065 --(a) 1,840 4,065
President, Lifetime Learning
Systems, Inc.
Gary Spears...................... -- -- -- -- -- --
President and Chief Executive
Officer, Gareth Stevens Inc.
Gerald G. Adams.................. 717(b)(g) 0.2% 18.60065 12/31/01(a) 3,685 8,142
Executive Vice President
Finance and Chief Financial
Officer, American Guidance
Leigh Ann Price.................. -- -- -- -- -- --
Director, Client Services,
Lifetime Learning
Systems, Inc.
Joyce F. Russell................. 62,500(d) 6.2% 4.0 --(e) (f) (f)
Senior Vice President and Chief
Financial Officer,
CompassLearning
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POTENTIAL REALIZED
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (A)
- ------------------------------------------------------------------------------------------ ---------------------
(1) (2) (3) (4) (5) (6) (7)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ------------ ------------ -------- ---------- --------- ---------
Michael W. DePasquale............ 62,500(d) 6.2% 4.0 --(e) (f) (f)
Senior Vice President, Sales,
CompassLearning
Nancy G. Lockwood................ 62,500(d) 6.2% 4.0 --(e) (f) (f)
Senior Vice President, Product
Development, CompassLearning
C. Michael Hayes................. 62,500(d) 6.2% 4.0 --(e) (f) (f)
Senior Divisional Sales Vice
President, CompassLearning
R. Alfred Knechel................ 17,500(d) 1.7% 4.0 --(e) (f) (f)
Regional Vice President,
CompassLearning
Edward P. Ponikvar, Jr........... 5,000(d) 0.5% 4.0 --(e) (f) (f)
Regional Marketing Executive,
CompassLearning
- --------------------------
(a) The options expire only if the employee's employment is terminated or his
employment contract is not renewed. However, for ease of calculation, under
columns (6) and (7) above we have assumed that the expiration date of the
options and the SARs is five years from the time of grant.
(b) Represents options which are exercisable for WRC Media common stock. There
were a total of 301,724 options to purchase WRC Media common stock granted
in the fiscal year 1999. The percent of options granted to each employee is
based on the total aggregate amount of WRC Media options granted.
(c) Mr. Kenney was granted, subject to cancelation if Mr. Kenney's employment is
terminated for good cause as defined in his employment agreement, the option
to acquire 204,294 shares of WRC Media common stock, of which 33% vested on
November 17, 1999. The remainder will vest 33% on December 31, 2000 and 34%
on December 31, 2001, unless deemed fully vested on a prior date due to the
occurrence of a change in control as defined in the employment agreement.
See, "Employment Agreements--WRC Media Agreement with Martin E. Kenney, Jr."
(d) Represents SARs (Stock Appreciation Rights) of CompassLearning. There were a
total of 1,013,500 SARs of CompassLearning granted in the fiscal year 1999.
The percent of SARs granted to each employee is based on the total aggregate
amount of CompassLearning SAR's granted. The SARS were exercised on
November 15, 1999.
(e) There are no expiration dates for these SARs because they have already been
exercised.
(f) Because the SARs for these individuals have already been exercised, there is
no "Potential Realized Value" and columns (6) and (7) above are
inapplicable.
(g) 33% of these options vested on December 31, 1999. Unless deemed fully vested
on a prior date due to the occurrence of a change in control as defined in
the employment agreements, an additional 33% will vest on December 31, 2000
and, if their employment is renewed for an additional year ending
December 31, 2002, as described under "Employment Agreements," the final 34%
will vest on December 31, 2001. See, "Employment Agreements."
142
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
- --------------------------------------------------------------------------------
(1) (2) (3) (4) (5)
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SAR'S AT FY- OPTIONS/SAR'S AT FY-
SHARES ACQUIRED END(#)EXERCISABLE/ END($) EXERCISABLE/
NAME ON EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---------------------------- --------------- ------------------ -------------------- --------------------
Dr. Therese K. Crane........ 150,000 165,750.00(a) 0 0
President, CompassLearning
Joyce F. Russell............ 62,500 69,062.50(b) 0 0
Senior Vice President and
Chief Financial Officer,
CompassLearning
Michael DePasquale.......... 62,500 69,062.50(b) 0 0
Senior Vice President,
Sales, CompassLearning
Nancy Lockwood.............. 62,500 69,062.50(b) 0 0
Senior Vice President,
Product Development,
CompassLearning
C. Michael Hayes............ 62,500 69,062.50(b) 0 0
Senior Divisional Sales
Vice President,
CompassLearning
R. Alfred Knechel........... 17,500 19,337.50(c) 0 0
Regional Vice President,
CompassLearning
Edward P. Ponikvar, Jr...... 5,000 5,525.00(d) 0 0
Regional Marketing
Executive, CompassLearning
- --------------------------
(a) An additional $59,250.00 was realized. These funds remain in escrow to
satisfy certain potential unasserted claims against CompassLearning and will
be released July 14, 2000.
(b) An additional $24,687.50 was realized. These funds remain in escrow to
satisfy certain potential unasserted claims against CompassLearning and will
be released July 14, 2000.
(c) An additional $6,912.50 was realized. These funds remain in escrow to
satisfy certain potential unasserted claims against CompassLearning and will
be released July 14, 2000.
(d) An additional $1,975.00 was realized. These funds remain in escrow to
satisfy certain potential unasserted claims against CompassLearning and will
be released July 14, 2000.
143
DIRECTOR COMPENSATION
Our directors do not receive compensation, except as officers or employees.
However, WRC Media has entered into a letter agreement with Mr. Caulo, the
Non-Executive Vice-Chairman of WRC Media providing terms for a consulting
agreement beginning on January 1, 2000 through December 31, 2002. Under this
arrangement, Mr. Caulo will be paid, among other compensation, an annual salary
of $200,000 by WRC Media and $150,000 by Ripplewood Holdings L.L.C. for services
in connection with the identification, evaluation and consummation of new
investment opportunities. See "Certain Relationships and Related
Transactions--Other Transactions."
EMPLOYMENT AGREEMENTS
The following summary of the material provisions of the employment
agreements for the executives listed pursuant to "Executive Compensation" is
qualified in its entirety by reference to such agreements.
WRC MEDIA AND COMPASSLEARNING AGREEMENT WITH MARTIN E. KENNEY, JR. On
November 17, 1999, WRC Media and CompassLearning entered into an employment
agreement with Martin E. Kenney, Jr. This agreement will remain in effect until
December 31, 2002 unless earlier terminated by either party upon 90 days' prior
written notice. Mr. Kenney shall receive a minimum annual base salary of
$480,000, subject to increase after an annual review, as well as a bonus of up
to 156% of his annual base salary based on the achievement of annual performance
objectives. Mr. Kenney is guaranteed to receive an annual bonus of at least
$200,000, regardless of whether any performance objectives are achieved.
Mr. Kenney was granted, subject to cancelation if Mr. Kenney's employment is
terminated for good cause as defined in the agreement, the option to acquire
193,546.23 shares of WRC Media common stock, of which 33% vested on
November 17, 1999. The remainder will vest 33% on December 31, 2000 and 34% on
December 31, 2001, unless deemed fully vested on a prior date due to the
occurrence of a change in control as defined in the agreement. In addition,
Mr. Kenney shall receive, upon achievement of performance objectives in fiscal
year 2000, bonus stock options, valued up to $400,000, which shall be fully
vested upon grant. In the event of an initial public offering of WRC Media
common stock, Mr. Kenney shall participate in a stock option plan commensurate
with industry standards. If his employment is terminated due to death or
disability or without cause, Mr. Kenney shall receive his base salary and
guaranteed bonus for the balance of his term or eighteen months, whichever is
longer. In the event Mr. Kenney elects to receive the severance payment as
salary continuation payments for eighteen months rather than as a lump sum, he
shall continue to receive medical, dental and vision coverage for such period.
If Mr. Kenney's employment is terminated for any reason, WRC Media shall have an
option to purchase all or any portion of his shares of common stock of WRC Media
(including any shares obtained or obtainable through the exercise of any option)
at fair market value. If Mr. Kenney's employment is terminated without cause, he
shall have the option to sell to WRC Media all of his 16,128 shares of WRC Media
common stock purchased on November 17, 1999, then held at fair market value. In
addition, Mr. Kenney is subject to customary non-competition, non-solicitation
of employees and confidentiality provisions.
COMPASSLEARNING AGREEMENT WITH THERESE K. CRANE. On July 14, 1999,
CompassLearning entered into an employment agreement with Therese K. Crane. This
agreement will remain in effect until terminated by either party upon 30 days'
prior written notice. Dr. Crane shall receive a minimum annual base salary of
$330,000, subject to increase after annual review, as well as an annual bonus of
up to 121.0% of her base salary based on the achievement of annual performance
objectives. In the event of an initial public offering of CompassLearning common
stock, Dr. Crane shall participate in a stock option plan commensurate with
industry standards. If her employment is terminated because of death or
disability or without cause, Dr. Crane shall receive, among other things, as a
lump sum payment her base salary for eighteen months less the term of her
employment since execution of the agreement or one year, whichever is greater.
If Dr. Crane elects to receive the severance payment as
144
salary continuation payments for the period used to calculate such payment
rather than as a lump sum, she shall receive medical, dental and vision coverage
for such period. In addition, Dr. Crane is subject to customary non-competition,
non-solicitation of employees and confidentiality provisions.
WEEKLY READER AGREEMENT WITH PETER E. BERGEN. On November 17, 1999, Weekly
Reader entered into an employment agreement with Peter E. Bergen. This agreement
will remain in effect until December 31, 2001 unless earlier terminated by
either party upon 30 days' prior written notice. The agreement will
automatically be renewed for successive one-year periods unless terminated by
either party at least 90 days prior to an applicable expiration date.
Mr. Bergen received an annual base salary of $250,000 until January 1, 2000. He
shall receive a minimum annual base salary for the duration of his employment of
$275,000, subject to increase after annual review, as well as an annual bonus of
up to 52.5% of his base salary based on the achievement of annual performance
objectives. If his employment is terminated without cause, Mr. Bergen shall
receive, among other things, as a lump sum payment his base salary for the
balance of his term or one year, whichever is longer, and, if his bonus
objectives have been achieved, a prorated portion of his bonus for the portion
of the year worked during the year of termination. In addition, Mr. Bergen is
subject to customary non-competition, non-solicitation of employees and
confidentiality provisions.
WEEKLY READER AGREEMENT WITH ROBERT J. JACKSON. On November 17, 1999,
Weekly Reader entered into an employment agreement with Robert Jackson. This
agreement will remain in effect until December 31, 2001 unless earlier
terminated by either party upon 30 days' prior written notice. The agreement
will automatically be renewed for successive one-year periods unless terminated
by either party at least 90 days prior to an applicable expiration date.
Mr. Jackson shall receive a minimum annual base salary of $250,000, subject to
increase after annual review, as well as an annual bonus of up to 52.5% of his
base salary based on the achievement of annual performance objectives. If his
employment is terminated without cause, Mr. Jackson shall receive, among other
things, as a lump sum payment his base salary for the balance of his term or one
year, whichever is longer, and, if his bonus objectives have been achieved, a
prorated portion of his bonus for the portion of the year worked during the year
of termination. In addition, Mr. Jackson is subject to customary
non-competition, non-solicitation of employees and confidentiality provisions.
WEEKLY READER AGREEMENT WITH LESTER RACKOFF. On November 17, 1999, Weekly
Reader entered into an employment agreement with Lester Rackoff. This agreement
will remain in effect until December 31, 2001 unless earlier terminated by
either party upon 30 days' prior written notice. The agreement will
automatically be renewed for successive one-year periods unless terminated by
either party at least 90 days prior to an applicable expiration date.
Mr. Rackoff received an annual base salary of $175,000 until January 1, 2000. He
shall receive a minimum annual base salary of $210,000 for the duration of his
employment, subject to increase after annual review, as well as an annual bonus
of up to 45% of his base salary based on the achievement of annual performance
objectives. If his employment is terminated without cause, Mr. Rackoff shall
receive, among other things, as a lump sum payment his base salary and, if his
bonus objectives have been achieved and termination occurs more that six months
after the beginning of the calender year, a prorated portion of his bonus for
the portion of the year worked during the year of termination. In addition,
Mr. Rackoff is subject to customary non-competition, non-solicitation of
employees and confidentiality provisions.
WEEKLY READER AGREEMENT WITH SANDY MACCARONE. On November 17, 1999, Weekly
Reader entered into an employment agreement with Sandy Maccarone. This agreement
will remain in effect until December 31, 2001 unless earlier terminated by
either party upon 30 days' prior written notice. The agreement will
automatically be renewed for successive one-year periods unless terminated by
either party at least 90 days prior to an applicable expiration date.
Ms. Maccarone shall receive a minimum annual base salary of $190,000, subject to
increase after annual review, as well as an annual bonus of up to 37.5% of her
base salary based on the achievement of annual performance objectives. If her
145
employment is terminated without cause, Ms. Maccarone shall receive, among other
things, as a lump sum payment her base salary and, if her bonus objectives have
been achieved and termination occurs more that six months after the beginning of
the calender year, a prorated portion of her bonus for the portion of the year
worked during the year of termination. In addition, Ms. Maccarone is subject to
customary non-competition, non-solicitation of employees and confidentiality
provisions.
AMERICAN GUIDANCE AGREEMENT WITH LARRY RUTKOWSKI. On November 17, 1999,
American Guidance entered into an employment agreement with Larry Rutkowski.
This agreement will remain in effect until December 31, 2001 unless earlier
terminated by either party upon 30 days' prior written notice. The agreement
will automatically be renewed for successive one-year periods unless terminated
by either party at least 90 days prior to an applicable expiration date.
Mr. Rutkowski shall receive a minimum annual base salary of $260,000, subject to
increase after review on February 28, 2000 and annually thereafter, as well as
an annual bonus of up to 75.0% of his base salary based on the achievement of
annual performance objectives. If his employment is terminated without cause,
Mr. Rutkowski shall receive, among other things, as a lump sum payment his base
salary for the balance of his term, one year or eighteen months (provided
certain conditions described in the agreement are satisfied), whichever is
longer, and, if his bonus objectives have been achieved, a prorated portion of
his bonus for the portion of the year worked during the year of termination. If
Mr. Rutkowski's employment is terminated for good cause, as defined in the
agreement, he or his beneficiary may under certain circumstances described in
the agreement, be eligible to receive, among other compensation, his salary then
in effect for a 120 day period following his termination. In addition,
Mr. Rutkowski is subject to customary non-competition, non-solicitation of
employees and confidentiality provisions.
PRIMEDIA REFERENCE INC. AGREEMENT WITH AL DE SETA. On November 17, 1999,
PRIMEDIA Reference Inc. entered into an employment agreement with Al De Seta.
This agreement will remain in effect until December 31, 2001 unless earlier
terminated by either party upon 30 days' prior written notice. The agreement
will automatically be renewed for successive one-year periods unless terminated
by either party at least 90 days prior to an applicable expiration date. Mr. De
Seta shall receive a minimum annual base salary of $230,000 until January 1,
2000 and $255,000 thereafter, subject to increase after annual review, as well
as an annual bonus of up to 52.5% of his base salary based on the achievement of
annual performance objectives. If his employment is terminated without cause,
Mr. De Seta shall receive, among other things, as a lump sum payment his base
salary for the balance of his term or one year, whichever is longer, and, if his
bonus objectives have been achieved, a prorated portion of his bonus for the
portion of the year worked during the year of termination. In addition, Mr. De
Seta is subject to customary non-competition, non-solicitation of employees and
confidentiality provisions.
WEEKLY READER AGREEMENT WITH TERRY BROMBERG. On November 17, 1999, Weekly
Reader entered into an employment agreement with Terry Bromberg. This agreement
will remain in effect until December 31, 2001 unless earlier terminated by
either party upon 30 days' prior written notice. The agreement will
automatically be renewed for successive one-year periods unless terminated by
either party at least 90 days prior to an applicable expiration date.
Mr. Bromberg received an annual base salary of $120,000 until January 1, 2000.
He shall receive a minimum annual base salary of $150,000 for the duration of
his employment, subject to increase after annual review, as well as an annual
bonus of up to 30% of his base salary based on the achievement of annual
performance objectives. If his employment is terminated without cause,
Mr. Bromberg shall receive, among other things, as a lump sum payment his base
salary and, if his bonus objectives have been achieved and termination occurs
more that six months after the beginning of the calender year, a prorated
portion of his bonus for the portion of the year worked during the year of
termination. In addition, Mr. Bromberg is subject to customary non-competition,
non-solicitation of employees and confidentiality provisions.
146
AMERICAN GUIDANCE AGREEMENT WITH GERALD ADAMS. On November 17, 1999,
American Guidance entered into an employment agreement with Gerald Adams. This
agreement will remain in effect until December 31, 2001 unless earlier
terminated by either party upon 30 days' prior written notice. The agreement
will automatically be renewed for successive one-year periods unless terminated
by either party at least 90 days prior to an applicable expiration date.
Mr. Adams received an annual base salary of $180,000 until January 1, 2000. He
shall receive a minimum annual base salary of $195,000 for the duration of his
employment, subject to increase after annual review, as well as an annual bonus
of up to 75% of his base salary based on the achievement of annual performance
objectives. If his employment is terminated without cause, Mr. Adams shall
receive, among other things, as a lump sum payment his base salary for the year
in which termination occurs or eighteen months (provided certain conditions
described in the agreement are satisfied) and, if his bonus objectives have been
achieved and termination occurs more that six months after the beginning of the
calender year, a prorated portion of his bonus for the portion of the year
worked during the year of termination. If Mr. Adams's employment is terminated
for good cause, as defined in the agreement, he or his beneficiary may under
certain circumstances described in the agreement, be eligible to receive, among
other compensation, his salary then in effect for a 120 day period following his
termination. In addition, Mr. Adams is subject to customary non-competition,
non-solicitation of employees and confidentiality provisions.
COMPASSLEARNING AGREEMENT WITH JOYCE F. RUSSELL. On November 17, 1999,
CompassLearning entered into an employment agreement with Joyce F. Russell. This
agreement will remain in effect unless terminated by either party upon 30 days'
prior written notice. Ms. Russell shall receive a minimum annual base salary of
$200,000, subject to increase after annual review, as well as an annual bonus of
up to 100.0% of her base salary based on the achievement of annual performance
objectives. In the event of an initial public offering of CompassLearning common
stock, Ms. Russell shall participate in a stock option plan commensurate with
industry standards. If her employment is terminated because of death or total
disability or without cause, Ms. Russell shall receive, among other things, as a
lump sum payment her base salary. If Ms. Russell elects to receive the severance
payment as salary continuation payments for twelve months rather than as a lump
sum, she shall receive medical, dental and vision coverage for such period. In
addition, Mr. Russell is subject to customary non-competition, non-solicitation
of employees and confidentiality provisions.
COMPASSLEARNING AGREEMENT WITH MICHAEL DEPASQUALE. Mr. DePasquale, who
serves as an employee-at-will of CompassLearning, shall receive his annual base
salary as a lump sum severance payment if his employment is terminated without
cause.
COMPASSLEARNING AGREEMENT WITH NANCY LOCKWOOD. On July 14, 1999,
CompassLearning entered into an employment agreement with Nancy Lockwood. This
agreement will remain in effect until terminated by either party upon 30 days'
prior written notice. Ms. Lockwood shall receive a minimum annual base salary of
$190,000, subject to increase after annual review, as well as an annual bonus of
up to 95.0% of her base salary based on the achievement of annual performance
objectives. In the event of an initial public offering of CompassLearning common
stock, Ms. Lockwood shall participate in a stock option plan commensurate with
industry standards. If her employment is terminated because of death or total
disability or without cause, Ms. Lockwood shall receive, among other things, as
a lump sum payment her base salary. If Ms. Lockwood elects to receive the
severance payment as salary continuation payments for the period used to
calculate such payment rather than as a lump sum, she shall receive medical,
dental and vision coverage for such period. In addition, Ms. Lockwood is subject
to customary non-competition, non-solicitation of employees and confidentiality
provisions.
COMPASSLEARNING AGREEMENT WITH C. MICHAEL HAYES. Mr. Hayes, who serves as
an employee-at-will of CompassLearning, shall receive his annual base salary as
a lump sum severance payment if his employment is terminated without cause.
147
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENTS
In connection with the acquisition of CompassLearning, CompassLearning
entered into a management agreement with Ripplewood Holdings L.L.C., and after
the consummation of the transactions described under "Transactions," Weekly
Reader entered into a management agreement with Ripplewood Holdings L.L.C. The
following summary of the material provisions of these management agreements is
qualified in its entirety by reference to the management agreements as entered
into or amended as of the date of this prospectus.
Pursuant to the terms of CompassLearning's management agreement with
Ripplewood Holdings L.L.C., and since the date of the acquisition of
CompassLearning, Ripplewood Holdings L.L.C. has been providing to
CompassLearning management consulting and financial advisory services, and
CompassLearning has been paying to Ripplewood Holdings L.L.C. an annual
management fee of $150,000, payable quarterly, and has reimbursed Ripplewood
Holdings L.L.C. for its reasonable out-of-pocket costs and expenses incurred in
connection with the performance of its services. On November 17, 1999,
CompassLearning and Ripplewood Holdings L.L.C. amended the terms of the
CompassLearning's management agreement with Ripplewood Holdings L.L.C. to
relieve CompassLearning of its obligation to pay management fees to Ripplewood
Holdings L.L.C. until 2001.
Pursuant to the terms of the Weekly Reader's management agreement with
Ripplewood Holdings L.L.C., Ripplewood Holdings L.L.C. provides to Weekly Reader
management consulting and financial advisory services. As a result of the Weekly
Reader's management agreement and the amendment of the CompassLearning's
management agreement, CompassLearning and Weekly Reader will reimburse
Ripplewood Holdings L.L.C. for its reasonable out-of-pocket costs and expenses
incurred in connection with the performance of its services and, beginning in
the first quarter of 2001, will be obligated to pay to Ripplewood Holdings
L.L.C. annual aggregate management fees for services to both CompassLearning and
Weekly Reader totaling $950,000, payable quarterly. In connection with the
transactions described under "Transactions," Ripplewood Holdings L.L.C. also
received an advisory fee customary for transactions of this nature.
Pursuant to these management agreements, Weekly Reader and CompassLearning
are obligated to indemnify, defend and hold harmless Ripplewood Holdings L.L.C.,
its affiliates and each of their respective directors, stockholders, advisory
directors, officers, members, employees and agents from any damages related to
the performance by Ripplewood Holdings L.L.C. of its obligations under these
management agreements. Ripplewood Holdings L.L.C. may terminate these management
agreements at any time on five days' prior written notice to Weekly Reader or
CompassLearning, as applicable.
MANAGEMENT SHAREHOLDER AGREEMENTS
Simultaneously with the closing of the transactions described under
"Transactions," and pursuant to the terms of their respective employment
agreements with Weekly Reader and CompassLearning some executives of WRC Media,
Weekly Reader, and CompassLearning purchased shares of WRC Media common stock
and entered into management shareholder agreements with WRC Media and EAC III
with respect to the WRC Media common stock held by such executives. The
following summary of the material provisions of these management shareholder
agreements is qualified in its entirety by reference to the management
shareholder agreements.
VOTING AGREEMENT. Each executive who is a party to a management shareholder
agreement with WRC Media and EAC III with respect to WRC Media common stock will
grant to EAC III an irrevocable proxy to vote the WRC Media common stock held by
such executive as well as all WRC Media common stock thereafter acquired by such
executive on all matters except for any matter that would both adversely affect
and treat such executive differently from other holders of WRC Media
148
common stock. Such proxy shall terminate upon any transfer of such shares to a
third party after or upon completion of an initial public offering of WRC Media
common stock and the expiration of any "lock-up" period agreed upon by the
executives and the underwriters in connection with such initial public offering.
TRANSFER RESTRICTIONS. Each management shareholder agreement with WRC Media
and EAC III with respect to WRC Media common stock restricts the right of an
executive to transfer the WRC Media common stock such executive holds without
the prior written consent of EAC III to any person other than a permitted
transferee of such executive. With respect to each executive who is a party to a
management shareholder agreement, permitted transferees will include EAC III,
another such executive, such executive's spouse or lineal descendants or any
trust the beneficiaries of which include only such executive's spouse or lineal
descendants. Each executive may also transfer, without restriction, the WRC
Media common stock that such executive holds after the consummation of an
initial public offering of WRC Media common stock.
OPTIONS. Certain executives who are parties to a management shareholder
agreement with WRC Media and EAC III with respect to WRC Media common stock were
also granted options to purchase a specified number of shares of WRC Media
common stock. With respect to each such executive, to the extent that such
executive remains employed with Weekly Reader or CompassLearning, as applicable,
33% of such options will vest on December 31, 1999, a further 33% on
December 31, 2000 and the remaining 34% on December 31, 2001. If such
executive's employment with Weekly Reader or CompassLearning, as applicable, is
terminated for any reason other than those specified in the applicable
management shareholder agreement such options will vest immediately.
TAG-ALONG RIGHTS. The management shareholder agreements with WRC Media and
EAC III with respect to WRC Media common stock provide that, if EAC III
determines to sell in excess of 5% of its WRC Media common stock to a third
party other than a permitted transferee and, after giving effect to such sale,
EAC III will have transferred in excess of 35% of its WRC Media common stock to
a third party other than a permitted transferee, the executives who are party to
the management shareholder agreements will have the right to sell a
proportionate amount of their WRC Media common stock in such transaction at the
same price per share and on the same terms and conditions as apply to the sale
of WRC Media common stock by EAC III.
DRAG-ALONG RIGHTS. In the event that EAC III determines to sell all or any
portion in excess of 35% of its WRC Media common stock to any third party, EAC
III will have the right to cause the executives who are party to the management
shareholder agreements with WRC Media and EAC III to sell a proportionate amount
of their WRC Media common stock in such transaction, all at the same price per
share and on the same terms and conditions as apply to the sale of WRC Media
common stock by EAC III.
OPTION UPON TERMINATION. In the event that the employment of an executive
who is party to a management shareholder agreement with WRC Media and EAC III
with respect to WRC Media common stock is terminated for any reason, EAC III has
the option to purchase all or any portion of the WRC Media common stock held by
such executive at fair market value as determined pursuant to the terms of such
management shareholder agreement. In addition, in the event that an executive's
employment is terminated other than for good cause, as defined in such
executive's employment agreement, or because of a notice of non-renewal given by
such executive's employer, in the event of financial hardship as determined by
the Board of Directors of WRC Media or because of death, such executive or such
executive's estate will have the right to require WRC Media to purchase any or
all of such executive's WRC Media common stock, subject to certain exceptions
and customary limitations.
149
TRANSITION SERVICES AGREEMENT
As part of the recapitalization, PRIMEDIA, Weekly Reader and WRC Media
entered into a transition services agreement pursuant to which PRIMEDIA and
Weekly Reader will each provide certain services following the consummation of
the transactions described under "Transactions" to the other and will each pay
the other for these services at rates determined under such transition services
agreement. The following summary of the material provisions of such transition
services agreement is qualified in its entirety by reference to such transition
services agreement. PRIMEDIA will:
- make available to all the employees of Weekly Reader, together with its
subsidiaries that are participating in the relevant plan as of the
consummation of the Transactions, participation in each of the employee
benefit plans sponsored by PRIMEDIA;
- provide administrative services in respect of such employee benefit plans
until December 31, 1999;
- continue to make available office space currently occupied by certain
individuals who have become our employees upon consummation of the
transactions described under "Transactions;" and
- provide related services such as security, cleaning and access to
administrative and secretarial services at a monthly rental fee of
approximately $8,500, plus any incremental direct costs associated with
such services.
Weekly Reader will continue to provide some computer services to PRIMEDIA until
March 31, 2000, including maintenance of some hardware and software systems, and
PRIMEDIA will pay incremental costs reasonably incurred by Weekly Reader in
connection with such services.
OTHER TRANSACTIONS
WRC Media, Ripplewood Holdings L.L.C. and Mr. Ralph D. Caulo, the
Vice-Chairman of WRC Media, were party to a letter agreement providing terms for
consulting agreements beginning on January 1, 2000 through December 31, 2002.
Under these agreements, Mr. Caulo will be paid, among other compensation, an
annual salary of $200,000 by WRC Media and $150,000 by Ripplewood Holdings
L.L.C. for services in connection with the identification, evaluation and
consummation of new investment opportunities.
As additional consideration for his consulting services to WRC Media, WRC
Media will also pay Mr. Caulo a transaction fee of $250,000 and grant him 53,762
options to purchase common stock of WRC Media at an exercise price of $18.60065.
Subject to termination for "good cause" as defined in such agreement, 33% of the
options will vest upon signing, 34% on December 31, 2000 and 33% on
December 31, 2001 and will expire only if Mr. Caulo's contract is not renewed or
is terminated. These options represent a potential realized value:
- of $276,284 at an assumed annual stock price appreciation rate of 5% over
five years; and
- of $610,515 at an assumed annual stock price appreciation rate of 5% over
ten years.
Pursuant to Mr. Caulo's agreement with Ripplewood Holdings L.L.C.,
Ripplewood Holdings L.L.C. will also grant him stock options based upon the size
of each transaction for which he provides services.
Although not yet determined as of the date of this prospectus, Mr. Caulo may
receive additional compensation pursuant to these agreements as well.
150
OWNERSHIP OF STOCK
As used in the three sections below describing the beneficial ownership of
WRC Media, Weekly Reader and CompassLearning, "beneficial ownership" means the
sole or shared power to vote, or direct the voting of, a security, or the sole
or shared investment power with respect to a security (i.e. the power to dispose
of, or direct the disposition of, a security). A person is deemed as of any date
to have "beneficial ownership" of any security that such person has the right to
acquire within 60 days after such date. For purposes of computing the
percentages of outstanding shares held by each person named in the three
sections below, any security that such person has the right to acquire within
60 days of the date of calculation is deemed to be outstanding, but such
security is not deemed to be outstanding for purposes of calculating the
percentage ownership of any other person.
BENEFICIAL OWNERSHIP OF WRC MEDIA
The following tables list, as of the date of this prospectus, information
known to us regarding the beneficial ownership of WRC Media common stock by:
- each person known by WRC Media to be the beneficial owner of more than 5%
of the outstanding WRC Media common stock;
- each of the directors and the executive officers listed pursuant to
"Management--Executive Compensation;" and
- all directors and the executive officers listed pursuant to
"Management--Executive Compensation," as a group.
As of the date of this prospectus, the total number of outstanding shares of
WRC Media common stock was 6,855,853. Except as otherwise noted, the persons
named in the tables have sole voting and investment power with respect to all
shares shown as beneficially owned by them. The information concerning
beneficial ownership is based on statements furnished to us by the beneficial
owners and assumes that 6,855,853 shares of common stock have been issued and
are outstanding.
WRC MEDIA COMMON STOCK
BENEFICIAL OWNERSHIP
-------------------------------
NAME AND ADDRESS SHARES(A) PERCENT OF CLASS(A)
- ---------------- --------- -------------------
EAC III (b)
c/o Ripplewood Holdings L.L.C.
1 Rockefeller Plaza
32nd Floor
New York, NY 10020........................................ 5,037,985 73.3%
SGC Partners II LLC
1221 Avenue of the Americas
New York, NY 10020........................................ 1,694,039 24.7%
EAC IV, L.L.C.
c/o Ripplewood Holdings L.L.C.
1 Rockefeller Plaza
32nd Floor
New York, NY 10020........................................ 5,037,985(c) 73.3%
Martin E. Kenney, Jr........................................ 83,545(d) 1.2%
Timothy C. Collins.......................................... 58,342(e) *
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BENEFICIAL OWNERSHIP
-------------------------------
NAME AND ADDRESS SHARES(A) PERCENT OF CLASS(A)
- ---------------- --------- -------------------
Charles L. Laurey........................................... 1,636(f) *
Robert S. Lynch............................................. 5,283(g) *
D. Ronald Daniel............................................ --(h) *
William F. Dawson........................................... -- *
James N. Lane............................................... --(i) *
Dr. Therese K. Crane........................................ 4,032(f) *
Alfred De Seta.............................................. 14,102(j) *
Larry J. Rutkowski.......................................... 14,757(k) *
Ralph D. Caulo.............................................. 17,741(l) *
Robert J. Jackson........................................... 13,118(m) *
Peter E. Bergen............................................. 9,838(n) *
Joyce F. Russell............................................ -- *
Michael W. DePasquale....................................... -- *
Nancy G. Lockwood........................................... -- *
C. Michael Hayes............................................ -- *
R. Alfred Knechel........................................... -- *
Edward P. Ponikvar, Jr...................................... -- *
Lester Rackoff.............................................. 4,919(o) *
Sandra F. Maccarone......................................... 656(p) *
Terry Bromberg.............................................. 656(p) *
Gary Spears................................................. -- *
Gerald G. Adams............................................. 1,312(q) *
Leigh Ann Price............................................. -- *
All directors of WRC Media and the executive officers listed
pursuant to "Management--Executive Compensation," as a
group..................................................... 237,704 3.42%
- ------------------------
* Represents holdings of less than 1%.
(a) Calculated excluding all shares issuable pursuant to options except, as to
each person, the shares issuable to such person pursuant to options
immediately exercisable or exercisable within 60 days from the date of this
prospectus.
(b) Represents 4,870,494 shares held directly and 167,491 shares held indirectly
through its rights granted to it under certain shareholder agreements. See
"Certain Relationships and Related Transactions--Management Shareholder
Agreements." Each of EAC IV L.L.C., Co-Investment Partners, L.P., The
Northwestern Mutual Life Insurance Company, Jackson National Life Insurance
Company and Blue Ridge Investments, L.L.C., an affiliate of Bank of America,
N.A. owns 66.4%, 16.6%, 10.9%, 5.5% and 0.6%, respectively, of the
membership interests in EAC III.
152
(c) Represents the beneficial ownership of shares through its ownership of 66.4%
of the membership interests of EAC III and the rights granted to EAC III
under certain shareholder agreements and the limited liability company
agreement of EAC III. EAC IV L.L.C. is controlled by Ripplewood
Partners, L.P., an affiliate of Ripplewood Holdings L.L.C. See "Risk
Factors--Ownership of WRC Media and its Subsidiaries" and "Certain
Relationships and Related Transactions."
(d) Represents 16,128 shares held directly and 67,417 shares issuable upon
exercise of options granted pursuant to his employment agreement. See
"Management--Employment Agreements--WRC Media and CompassLearning Agreement
with Martin E. Kenney Jr."
(e) Excludes shares listed above as beneficially owned by EAC III or EAC IV,
L.L.C., which may be deemed an affiliate of Timothy C. Collins.
(f) Represents shares held directly.
(g) Excludes shares listed above as beneficially owned by EAC III or EAC IV,
L.L.C., which may be deemed an affiliate of Robert S. Lynch.
(h) Excludes shares listed above as beneficially owned by EAC III or EAC IV,
L.L.C., which may be deemed an affiliate of D. Ronald Daniel.
(i) Excludes shares listed above as beneficially owned by SGC Partners II
L.L.C., which may be deemed an affiliate of James N. Lane.
(j) Represents 11,559 shares held directly and 2,543 shares issuable upon
exercise of options granted pursuant to the Management Shareholder
Agreement. See "Certain Relationships and Related Transactions--Management
Shareholder Agreements--Options."
(k) Represents 12,096 shares held directly and 2,661 shares issuable upon
exercise of options granted pursuant to the Management Shareholder
Agreement. See "Certain Relationships and Related Transactions--Management
Shareholder Agreements--Options."
(l) Represents 17,741 shares issuable upon exercise of options to be granted
pursuant to Mr. Caulo's consulting agreement with WRC Media. See "Certain
Relationships and Related Party Transactions--Other Transactions."
(m) Represents 10,752 shares held directly and 2,366 shares issuable upon
exercise of options granted pursuant to the Management Shareholder
Agreement. See "Certain Relationships and Related Transactions--Management
Shareholder Agreements--Options."
(n) Represents 8,064 shares held directly and 1,774 shares issuable upon
exercise of options granted pursuant to the Management Shareholder
Agreement. See "Certain Relationships and Related Transactions--Management
Shareholder Agreement--Options."
(o) Represents 4,032 shares held directly and 887 shares issuable upon exercise
of options granted pursuant to the Management Shareholder Agreement. See
"Certain Relationships and Related Transactions--Management Shareholder
Agreement--Options."
(p) Represents 538 shares held directly and 118 shares issuable upon exercise of
options granted pursuant to the Management Shareholder Agreement. See
"Certain Relationships and Related Transactions--Management Shareholder
Agreement--Options."
(q) Represents 1,075 shares held directly and 237 shares issuable upon exercise
of options granted pursuant to the Management Shareholder Agreement. See
"Certain Relationships and Related Transactions--Management Shareholder
Agreement--Options."
153
BENEFICIAL OWNERSHIP OF WEEKLY READER COMMON STOCK
The following table lists, as of the date of this prospectus, information
known to us regarding the beneficial ownership of Weekly Reader common stock,
which consists of Weekly Reader's Class A and Class B non-voting common stock
and Weekly Reader voting common stock, by:
- each person known by Weekly Reader to be the beneficial owner of more than
5% of the outstanding Weekly Reader common stock;
- each of the directors and the executive officers listed pursuant to
"Management--Executive Compensation;" and
- all directors and the executive officers listed pursuant to
"Management--Executive Compensation," as a group.
As of the date of this prospectus, no shares of Weekly Reader's class A and
class B non-voting common stock are outstanding.
As of the date of this prospectus, the total number of outstanding shares of
Weekly Reader voting common stock was 2,830,000. Except as otherwise noted, the
persons named in the table have sole voting and investment power with respect to
all shares shown as beneficially owned by them. The information concerning
beneficial ownership is based on statements furnished to us by the beneficial
owners and assumes that 2,830,000 shares of voting common stock have been issued
and are outstanding.
WEEKLY READER VOTING COMMON STOCK
BENEFICIAL OWNERSHIP
----------------------------
NAME AND ADDRESS SHARES PERCENT OF CLASS
- ---------------- --------- ----------------
WRC Media
c/o Ripplewood Holdings L.L.C.
1 Rockefeller Plaza
32nd Floor
New York, NY 10020........................................ 2,685,670 94.9%
PRIMEDIA, Inc.
745 Fifth Avenue
New York, NY 10151........................................ 144,330 5.1%
DLJ Merchant Banking Partners II, L.P. and affiliates (a)... 310,109 9.9%
c/o DLJ Merchant Banking Partners
277 Park Avenue
New York, NY 10172........................................
All directors and the executive officers listed pursuant to
"Management--Executive Compensation," as a group.......... 0 *
- ------------------------
* Represents holdings of less than 1%.
(a) Represents ownership by DLJ Merchant Banking Partners II, L.P. of 159,828
warrants to purchase Weekly Reader common stock; ownership by DLJ Merchant
Banking Partners II-A, L.P of 6,365 warrants to purchase Weekly Reader
common stock; ownership by DLJ Offshore Partners II, C.V. of 7,860 warrants
to purchase Weekly Reader common stock; ownership by DLJ Diversified
Partners, L.P. of 9,344 warrants to purchase Weekly Reader common stock;
ownership by DLJ Diversified Partners-A, L.P. of 3,470 warrants to purchase
Weekly Reader common stock;
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ownership by DLJMB Funding II, Inc. of 88,988 warrants to purchase Weekly
Reader common stock; ownership by DLJ Millennium Partners, L.P. of 2,584
warrants to purchase Weekly Reader common stock; ownership by DLJ Millennium
Partners-A, L.P. of 504 warrants to purchase Weekly Reader common stock;
ownership by DLJ EAB Partners, L.P. of 718 warrants to purchase Weekly
Reader common stock; ownership by DLJ ESC II, L.P. of 30,140 warrants to
purchase Weekly Reader common stock; ownership by DLJ First ESC, L.P. of 308
warrants to purchase Weekly Reader common stock. Because the various funds
are under common control, each fund may be deemed to beneficially own the
shares underlying the warrants held by all the other funds.
BENEFICIAL OWNERSHIP OF COMPASSLEARNING COMMON STOCK
The following table lists, as of the date of this prospectus, information
known to us regarding the beneficial ownership of CompassLearning common stock
by:
- each person known by WRC Media to be the beneficial owner of more than 5%
of the outstanding WRC Media common stock;
- each of the directors and the executive officers listed pursuant to
"Management--Executive Compensation," and
- all directors and executive officers listed pursuant to
"Management--Executive Compensation," as a group.
As of the date of this prospectus, the total number of outstanding shares of
CompassLearning common stock was 10,000. Except as otherwise noted, the persons
named in the table have sole voting and investment power with respect to all
shares shown as beneficially owned by them. The information concerning
beneficial ownership is based on statements furnished to us by the beneficial
owners and assumes that 10,000 shares of common stock have been issued and are
outstanding.
COMPASSLEARNING COMMON STOCK
BENEFICIAL OWNERSHIP
---------------------------
NAME AND ADDRESS SHARES PERCENT OF CLASS
- ---------------- -------- ----------------
WRC Media
c/o Ripplewood Holdings L.L.C.
1 Rockefeller Plaza
32nd Floor
New York, NY 10020........................................ 10,000 100%
DLJ Merchant Banking Partners II, L.P. and affiliates (a)
c/o DLJ Merchant Banking Partners
277 Park Avenue
New York, NY 10172........................................ 1,098 9.9%
All directors and the executive officers listed pursuant to
"Management--Executive Compensation," as a group.......... 0 *
- ------------------------
* Represents holdings of less than 1%.
(a) Represents ownership by DLJ Merchant Banking Partners II, L.P. of 566
warrants to purchase CompassLearning common stock; ownership by DLJ Merchant
Banking Partners II-A, L.P of 23 warrants to purchase CompassLearning common
stock; ownership by DLJ Offshore Partners II, C.V. of 28 warrants to
purchase CompassLearning common stock; ownership by DLJ Diversified
Partners, L.P. of 33 warrants to purchase CompassLearning common stock;
ownership by DLJ
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Diversified Partners-A, L.P. of 12 warrants to purchase CompassLearning
common stock; ownership by DLJMB Funding II, Inc. of 314 warrants to
purchase CompassLearning common stock; ownership by DLJ Millennium Partners,
L.P. of 9 warrants to purchase CompassLearning common stock; ownership by
DLJ Millennium Partners-A, L.P. of 2 warrants to purchase CompassLearning
common stock; ownership by DLJ EAB Partners, L.P. of 3 warrants to purchase
CompassLearning common stock; ownership by DLJ ESC II, L.P. of 107 warrants
to purchase CompassLearning common stock; ownership by DLJ First ESC, L.P.
of 1 warrant to purchase CompassLearning common stock. Because the various
funds are under common control, each fund may be deemed to beneficially own
the shares underlying the warrants held by all the other funds.
PRIMEDIA SHAREHOLDER AGREEMENT
WRC Media owns 2,685,070 shares, or 94.9% of the voting common stock of
Weekly Reader. In connection with the consummation of the transactions described
under "Transactions," WRC Media, PRIMEDIA and Weekly Reader entered into a
shareholder agreement relating to registration rights, transfers of Weekly
Reader voting common stock and other matters. The PRIMEDIA shareholder agreement
will terminate (other than with respect to the demand registration rights
described below) upon an initial public offering of the Weekly Reader voting
common stock or WRC Media common stock. The following summary of the material
provisions of the PRIMEDIA shareholder agreement is qualified in its entirety by
reference to the PRIMEDIA shareholder agreement.
TRANSFER RESTRICTIONS. The PRIMEDIA shareholder agreement restricts
PRIMEDIA's right to transfer Weekly Reader voting common stock held by PRIMEDIA
without the prior written consent of the board of directors of Weekly Reader to
any person other than a wholly-owned subsidiary of PRIMEDIA.
REGISTRATION RIGHTS. Pursuant to the PRIMEDIA shareholder agreement, after
the occurrence of an initial public offering of Weekly Reader voting common
stock, PRIMEDIA will have one demand registration right to require Weekly Reader
to register the Weekly Reader voting common stock held by PRIMEDIA under the
Securities Act of 1933. In addition, PRIMEDIA will have "piggyback" registration
rights on a proportional basis in any public offering that includes shares of
Weekly Reader voting common stock owned by WRC Media. Weekly Reader will pay
certain expenses related to registration, including, without limitation, filing
fees and the fees and expenses of counsel for PRIMEDIA, and will provide
customary indemnities in connection with such registration.
TAG-ALONG RIGHTS. The PRIMEDIA shareholder agreement provides that, if WRC
Media determines to sell all or any portion in excess of 35% of its Weekly
Reader voting common stock to any third party other than a permitted transferee
or that EAC III determines to sell all or any portion in excess of 35% of its
WRC Media common stock to any third party other than a permitted transferee,
subject to customary exceptions, PRIMEDIA will have the right to participate
proportionately in such transactions as a seller on the same terms and
conditions as apply to WRC Media's sale of Weekly Reader voting common stock or,
in the case of EAC III's sale of WRC Media common stock, at a price to be
determined in good faith by the board of directors of Weekly Reader, which will,
as nearly as reasonably practicable, provide PRIMEDIA economic treatment
comparable to that which it would have received as a holder of WRC Media common
stock. With respect to WRC Media and EAC III, a permitted transferee is an
affiliate, shareholder, partner, member or employee of Ripplewood Partners, L.P.
or an employee of Weekly Reader. The PRIMEDIA shareholder agreement also
provides that, in the event that an initial public offering of WRC Media common
stock shall occur, PRIMEDIA will have the right to exchange all or any portion
of its Weekly Reader voting common stock for shares of WRC Media common stock
having an equivalent fair market value.
DRAG-ALONG RIGHTS. In the event that WRC Media determines to sell all or
any portion in excess of 35% of its Weekly Reader voting common stock to any
third party or that EAC III determines to
156
sell all or any portion in excess of 35% of its WRC Media common stock to any
third party, subject to customary exceptions, WRC Media will have the right to
require PRIMEDIA to sell its shares of Weekly Reader voting common stock in such
transaction, all at the same price per share and on the same terms and
conditions as apply to the sale of Weekly Reader voting common stock held by WRC
Media or, in the case of EAC III's sale of WRC Media common stock, at a price to
be determined in good faith by the board of directors of Weekly Reader, which
will, as nearly as reasonably practicable, provide PRIMEDIA economic treatment
comparable to that which it would have received as a holder of WRC Media common
stock.
STOCKHOLDERS AGREEMENT
On November 17, 1999, WRC Media and EAC III entered into a stockholders
agreement with SGC Partners II LLC as purchaser concerning the relative rights
and relationships of SGC Partners II LLC and the other parties to the agreement
with respect to WRC Media common stock. The following summary of the material
provisions of this stockholders agreement is qualified in its entirety by
reference to the stockholders agreement with SGC Partners II LLC.
TAG-ALONG RIGHTS. The stockholders agreement with SGC Partners II LLC as
purchaser provides that if EAC III determines to sell all or any portion in
excess of 20% of its WRC Media common stock or Ripplewood Partners, L.P.
determines to sell in excess of 10% of its membership interests in EAC III to
any third party, subject to certain exceptions, SGC Partners II LLC will have
the right to participate proportionately in such transactions as a seller on the
same terms and conditions as apply to EAC III's sale of WRC Media common stock.
The stockholders agreement also provides that if Ripplewood Partners, L.P.
determines to sell its membership interests in EAC III, SGC Partners II LLC will
have the right to participate at a price to be determined in good faith by the
Board of Directors of WRC Media which will, as nearly as reasonably practicable,
provide SGC Partners II LLC economic treatment comparable to that which it would
have received had the sale been of WRC Media common stock in lieu of membership
interests in EAC III.
DRAG-ALONG RIGHTS. This stockholders agreement with SGC Partners II LLC as
purchaser provides that, in the event that EAC III determines to enter into an
agreement for the sale of 90% or more of the WRC Media common stock it holds in
certain qualifying transactions as described in this stockholders agreement, it
will have the right to require SGC Partners II LLC to sell the same percentage
of its WRC Media common stock in such transaction, at the same price per share
and on the same terms and conditions as apply to EAC III's sale of WRC Media
common stock.
INFORMATION AND OBSERVATION RIGHTS. Pursuant to the agreement, WRC Media
will be obligated to provide certain financial and business information to SGC
Partners II LLC, such as quarterly and annual financial statements, filings made
with the Securities and Exchange Commission and other reports or information
that may be reasonably requested by SGC Partners II LLC.
CORPORATE GOVERNANCE. Pursuant to the agreement, SGC Partners II LLC will
be entitled to appoint one person to the board of directors of WRC Media, or two
persons, if the board of directors consists of ten or more directors, as long as
SGC Partners II LLC continues to hold at least 50% of the WRC Media common stock
it purchased in connection with the recapitalization of PRIMEDIA's Supplemental
Education Group and the acquisition of CompassLearning.
TRANSFER RIGHTS AND RESTRICTIONS; RIGHT OF FIRST OFFER. Other than in a
public offering, WRC Media will not issue any shares of WRC Media common stock
to any person, unless such person acknowledges that it has notice of the
provisions of this agreement. No shares of WRC Media common stock shall be
transferred by EAC III or SGC Partners II LLC to any third party unless such
third party assumes in writing all of the obligations of its transferor under
the stockholders agreement. In addition, in the
157
event that SGC Partners II LLC wishes to transfer its shares of WRC Media common
stock to any third party (other than one or more of its affiliates), it must
first offer to sell such shares to EAC III.
REGISTRATION RIGHTS. Pursuant to this stockholders agreement with SGC
Partners II LLC as purchaser, both SGC Partners II LLC and EAC III will be
entitled to require WRC Media to effect registration of its WRC Media common
stock under the Securities Act of 1933. SGC Partners II LLC will be entitled to
make one such demand registration and EAC III will be entitled to make any
number of such demand registrations after the earlier to occur of an initial
public offering of WRC Media common stock or July 13, 2004. Notwithstanding the
foregoing, WRC Media will not be required to effect a registration unless the
gross aggregate offering price of all securities to be included in such
registration exceeds $30.0 million or the requested registration includes all
the registrable securities of SGC Partners II L.L.C. In addition, if WRC Media
proposes to register any WRC Media common stock for sale in a public offering,
including an initial public offering, each of SGC Partners II LLC and EAC III
will have "piggy-back" registration rights with respect to the WRC Media common
stock it owns. WRC Media will bear the costs and expenses of registration,
including the costs and expenses of one counsel for SGC Partners II LLC or EAC
III, and will provide customary indemnities in connection therewith.
SENIOR PREFERRED STOCKHOLDERS AGREEMENT
On November 17, 1999, WRC Media, CompassLearning, Weekly Reader, the senior
preferred stockholders, SGC Partners II LLC (only with respect to certain
provisions, including voting for the nominee of the DLJMB Investors and their
permitted transferees as described below and related matters and certain
transfer restrictions) and EAC III entered into a stockholders agreement
concerning the relative rights and relationships of the senior preferred
stockholders and the other parties to the agreement with respect to the senior
preferred stock and the Preferred Stockholder Warrants. The following summary of
the material provisions of the senior preferred stockholders agreement is
qualified in its entirety by reference to the senior preferred stockholders
agreement.
CORPORATE GOVERNANCE. The DLJMB Investors and their permitted transferees
have the right, for so long as any of them owns senior preferred stock,
Preferred Stockholders Warrants or any securities of WRC Media, Weekly Reader or
CompassLearning into which such senior preferred stock or Preferred Stockholder
Warrants are convertible or exchangeable, to nominate one director to the boards
of directors of WRC Media, Weekly Reader and CompassLearning. In addition, EAC
III and SGC Partners II LLC are required to vote their shares of WRC Media
common stock, and EAC III will cause WRC Media to vote its shares of Weekly
Reader voting common stock and CompassLearning's voting common stock, in favor
of the election of such nominee designated by the DLJMB Investors and their
permitted transferees.
TRANSFER RIGHTS AND RESTRICTIONS. The senior preferred stockholders
agreement restricts the right of the senior preferred stockholders to transfer
the senior preferred stock and the Preferred Stockholder Warrants to certain
adverse parties and require transferees to become party to and be bound by the
senior preferred stockholders agreement to the same extent as the transferor.
Transfers of the senior preferred stock and the Preferred Stockholder Warrants
and any other securities of WRC Media, Weekly Reader or CompassLearning into
which the senior preferred stock and Preferred Stockholder Warrants are
convertible or exchangeable, are otherwise unrestricted, subject to compliance
with the securities laws.
TAG-ALONG AND DRAG-ALONG RIGHTS. The senior preferred stockholders
agreement provides for certain "tag-along" and "drag-along" rights in certain
situations, including in connection with certain sales of the capital stock of
WRC Media, Weekly Reader or CompassLearning.
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REGISTRATION RIGHTS. Pursuant to the senior preferred stockholders
agreement, the DLJMB Investors and their permitted transferees are entitled to
require WRC Media, Weekly Reader or CompassLearning, as applicable, to register
under the Securities Act of 1933:
- the old senior preferred stock and any other securities into which such
old senior preferred stock is exchangeable on two separate occasions; and
- on two separate occasions, the new senior preferred stock, the Preferred
Stockholder Warrants and the shares of Weekly Reader's Class A and
Class B non-voting common stock and Weekly Reader voting common stock or
the common stock of CompassLearning, into which such Preferred Stockholder
Warrants are exchangeable.
In addition, the senior preferred stockholders are entitled to "piggy back"
registration rights with respect to the old senior preferred stock, the new
senior preferred stock, Preferred Stockholder Warrants and any securities of WRC
Media, Weekly Reader or CompassLearning into which such old senior preferred
stock, new senior preferred stock or Preferred Stockholder Warrants are
convertible or exchangeable. WRC Media, Weekly Reader or CompassLearning, as
applicable, will bear the costs and expenses of registration, including the
costs and expenses of one counsel for the DLJMB Investors, and will provide
customary indemnities in connection therewith.
See "Description of Capital Stock."
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DESCRIPTION OF SENIOR CREDIT FACILITIES
This description is qualified in its entirety by reference to the agreements
which define the principal terms and conditions of the senior credit facilities.
As part of the financing for the recapitalization and the related
transactions, Weekly Reader and CompassLearning obtained the senior credit
facilities pursuant to a credit agreement among WRC Media as parent and
guarantor, Weekly Reader and CompassLearning as borrowers, the other direct and
indirect domestic subsidiaries of WRC Media as guarantors, DLJ Capital Funding
as the lead arranger, sole book manager and syndication agent, Bank of America,
N.A. as administrative agent, and a syndicate of banks and other financial
institutions as the lenders. The senior credit facilities are comprised of
$30.0 million revolving credit facility (which includes a letter of credit
subfacility) maturing in six years, the $31.0 million term loan A facility
maturing in six years and the $100.0 million term loan B facility maturing in
seven years, with such term loan A facility and the term loan B facility to
amortize in quarterly installments beginning on December 31, 1999 based upon the
annual amounts shown below:
TERM LOAN A TERM LOAN B
FACILITY FACILITY
(IN THOUSANDS) (IN THOUSANDS)
TWELVE MONTHS ENDING SEPTEMBER 30 -------------- --------------
2000.................................................. $ 1,550 $ 1,000
2001.................................................. 3,100 1,000
2002.................................................. 4,650 1,000
2003.................................................. 6,200 1,000
2004.................................................. 7,750 1,000
2005.................................................. 6,200 1,000
2006.................................................. -- 75,200
FINAL PAYMENT
November 2005......................................... 1,550 --
November 2006......................................... -- 18,800
------- --------
$31,000 $100,000
Loans under the senior credit facilities bear interest at a rate per annum
equal to:
(1) for the revolving credit facility and the term loan A facility, the LIBO
rate as defined in the credit agreement, plus 3.25% or the alternate base
rate as defined in the credit agreement, plus 2.25% (subject to
performance-based step downs); and
(2) for the term loan B facility, the LIBO rate plus 4.00% or the alternate
base rate plus 3.00%.
In addition to paying interest on outstanding loans under the senior credit
facilities, we are required to pay a commitment fee to the lenders under the
revolving credit facility in respect of the unused commitments thereunder at a
rate of 0.5% per annum (subject to performance-based step downs).
The senior credit facilities are subject to mandatory prepayments with:
- the proceeds of the incurrence of certain indebtedness;
- the proceeds of certain asset sales or other dispositions (including as a
result of casualty or condemnation);
- the proceeds of issuances of certain equity offerings of WRC Media, Weekly
Reader, CompassLearning and their respective subsidiaries; and
- annually beginning in 2000, 50% of the borrowers' excess cash flow (as
defined in the credit agreement) from the prior year.
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Weekly Reader's and CompassLearning's obligations under the senior credit
facilities are guaranteed by WRC Media and the borrowers' domestic subsidiaries.
The senior credit facilities are secured by a first priority security interest
in substantially all assets of WRC Media, the borrowers and their domestic
subsidiaries, including all of the capital stock (other than certain warrants
and warrant shares issued in connection with them and certain shares of
preferred and common stock) of the borrowers and their domestic subsidiaries,
and up to 65% of the capital stock of foreign subsidiaries that are direct
subsidiaries of their domestic subsidiaries.
The senior credit facilities contain covenants that, among other things,
restrict the ability of WRC Media, the borrowers and their subsidiaries to:
- borrow money or incur liens;
- guarantee indebtedness of others;
- pay dividends or make other distributions;
- make investments or acquisitions;
- make capital expenditures;
- use assets as security in other transactions;
- sell certain assets or merge with or into other companies;
- enter into sale and leaseback transactions; and
- enter into transactions with affiliates.
The senior credit facilities also contain financial covenants, including a
leverage ratio and a fixed charge coverage ratio, and customary events of
default.
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DESCRIPTION OF CAPITAL STOCK
Each of the following summaries of the capital stock of WRC Media, Weekly
Reader and CompassLearning and related agreements is qualified in its entirety
by reference to the instruments and agreements to which each summary relates.
Copies of such instruments and agreements are available upon request to us.
CAPITAL STOCK OF WRC MEDIA
WRC MEDIA COMMON STOCK
GENERAL. WRC Media has authorized the issuance of an aggregate of
20,000,000 shares of voting common stock, par value $.01 per share, of which
6,855,853 is outstanding, excluding shares that will be reserved for issuance of
options. In connection with the transactions described under "Transactions," WRC
Media granted to certain members of management, including, but not limited to,
persons listed under "Ownership of Stock," options to purchase 301,724 shares of
WRC Media common stock. The following is a summary of certain of the rights and
privileges pertaining to the WRC Media common stock. For a full description of
WRC Media's capital stock, reference is made to WRC Media's Certificate of
Incorporation then in effect, a copy of which is available from WRC Media.
VOTING RIGHTS. The holders of WRC Media common stock are entitled to one
vote per share on all matters submitted for action by the shareholders. There is
no provision for cumulative voting with respect to the election of directors.
Accordingly, the holders of more than 50% of the shares of WRC Media common
stock can, if they choose to do so, elect the board of directors of WRC Media
and determine most matters on which stockholders are entitled to vote. See
"Ownership of Stock."
DIVIDEND RIGHTS. Holders of the WRC Media common stock are entitled to
share equally, share for share, if dividends are declared on WRC Media common
stock, whether payable in cash, property or securities of WRC Media.
LIQUIDATION RIGHTS. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of WRC Media, after payment has been made
from the funds available therefor to the holders of the senior preferred stock,
if any, for the full amount to which they are entitled, the holders of the
shares of WRC Media common stock are entitled to share equally, share for share,
in the assets available for distribution. Holders of common stock issued as part
of the units issued on November 17, 1999 have no conversion (except as provided
in the shareholders agreement relating to such units), redemption or preemptive
rights.
WRC MEDIA PREFERRED STOCK
WRC Media's certificate of incorporation allows the issuance, without
stockholder approval, of preferred stock having rights senior to those of our
common stock. The board of directors of WRC Media is authorized, without further
stockholder approval, to issue up to 20,000,000 shares of preferred stock in one
or more series and to fix and designate the rights, preferences, privileges and
restrictions of the preferred stock, including:
- dividend rights;
- conversion rights;
- voting rights;
- terms of redemption; and
- liquidation preferences.
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The board of directors of WRC Media may fix the number of shares
constituting any series and the designations of these series. See "Description
of New Senior Preferred Stock."
CAPITAL STOCK OF WEEKLY READER
WEEKLY READER COMMON STOCK
GENERAL. Weekly Reader has authorized the issuance of:
- 20,000,000 shares of preferred stock; and
- 22,000,000 shares of Weekly Reader common stock, par value $0.01 per
share, which consist of:
-- 20,000,000 shares of Weekly Reader voting common stock,
-- 1,000,000 shares of Weekly Reader Class A non-voting common stock, and
-- 1,000,000 shares of Weekly Reader Class B non-voting common stock.
Except with regard to voting rights, the three designations of Weekly Reader
common stock have the same rights, powers and limitations. The Weekly Reader
Class A non-voting common stock will automatically convert into Weekly Reader
voting common stock upon an initial public offering of Weekly Reader. The Weekly
Reader Class B non-voting common stock shall automatically convert upon transfer
to any party other than a DLJMB Investor or any affiliate thereof.
VOTING RIGHTS. The holders of Weekly Reader voting common stock are
entitled to one vote per share on all matters submitted for action by the
shareholders. There is no provision for cumulative voting with respect to the
election of directors. Accordingly, the holders of more than 50% of the shares
of Weekly Reader voting common stock can, if they choose to do so, elect the
board of directors of Weekly Reader and determine most matters on which
stockholders are entitled to vote. See "Ownership of Stock."
DIVIDEND RIGHTS. Holders of the Weekly Reader common stock are entitled to
share equally, share for share, if dividends are declared on Weekly Reader
common stock, whether payable in cash, property or securities of Weekly Reader.
LIQUIDATION RIGHTS. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of Weekly Reader, after payment has been
made from the funds available therefor to the holders of Weekly Reader's
preferred stock, if any, for the full amount to which they are entitled, the
holders of the shares of Weekly Reader common stock are entitled to share
equally, share for share, in the assets available for distribution. Holders of
Weekly Reader common stock have no conversion, redemption or preemptive rights.
WEEKLY READER PREFERRED STOCKHOLDER WARRANTS
In connection with the sale of the old senior preferred stock to the senior
preferred stockholders, Weekly Reader issued to the senior preferred
stockholders Preferred Stockholder Warrants to acquire 422,874 shares of Weekly
Reader voting common stock, representing 13% of its common stock on a fully
diluted basis, at an exercise price of $0.01 per share; PROVIDED, HOWEVER, for
so long as any such warrants are held by any of the DLJMB Investors or any of
their affiliates, they shall be warrants to acquire Weekly Reader Class B
non-voting common stock. All such warrants that are held by the DLJMB Investors
or any of their affiliates shall automatically convert into warrants to acquire,
and all shares of Weekly Reader Class B non-voting common stock held by the
DLJMB Investors or any of their affiliates shall automatically convert into
shares of, Weekly Reader voting common stock upon their transfer of such
warrants or common stock to a party other than a DLJMB Investor or any affiliate
thereof. The Preferred Stockholder Warrants issued by Weekly Reader are not
exercisable after
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the twelfth anniversary of the issuance date and contain antidilution
provisions. The Preferred Stockholder Warrants issued by Weekly Reader also
include the right to share ratably in stock splits, stock dividends, mergers and
rights offerings to existing holders of Weekly Reader common stock, and are
freely transferable, subject to certain customary restrictions. See "Ownership
of Stock--Senior Preferred Stockholders Agreement."
COMPASSLEARNING PREFERRED STOCKHOLDER WARRANTS
In connection with the sale of the old senior preferred stock to the senior
preferred stockholders, CompassLearning issued to the WRC Media senior preferred
stockholders Preferred Stockholder Warrants to acquire 1,495 shares of
CompassLearning common stock representing 13% of its common stock on a fully
diluted basis, at an exercise price of $0.01 per share. The Preferred
Stockholder Warrants issued by CompassLearning are not exercisable after the
twelfth anniversary of the issuance date and contain antidilution provisions.
The Preferred Stockholder Warrants issued by CompassLearning also include the
right to share ratably in stock splits, stock dividends, mergers and rights
offerings to existing holders of CompassLearning common stock, and is freely
transferable, subject to certain customary restrictions. See "Ownership of
Stock--Senior Preferred Stockholders Agreement."
EQUITY SPONSORS
As part of the transactions described under "Transactions", funds managed by
an investor group led by Ripplewood Partners, L.P. and including SGC Partners II
LLC, Co-Investment Partners, L.P., The Northwestern Mutual Life Insurance
Company, Jackson National Life Insurance Company, DLJ Merchant Banking Partners
II, L.P. and certain other investors, together with Company management, will
have invested, directly and indirectly, an aggregate of approximately
$198.7 million in common and preferred equity of WRC Media to finance the
transactions described under "Transactions." Ripplewood Partners, L.P. is
managed by Ripplewood Holdings L.L.C., its general partner, which was founded in
1995. Ripplewood Partners, L.P. makes direct investments in select leveraged
acquisitions, which provide opportunities for significant growth, consolidation
and high rates of return. Together with its industrial partners, Ripplewood
Partners, L.P. typically buys platform companies as core holdings, then pursues
predefined strategies to support the operating management and enhance the value
of these businesses. Ripplewood Holdings L.L.C. manages approximately
$430 million of committed capital and currently has seven "partnerships" in the
automotive retail (Asbury Automotive Group), food manufacturing (Lighthouse
Holdings), technology (Leeward Technology Group), industrial manufacturing
(McClintock Industries), chemicals (Resolute Partners), financial services (New
LTCB Partners) and media (WRC Media) industries. WRC Media is Ripplewood
Holdings L.L.C.'s partnership with Martin E. Kenney, Jr., an experienced print
and electronic media executive. Ripplewood Holdings L.L.C. will provide certain
management services to us pursuant to the management agreement described under
"Certain Relationships and Related Transactions." Certain Co-investors
separately manage several private equity funds which aggregate over
$6.5 billion of committed capital.
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DESCRIPTION OF NEW NOTES
Unless otherwise specified, you can find the definitions of capitalized
terms used in this description under "--Definitions." In this description, the
word "Issuers" refers only to WRC Media, Weekly Reader and CompassLearning
collectively, and not to any of their respective subsidiaries. For purposes of
this section, WRC Media refers only to WRC Media and not to any of its
subsidiaries.
The Issuers issued the old notes and will issue the new notes as a joint and
several obligations under the notes indenture among the Issuers, the Note
Guarantors and Bankers Trust Company as trustee (the "Trustee"), which has been
filed as an exhibit to the registration statement of which this prospectus forms
a part. The terms of the new notes will be substantially identical to the terms
of the old notes, except that the new notes will not contain terms with respect
to transfer restrictions and will not require the Issuers to consummate a
registered exchange offer. Except as described in the previous sentence, the new
notes will evidence the same debt as the old notes and will be entitled to the
same benefits under the notes indenture as the old notes. Accordingly, unless
specifically stated to the contrary, the following description applies equally
to the old notes and the new notes. The terms of the notes include those stated
in the notes indenture and those made part of the notes indenture by reference
to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
notes are subject to all such terms, and prospective investors are referred to
the notes indenture and the Trust Indenture Act for a statement thereof.
The following description is a summary of the material provisions of the
notes indenture. It does not restate the agreement in its entirety. We urge you
to read the notes indenture because it, and not this description, define your
rights as holders of the new notes. Copies of the notes indenture are available
as described under "Where You Can Find More Information."
BRIEF DESCRIPTION OF THE NOTES AND THE NOTE GUARANTEES
THE NOTES
The notes:
- are general unsecured obligations of the Issuers;
- are subordinated in right of payment to all existing and future Senior
Debt of the Issuers;
- are equal in right of payment with any future senior subordinated
Indebtedness of the Issuers;
- are senior in right of payment to any future subordinated Indebtedness of
the Issuers;
- are effectively subordinated to all existing and future secured
Indebtedness of the Issuers to the extent of the value of the assets
securing such Indebtedness; and
- are unconditionally guaranteed by the Note Guarantors.
THE NOTE GUARANTEES
The notes are guaranteed by all existing and future Domestic Subsidiaries of
WRC Media, other than Weekly Reader and CompassLearning.
Each Note Guarantee of the notes:
- is a general unsecured obligation of the Note Guarantor;
- is subordinated in right of payment to all existing and future Senior Debt
of the Note Guarantor;
- is equal in right of payment with any future senior subordinated
Indebtedness of the Note Guarantor;
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- is effectively subordinated to all existing and future secured
Indebtedness of such Note Guarantor to the extent of the value of the
assets securing such Indebtedness; and
- is senior in right of payment to any future subordinated Indebtedness of
the Note Guarantor.
Assuming we had completed the offering of the old notes and the other
transactions described under "Transactions" and applied the proceeds as
intended, as of September 30, 1999, the Issuers and the Note Guarantors would
have had total Senior Debt of approximately $131.0 million. As indicated above
and as discussed in detail below under the subheading "--Subordination,"
payments on the notes and the Note Guarantees will be subordinated to the
payment of Senior Debt. The notes indenture will permit us and the Note
Guarantors to incur additional Senior Debt.
As of the date of the notes indenture, all existing Subsidiaries of WRC
Media became "Restricted Subsidiaries." However, under the circumstances
described below under the subheading "--Material Covenants--Designation of
Restricted and Unrestricted Subsidiaries," WRC Media will be permitted to
designate certain of its subsidiaries as "Unrestricted Subsidiaries." The
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants in the notes indenture. The Unrestricted Subsidiaries will not
guarantee the notes.
PRINCIPAL, MATURITY AND INTEREST
The notes indenture provides for the issuance by the Issuers of notes with a
maximum aggregate principal amount of $250.0 million, of which $152.0 million
was issued pursuant to the offering of the old notes. The Issuers may issue
additional notes (the "Additional Notes") from time to time. Any offering of
Additional Notes is subject to the covenant described below under the caption
"--Material Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock." The old notes, the new notes and any Additional Notes subsequently
issued under the notes indenture would be treated as a single class for all
purposes under the notes indenture, including, without limitation, waivers,
amendments, redemptions and offers to purchase. The Issuers issued old notes in
denominations of $1,000 and integral multiples of $1,000. The new notes will
also be issued in denominations of $1,000 and integral multiples of $1,000. The
notes will mature on November 15, 2009.
Interest on the notes is payable semi-annually in arrears on November 15 and
May 15, commencing on May 15, 2000. The Issuers will make each interest payment
to the Holders of record on the immediately preceding November 1 and May 1.
Interest on the notes accrues from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a Holder has given wire transfer instructions to the Issuers, the Issuers
will pay all principal, interest and premium and Liquidated Damages, if any, on
that Holder's notes in accordance with those instructions. All other payments on
notes will be made at the office or agency of the Paying Agent (as defined in
the notes indenture) and Registrar (as defined in the notes indenture) within
the City and State of New York unless the Issuers elect to make interest
payments by check mailed to the Holders at their addresses set forth in the
register of Holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The Trustee will initially act as Paying Agent and Registrar. The Issuers
may change the Paying Agent or Registrar without prior notice to the Holders,
and WRC Media or any of its Restricted Subsidiaries may act as Paying Agent or
Registrar.
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TRANSFER AND EXCHANGE
A Holder may transfer or exchange notes in accordance with the notes
indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents, and the
Issuers may require a Holder to pay any taxes and fees required by law or
permitted by the notes indenture. The Issuers are not required to transfer or
exchange any note selected for redemption. Also, the Issuers are not required to
transfer or exchange any note for a period of 15 days before a selection of
notes to be redeemed.
The registered Holder of a note will be treated as the owner of it for all
purposes.
NOTE GUARANTEES
The Note Guarantors will jointly and severally guarantee the Issuers'
obligations under the notes. Each Note Guarantee will be subordinated to the
prior payment in full in cash or cash equivalents of all Senior Debt of that
Note Guarantor, including that Note Guarantor's Guarantee of the Credit
Agreement, to the same extent that the notes are subordinated to the Senior Debt
of the Issuers. The obligations of each Note Guarantor under its Note Guarantee
will be limited as necessary to prevent that Note Guarantee from constituting a
fraudulent conveyance under applicable law. See "Risk Factors--Fraudulent
Conveyance Matters."
If a Note Guarantee were to be rendered voidable, it could be subordinated
to all other indebtedness (including Guarantees and contingent liabilities) of
the applicable guarantor, and, depending on the amount of such Indebtedness, a
Note Guarantor's liability in respect of its Note Guarantee could be rendered to
zero. Each Note Guarantor that makes a payment under its Note Guarantee will be
entitled to a contribution from each other Note Guarantor in an amount equal to
such Note Guarantor's pro rata portion of such payment based on the respective
net assets of all Note Guarantors at the time of such payment, as determined in
accordance with GAAP.
A Note Guarantor may not sell or otherwise dispose of all or substantially
all of its assets to, or consolidate with or merge with or into (whether or not
such Note Guarantor is the surviving Person), another Person, other than WRC
Media or another Note Guarantor, unless:
(1) immediately after giving effect to that transaction, no Default or Event
of Default exists; and
(2) either:
(a) the Person acquiring the property in any such sale or disposition or
the Person formed by or surviving any such consolidation or merger
- is a Domestic Subsidiary of WRC Media and assumes all the
obligations of that Note Guarantor under the notes indenture, its
Note Guarantee and the Registration Rights Agreement pursuant to a
supplemental indenture satisfactory to the Trustee, or
- is a Wholly Owned Restricted Subsidiary that is not a Domestic
Subsidiary; or
(b) the Net Proceeds of such sale or other disposition are applied in
accordance with the covenant described under "--Repurchase at the
Option of Holders--Asset Sales."
The Note Guarantee of a Note Guarantor will be released:
(1) in connection with any sale or other disposition of all or substantially
all of the assets of that Note Guarantor (including by way of merger or
consolidation) to a Person that is not (either before or after giving
effect to such transaction) a Restricted Subsidiary of WRC Media, if the
Note Guarantor applies the Net Proceeds of that sale or other disposition
in accordance with the covenant described under "--Repurchase at the
Option of Holders--Asset Sales;"
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(2) in connection with any sale of all of the Capital Stock of a Note
Guarantor to a Person that is not (either before or after giving effect
to such transaction) a Restricted Subsidiary of WRC Media, if no Default
or Event of Default has occurred and is continuing;
(3) if WRC Media properly designates any Restricted Subsidiary that is a
Note Guarantor as an Unrestricted Subsidiary; or
(4) with respect to any Note Guarantor, upon the release or discharge of all
Guarantees by such Note Guarantor, including all pledges of property or
assets securing and all direct and indirect credit support of, all other
Indebtedness of WRC Media and the Note Guarantors; PROVIDED that no
Default or Event of Default shall have occurred and be continuing.
See "--Repurchase at the Option of Holders--Asset Sales."
SUBORDINATION
The payment of Subordinated Note Obligations will be subordinated to the
prior payment in full in cash or cash equivalents of all Senior Debt of the
Issuers, including Senior Debt incurred after the date of the notes indenture.
However, payment from the money or the proceeds of U.S. government obligations
held in any defeasance trust described below under "--Legal Defeasance and
Covenant Defeasance" will not be subordinated to any Senior Debt or subject to
the restrictions described therein.
The holders of Senior Debt will be entitled to receive payment in full in
cash or cash equivalents of all Obligations due in respect of Senior Debt
(including interest after the commencement of any bankruptcy proceeding at the
rate specified in the applicable Senior Debt) before the Holders of notes will
be entitled to receive any payment with respect to the Subordinated Note
Obligations. Also, until all Obligations with respect to Senior Debt are paid in
full in cash or cash equivalents, any distribution to which the Holders of notes
would be entitled shall be made to the holders of Senior Debt (except that
Holders of notes may receive and retain Permitted Junior Securities and payments
made from the trust described under "--Legal Defeasance and Covenant
Defeasance"), in the event of any distribution to creditors of any Issuer:
(1) in a liquidation or dissolution of such Issuer;
(2) in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to such Issuer or its property;
(3) in an assignment for the benefit of creditors; or
(4) in any marshaling of such Issuer's assets and liabilities.
The Issuers also may not make any payment in respect of the notes (except in
Permitted Junior Securities or from the trust described under "--Legal
Defeasance and Covenant Defeasance") if:
(1) a default in the payment of the principal (including reimbursement
obligations in respect of letters of credit) of, premium, if any, or
interest on or commitment, letter of credit or administrative fees
relating to, Designated Senior Debt occurs and is continuing beyond any
applicable period of grace; or
(2) any other default occurs and is continuing on any series of Designated
Senior Debt that permits holders of that series of Designated Senior Debt
as to which that default relates to accelerate its maturity and the
Trustee receives a notice of such default (a "Payment Blockage Notice")
from the Issuers or the holders of any Designated Senior Debt.
Payments on the notes may and shall be resumed:
(1) in the case of a payment default, upon the date on which such default is
cured or waived; and
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(2) in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on which
the applicable Payment Blockage Notice is received, unless the maturity
of any Designated Senior Debt has been accelerated.
No new Payment Blockage Notice may be delivered unless and until 360 days
have elapsed since the delivery of the immediately prior Payment Blockage
Notice.
No nonpayment default that existed or was continuing on the date of delivery
of any Payment Blockage Notice to the Trustee shall be, or be made, the basis
for a subsequent Payment Blockage Notice unless such default shall have been
cured or waived for a period of not less than 90 days.
If the Trustee or any Holder of the notes receives a payment in respect of
the notes (except in Permitted Junior Securities or from the trust described
under "--Legal Defeasance and Covenant Defeasance") when the payment is
prohibited by these subordination provisions the Trustee or the Holder, as the
case may be, shall promptly turn over such payment to the holders of Senior Debt
or their proper representative. Until the Trustee or the Holder shall have so
turned over such payment, the Trustee or the Holder shall be deemed to have held
such payment in trust for the benefit of the holders of Senior Debt.
The Issuers and the Trustee must promptly notify holders of Senior Debt (or
their representative) if payment of the notes is accelerated because of an Event
of Default.
As a result of the subordination provisions described above, in the event of
a bankruptcy, liquidation or reorganization of any Issuer, Holders of notes may
recover less ratably than creditors of such Issuers who are holders of Senior
Debt. See "Risk Factors--Ranking of the Notes."
OPTIONAL REDEMPTION
At any time prior to November 15, 2002, the Issuers may on any one or more
occasions redeem up to 35% of the aggregate principal amount of notes
(calculated giving effect to any issuance of Additional Notes) issued under the
notes indenture at a redemption price of 112.75% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the
redemption date, with the net cash proceeds of one or more Equity Offerings;
PROVIDED that:
(1) at least 65% of the aggregate principal amount of notes (calculated
giving effect to any issuance of Additional Notes) issued under the notes
indenture remains outstanding immediately after the occurrence of such
redemption (excluding notes held by WRC Media and its Subsidiaries); and
(2) the redemption must occur within 45 days of the date of the closing of
such Equity Offering.
Except pursuant to the preceding paragraph, the notes will not be redeemable
at the Issuers' option prior to November 15, 2004.
On or after November 15, 2004, the Issuers may redeem all or a part of the
notes upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below plus
accrued and unpaid interest and Liquidated Damages, if any, thereon, to the
applicable redemption date, if redeemed during the twelve-month period beginning
on November 15 of the years indicated below:
YEAR PERCENTAGE
- ---- ----------
2004........................................................ 106.375%
2005........................................................ 104.250%
2006........................................................ 102.125%
2007 and thereafter......................................... 100.000%
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MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders," the
Issuers are not required to make mandatory redemption or sinking fund payments
with respect to the notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs, unless the Issuers have given notice of
redemption of the notes pursuant to the provisions described above under the
caption "--Optional Redemption," each Holder of notes will have the right to
require the Issuers to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of that Holder's notes pursuant to an offer (the
"Change of Control Offer") on the terms set forth in the notes indenture. In the
Change of Control Offer, the Issuers will offer a payment in cash (the "Change
of Control Payment") equal to 101% of the aggregate principal amount of notes
repurchased plus accrued and unpaid interest and Liquidated Damages, if any,
thereon, to the date of purchase (subject to the right of Holders of record on
the relevant record date to receive interest due on the relevant interest
payment date). Within thirty days following any Change of Control, the Issuers
will mail a notice to each Holder describing the transaction or transactions
that constitute the Change of Control and offering to repurchase notes on the
date specified in such notice (the "Change of Control Payment Date"). The Change
of Control Payment Date shall be no earlier than 30 days and no later than
60 days from the date such notice is mailed, pursuant to the procedures required
by the notes indenture and described in such notice. The Issuers will comply
with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the notes as a
result of a Change of Control. To the extent that the provisions of any
securities laws or regulations conflict with the Change of Control provisions of
the notes indenture, the Issuers will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations under
the Change of Control provisions of the notes indenture by virtue of such
conflict.
On the Change of Control Payment Date, the Issuers will, to the extent
lawful:
(1) accept for payment all notes or portions thereof properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the Change of Control
Payment in respect of all notes or portions thereof so tendered; and
(3) deliver or cause to be delivered to the Trustee for cancellation the
notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of notes or portions thereof being purchased
by the Issuers.
The Paying Agent will promptly mail to each Holder of notes so tendered the
Change of Control Payment for such notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a newly issued note equal in principal amount to any unpurchased portion of the
notes surrendered, if any; PROVIDED that each such newly issued note will be in
a principal amount of $1,000 or an integral multiple thereof.
Prior to complying with any of the provisions of this "Change of Control"
covenant, but in any event within 90 days following a Change of Control, the
Issuers will either repay all outstanding Senior Debt or obtain the requisite
consents, if any, under all agreements governing outstanding Senior Debt to
permit the repurchase of notes required by this covenant. The Issuers will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
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The provisions described above that require the Issuers to make a Change of
Control Offer following a Change of Control will be applicable regardless of
whether any other provisions of the notes indenture are applicable. Except as
described above with respect to a Change of Control, the notes indenture does
not contain provisions that permit the Holders of the notes to require that the
Issuers repurchase or redeem the notes in the event of a takeover,
recapitalization or similar transaction.
The Issuers will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the notes indenture applicable to a Change of Control Offer made by the
Issuers and purchases all notes validly tendered and not withdrawn under such
Change of Control Offer.
The Issuers' ability to pay cash to the Holders upon a repurchase may be
limited by the Issuers' then existing financial resources. There can be no
assurance that the Issuers will have sufficient assets to satisfy their
repurchase obligation under the notes indenture. The provisions under the notes
indenture relating to the Issuers' obligation to make an offer to repurchase the
notes as a result of a Change of Control may be waived or modified with the
written consent of the Holders of a majority in principal amount of the notes.
The existence of a Holder's right to require the Issuers to repurchase such
Holder's notes upon the occurrence of a Change of Control may deter a third
party from seeking to acquire the Issuers in a transaction that would constitute
a Change of Control.
The definition of Change of Control includes a phrase relating to the direct
or indirect sale, lease, transfer, conveyance or other disposition of "all or
substantially all" of the properties or assets of WRC Media and its Subsidiaries
taken as a whole. Although there is a limited body of case law interpreting the
phrase "substantially all," there is no precise established definition of the
phrase under applicable law. Accordingly, the ability of a Holder of notes to
require the Issuers to repurchase such notes as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of WRC
Media and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
ASSET SALES
WRC Media will not, and will not permit any of its Restricted Subsidiaries
to, consummate an Asset Sale unless:
(1) WRC Media or such Restricted Subsidiary receives consideration at the
time of such Asset Sale at least equal to the fair market value of the
assets or Equity Interests issued or sold or otherwise disposed of;
(2) such fair market value is determined by WRC Media's Board of Directors
and evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee; and
(3) at least 75% of the consideration therefor received by WRC Media or such
Restricted Subsidiary is in the form of (A) Cash Equivalents or
(B) Qualified Proceeds; PROVIDED that the aggregate fair market value of
Qualified Proceeds (other than Cash Equivalents), which may be received
in consideration for Asset Sales pursuant to this clause (3)(B) shall not
exceed $20.0 million since the date of the notes indenture. For purposes
of this provision, each of the following shall be deemed to be cash:
(a) any liabilities (as shown on WRC Media's or such Restricted
Subsidiary's most recent balance sheet), of WRC Media or any
Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the notes or any
Note
171
Guarantee) that are assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases WRC Media or
such Restricted Subsidiary from further liability; and
(b) any securities, notes or other obligations received by WRC Media or
any such Restricted Subsidiary from such transferee that are
contemporaneously (subject to ordinary settlement periods) converted
by WRC Media or such Restricted Subsidiary into cash (to the extent
of the cash received in that conversion).
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
WRC Media may apply such Net Proceeds at its option:
(1) to repay Senior Debt and, if the Senior Debt repaid is revolving credit
Indebtedness, to correspondingly reduce commitments with respect thereto;
(2) to acquire all or substantially all of the assets of, or a majority of
the Voting Stock of, another Permitted Business;
(3) to make a capital expenditure; or
(4) to acquire other long-term assets that are used or useful in a Permitted
Business.
Pending the final application of any such Net Proceeds, WRC Media may
temporarily reduce revolving credit borrowings or otherwise invest such Net
Proceeds in any manner that is not prohibited by the notes indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $10.0 million, the Issuers will make
an Asset Sale Offer (as defined in the notes indenture) to all Holders of notes
and all holders of other Indebtedness that is PARI PASSU with the notes
containing provisions similar to those set forth in the notes indenture with
respect to offers to purchase or redeem with the proceeds of sales of assets to
purchase the maximum principal amount of notes (including Additional Notes) and
such other PARI PASSU Indebtedness that may be purchased out of the Excess
Proceeds. The offer price in any Asset Sale Offer will be equal to 100% of
principal amount plus accrued and unpaid interest and Liquidated Damages, if
any, to the date of purchase, and will be payable in cash. If any Excess
Proceeds remain after consummation of an Asset Sale Offer, the Issuers may use
such Excess Proceeds for any purpose not otherwise prohibited by the notes
indenture. If the aggregate principal amount of notes and such other PARI PASSU
Indebtedness tendered into such Asset Sale Offer exceeds the amount of Excess
Proceeds, the Trustee shall select the notes and such other PARI PASSU
Indebtedness to be purchased on a pro rata basis based on the principal amount
of notes and such other PARI PASSU Indebtedness tendered. Upon completion of
each Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero.
The Issuers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with each
repurchase of notes pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with the Asset Sales
provisions of the notes indenture, the Issuers will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the Asset Sale provisions of the notes indenture by virtue of
such conflict.
The agreements governing the Issuers' outstanding Senior Debt currently
prohibit the Issuers from purchasing any notes, and also provide that certain
change of control or asset sale events with respect to WRC Media would
constitute a default under these agreements. Any future credit agreements or
other agreements relating to Senior Debt to which the Issuers become a party may
contain similar restrictions and provisions. In the event a Change of Control or
Asset Sale occurs at a time when the
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Issuers are prohibited from purchasing notes, the Issuers could seek the consent
of their senior lenders to the purchase of notes or could attempt to refinance
the borrowings that contain such prohibition. If the Issuers do not obtain such
a consent or repay such borrowings, the Issuers will remain prohibited from
purchasing notes. In such case, the Issuers' failure to purchase tendered notes
would constitute an Event of Default under the notes indenture, which would, in
turn, constitute a default under such Senior Debt. In such circumstances, the
subordination provisions in the notes indenture would likely restrict payments
to the Holders of notes.
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the Trustee
will select notes for redemption as follows:
(1) if the notes are listed, in compliance with the requirements of the
principal national securities exchange on which the notes are listed; or
(2) if the notes are not so listed, on a pro rata basis, by lot or by such
method as the Trustee shall deem fair and appropriate.
No notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of notes to be redeemed at its registered
address. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note shall state the portion of the principal amount thereof to
be redeemed. A newly issued note in principal amount equal to the unredeemed
portion of the original note will be issued in the name of the Holder thereof
upon cancellation of the original note. Notes called for redemption become due
on the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on notes or portions of them called for redemption.
MATERIAL COVENANTS
Set forth below are covenants from the notes indenture which we believe are
material to us. Holders of the notes may decide other covenants not included
below are material. Therefore, we urge holders to read the notes indenture in
its entirety.
RESTRICTED PAYMENTS
WRC Media will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or distribution on
account of WRC Media's or any of its Restricted Subsidiaries' Equity
Interests (including, without limitation, any payment in connection with
any merger or consolidation involving WRC Media or any of its Restricted
Subsidiaries) or to the direct or indirect holders of WRC Media's or any
of its Restricted Subsidiaries' Equity Interests in their capacity as
such (other than:
(a) dividends or distributions payable in Equity Interests (other than
Disqualified Stock but including payments of dividends on the Senior
Preferred Stock paid in additional shares of Senior Preferred Stock)
and dividends or distributions payable through accretion to the
liquidation preference of such Senior Preferred Stock or in options,
warrants or other rights to purchase such Equity Interests of WRC
Media,
(b) to WRC Media or a Restricted Subsidiary of WRC Media or
(c) pursuant to the exercise of warrants to purchase common stock of an
Issuer);
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(2) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation
involving the Issuers) any Equity Interests of the Issuers or any direct
or indirect parent of the Issuers;
(3) make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is
subordinated to the notes or the Note Guarantees, except a payment of
interest or principal at the Stated Maturity or any scheduled repayment
thereof other than (a) Indebtedness permitted under clause (6) of the
covenant described under "--Incurrence of Indebtedness and Issuance of
Preferred Stock" or (b) the purchase, repurchase or other acquisition of
subordinated Indebtedness purchased in anticipation of satisfying a
sinking fund obligation, principal installment or final maturity, in each
case due within one year of the date of purchase, repurchase or
acquisition; or
(4) make any Restricted Investment (all such payments and other actions set
forth in clauses (1) through (4) above being collectively referred to as
"Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof; and
(2) WRC Media would, at the time of such Restricted Payment and after giving
pro forma effect thereto as if such Restricted Payment had been made at
the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Debt
to EBITDA Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock;" and
(3) such Restricted Payment, together with the aggregate amount of all other
Restricted Payments made by WRC Media and its Restricted Subsidiaries
after the date of the notes indenture (excluding Restricted Payments
permitted by clauses (2) through (10) and clauses (12) and (13) of the
next succeeding paragraph), is less than the sum, without duplication,
of:
(a) 50% of the Consolidated Net Income of WRC Media for the period (taken
as one accounting period) from the beginning of the first fiscal
quarter commencing after the date of the notes indenture to the end
of WRC Media's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a
deficit, less 100% of such deficit), PLUS
(b) 100% of the aggregate net cash proceeds and the fair market value of
Cash Equivalents and Qualified Proceeds received by the Issuers since
the date of the notes indenture as a contribution to their common
equity capital or from the issue or sale of Equity Interests of the
Issuers (other than Disqualified Stock and Excluded Contributions) or
from the issue or sale of convertible or exchangeable Disqualified
Stock or convertible or exchangeable debt securities of the Issuers
that have been converted into or exchanged for such Equity Interests
(other than Equity Interests (or Disqualified Stock or debt
securities and Excluded Contributions) sold to a Subsidiary of WRC
Media or WRC Media), PLUS
(c) to the extent that any Restricted Investment that was made after the
date of the notes indenture is sold for cash, Cash Equivalents or
Qualified Proceeds or is otherwise liquidated or repaid for cash,
Cash Equivalents or Qualified Proceeds, the lesser of (1) the return
of capital with respect to such Restricted Investment (less the cost
of disposition, if any) and (2) the initial amount of such Restricted
Investment, PLUS
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(d) the aggregate amount equal to the net reduction in Investments in
Unrestricted Subsidiaries resulting from:
- dividends, distributions, return of capital, repayments of
investments or other transfers of assets to WRC Media or any
Restricted Subsidiary from any Unrestricted Subsidiary, or the
sale of any interest in any Unrestricted Subsidiary, in each case
in the form of cash, Cash Equivalents or Qualified Proceeds, or
- the redesignation of any Unrestricted Subsidiary as a Restricted
Subsidiary (valued in each case as provided in the definition of
"Investment"), not to exceed in the case of any such Unrestricted
Subsidiary the fair market value of such Investment in such
Unrestricted Subsidiary at the time of such reduction in
Investment, after deducting any Indebtedness associated with the
Unrestricted Subsidiary; PROVIDED that the amount of such net
reduction in Investment in such Unrestricted Subsidiary shall be
excluded from Consolidated Net Income for purposes of calculating
clause 3(a) above.
So long as no Default has occurred and is continuing or would be caused
thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of declaration
thereof, if at said date of declaration such payment would have complied
with the provisions of the notes indenture;
(2) (a) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness of the Issuers or any
Restricted Subsidiary or of any Equity Interests of the Issuers
("Retired Capital Stock") in exchange for, or out of the net cash
proceeds of the substantially concurrent sale (other than to a
Restricted Subsidiary of WRC Media or to WRC Media) of, Equity
Interests of any of the Issuers (other than Disqualified Stock)
("Refunding Capital Stock"); PROVIDED that the amount of any such
net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be
excluded from clause (3)(b) of the preceding paragraph and
(b) the declaration and payment of dividends on the Refunding Capital
Stock in an aggregate amount per year no greater than the aggregate
amount of dividends per annum that was declarable and payable on such
Retired Capital Stock in a manner not in violation of the notes
indenture immediately prior to such retirement;
(3) the defeasance, redemption, repurchase or other acquisition or
retirement of subordinated Indebtedness of WRC Media or any Restricted
Subsidiary with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness;
(4) the payment of any dividend by a Restricted Subsidiary of WRC Media
(other than Weekly Reader or CompassLearning) to the holders of its
common Equity Interests on a pro rata basis; and
(5) the repurchase, redemption or other acquisition or retirement for value
of any Equity Interests of WRC Media or any Restricted Subsidiary of WRC
Media or any direct or indirect parent of WRC Media held by any future,
present or former member of WRC Media's (or any of its Restricted
Subsidiaries') management or any director, employee or consultant of WRC
Media or any of its Restricted Subsidiaries pursuant to any management
equity plan or stock option plan or any other management or employee
benefit plan or agreement; PROVIDED that the aggregate price paid for all
such repurchased, redeemed, acquired or retired Equity Interests shall
not exceed in any calendar year $1.0 million (with unused amounts in any
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calendar year being carried over to succeeding calendar years subject to
a maximum (without giving effect to the following proviso) of
$2.0 million in any calendar year); PROVIDED FURTHER that such amount in
any calendar year may be increased by an amount not to exceed:
(a) the cash proceeds from the sale of Equity Interests of WRC Media to
members of management of WRC Media and its Subsidiaries that occurs
after the date of the notes indenture (to the extent the cash
proceeds from the sale of such Equity Interests have not otherwise
been applied to the payment of Restricted Payments by virtue of the
preceding paragraph (3)(b)) plus
(b) the cash proceeds of key man life insurance policies received by WRC
Media and its Restricted Subsidiaries after the date of the notes
indenture less
(c) the amount of any Restricted Payments previously made pursuant to
this proviso;
(6) repurchases of Equity Interests deemed to occur upon exercise of stock
options if such Equity Interests represent a portion of the exercise
price of such options;
(7) the retirement of any shares of Disqualified Stock of WRC Media by
conversion into, or by exchange for, shares of Disqualified Stock of WRC
Media, or out of the Net Proceeds of the substantially concurrent sale
(other than to a Subsidiary of WRC Media) of other shares of Disqualified
Stock of WRC Media; PROVIDED that:
(a) the amount of such Disqualified Stock does not exceed the amount of
the Disqualified Stock so converted or exchanged or concurrently
retired (plus the amount of all fees, commissions, discounts, costs
and expenses incurred in connection therewith) and
(b) either:
- such Disqualified Stock by its terms, or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking
fund obligation or otherwise, or is redeemable at the option of the
holder thereof, in whole or in part, later than the final maturity
date or date that the Disqualified Stock being converted or
exchanged is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the
holder thereof, in whole or in part, or
- all scheduled payments on or in respect of such Disqualified Stock
(other than dividends) shall be at least 91 days following the
final scheduled maturity of the notes;
(8) Investments that are made with Excluded Contributions;
(9) other Restricted Payments in an aggregate amount not to exceed
$10.0 million;
(10) cash dividends and other payments required to be made under the
Recapitalization Agreement;
(11) the payment of dividends on the common stock of an Issuer following the
first public offering of such Issuer's common stock after the date of the
notes indenture, of up to an aggregate of 6% per annum of the net cash
proceeds received by such Issuer in all such public offerings of common
stock, other than public offerings with respect to common stock of an
Issuer registered on Form S-8; PROVIDED that the amount of any such net
cash proceeds that are utilized for any such payments shall be excluded
from clause 3(b) of the preceding paragraph;
(12) advances to employees (including guarantees of loans made to employees)
not in excess of $7.5 million outstanding at any one time in the
aggregate; and
(13) the payment to any direct or indirect parent of WRC Media of amounts
required for such parent to pay franchise taxes and other fees and
operating costs reasonably required to
176
maintain its corporate existence, together with any amounts permitted to
be paid pursuant to clause (8) of the covenant described below under the
caption "--Transactions with Affiliates."
In addition, this covenant will not prohibit the exchange of Senior
Preferred Stock into preferred stock of Weekly Reader and/or CompassLearning,
pursuant to the terms of the certificate of designations or the stockholders
agreement relating thereto, as in effect on the date of the notes indenture or
the exchange of Unit Common Stock for Exchange Common Stock pursuant to the
stockholders agreement, as in effect on the date of the notes indenture.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued to or by WRC Media or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any assets or securities that are required to be valued by this
covenant shall be determined by the Board of Directors. The Board of Directors'
determination must be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if the
fair market value exceeds $5.0 million.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
WRC Media will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt), and the
Issuers and the Note Guarantors will not issue any Disqualified Stock and WRC
Media will not permit any Restricted Subsidiary that is not an Issuer or a Note
Guarantor to issue any shares of preferred stock; PROVIDED, HOWEVER, that the
Issuers and the Note Guarantors may incur Indebtedness (including Acquired Debt)
or issue Disqualified Stock if WRC Media's Debt to EBITDA Ratio for its four
full fiscal quarters ending immediately prior to the date such additional
Indebtedness is Incurred would have been no greater than (x) 6.5 to 1.0 with
respect to any such four-quarter period ending on or prior to November 15, 2001
and (y) 6.0 to 1.0 with respect to any such four-quarter period ending
thereafter.
The first paragraph of this covenant will not prohibit the incurrence of any
of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by WRC Media and its Restricted Subsidiaries of
additional Indebtedness and letters of credit under Credit Facilities in
an aggregate principal amount at any one time outstanding under this
clause (1) (with letters of credit being deemed to have a principal
amount equal to the maximum potential liability of WRC Media and its
Restricted Subsidiaries thereunder) not to exceed $170.0 million
outstanding at any one time, LESS the aggregate amount of all Net
Proceeds of Asset Sales that have been applied by WRC Media or any of its
Restricted Subsidiaries since the date of the notes indenture to repay
any Indebtedness under a Credit Facility pursuant to the covenant
described above under the caption "--Repurchase at the Option of
Holders--Asset Sales;"
(2) Existing Indebtedness of WRC Media and its Restricted Subsidiaries;
(3) the incurrence by the Issuers and the Note Guarantors of Indebtedness
represented by the notes and the related Note Guarantees to be issued on
the date of the notes indenture and the new notes and the related Note
Guarantees to be issued pursuant to the registration rights agreement;
(4) the incurrence by WRC Media or any of its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case, incurred for the
purpose of directly or indirectly financing all or any part of the
purchase price or cost of construction or improvement of property, plant
or equipment used in
177
the business of WRC Media or such Restricted Subsidiary (whether through
the direct purchase of assets or Capital Stock of any Person owning such
assets), in an aggregate principal amount, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (4), not to exceed 6% of
Total Tangible Assets at any time outstanding;
(5) the incurrence by WRC Media or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace Indebtedness (other
than intercompany Indebtedness) that was permitted by the notes indenture
to be incurred under the first paragraph of this covenant or clauses (2),
(3), (4), (5) or (10) of this paragraph;
(6) the incurrence by WRC Media or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among WRC Media and any of its
Restricted Subsidiaries; PROVIDED, HOWEVER:
(a) that if the Issuers or any Note Guarantor is the obligor on such
Indebtedness and the obligee with respect to such Indebtedness is not
an Issuer or a Note Guarantor, such Indebtedness must be expressly
subordinated to all Obligations with respect to the notes, in the
case of the Issuers, or the Note Guarantee, in the case of a Note
Guarantor; and
(b) that,
- any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than
WRC Media or a Restricted Subsidiary of WRC Media and
- any sale or other transfer of any such Indebtedness to a Person
that is not either WRC Media or a Restricted Subsidiary of WRC
Media; shall be deemed, in each case, to constitute an incurrence
of such Indebtedness by WRC Media or such Restricted Subsidiary
that was not permitted by this clause (6);
(7) the incurrence by WRC Media or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or
hedging:
(a) interest rate risk with respect to any floating rate Indebtedness
that is permitted by the terms of the notes indenture to be
outstanding,
(b) the value of foreign currencies purchased or received by WRC Media
and its Restricted Subsidiaries in the ordinary course of business or
(c) commodity prices with respect to commodities used in the ordinary
course of business;
(8) the Guarantees by the Issuers or any of the Note Guarantors of
Indebtedness or any other obligations of WRC Media or a Restricted
Subsidiary of WRC Media that is permitted to be incurred by another
provision of this covenant;
(9) the accrual of interest, the accretion or amortization of original issue
discount, the payment of interest on any Indebtedness in the form of
additional Indebtedness with the same terms, and the payment of dividends
on Disqualified Stock in the form of additional shares of the same class
of Disqualified Stock will not be deemed to be an incurrence of
Indebtedness or an issuance of Disqualified Stock for purposes of this
covenant; PROVIDED, in each such case, that the amount thereof is
included in Consolidated Indebtedness of WRC Media as accrued;
(10) the incurrence by WRC Media or any of its Restricted Subsidiaries of
additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding,
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including all Permitted Refinancing Indebtedness incurred to refund,
refinance or replace any Indebtedness incurred pursuant to this
clause (10), not to exceed $10.0 million;
(11) the incurrence by WRC Media or any of its Restricted Subsidiaries of
Indebtedness constituting reimbursement obligations with respect to
letters of credit issued in the ordinary course of business, including,
without limitation, letters of credit in respect of workers' compensation
claims or self-insurance, or other Indebtedness with respect to
reimbursement type obligations regarding workers' compensation claims or
self-insurance;
(12) the incurrence by WRC Media or any of its Restricted Subsidiaries of
Indebtedness arising from agreements of WRC Media or such Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations incurred or assumed in connection with the
disposition of any business, assets or Capital Stock of a Subsidiary,
other than guarantees of Indebtedness incurred by any Person acquiring
all or any portion of such business, assets or a Subsidiary for the
purpose of financing such acquisition; PROVIDED that the maximum
assumable liability in respect of all such Indebtedness shall at no time
exceed the gross proceeds including noncash proceeds consisting of Cash
Equivalents or Qualified Proceeds (the fair market value of such noncash
proceeds being measured at the time received and without giving effect to
any subsequent changes in value) actually received by WRC Media and its
Restricted Subsidiaries in connection with such disposition;
(13) the issuance of preferred stock by any of WRC Media's Restricted
Subsidiaries issued to WRC Media or another Restricted Subsidiary;
PROVIDED that any subsequent issuance or transfer of any Equity Interests
or any other event that results in any such Restricted Subsidiary ceasing
to be a Restricted Subsidiary or any other subsequent transfer of any
such shares of preferred stock (except to WRC Media or another Restricted
Subsidiary) shall be deemed, in each case, to be an issuance of such
shares of preferred stock; and
(14) the incurrence by WRC Media or any of its Restricted Subsidiaries of
obligations in respect of performance and surety bonds and completion
guarantees provided by WRC Media or such Restricted Subsidiary in the
ordinary course of business.
For purposes of determining compliance with this "Incurrence of Indebtedness
and Issuance of Preferred Stock" covenant, in the event that an item of proposed
Indebtedness meets the criteria of more than one of the categories of Permitted
Debt described in clauses (1) through (14) above, or is entitled to be incurred
pursuant to the first paragraph of this covenant, WRC Media will be permitted to
classify such item of Indebtedness on the date of its incurrence, or later
reclassify all or a portion of such item of Indebtedness, in any manner that
complies with this covenant. Indebtedness under Credit Facilities outstanding on
the date on which notes are first issued and authenticated under the notes
indenture shall be deemed to have been incurred on such date in reliance on the
exception provided by clause (1) of the definition of Permitted Debt.
NO SENIOR SUBORDINATED DEBT
The Issuers will not incur, create, issue, assume, guarantee or otherwise
become liable for any Indebtedness that is subordinate or junior in right of
payment to any Indebtedness of the Issuers and senior in any respect in right of
payment to the notes. No Note Guarantor will incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness that is subordinate or
junior in right of payment to any Indebtedness of such Note Guarantor and senior
in any respect in right of payment to such Note Guarantor's Note Guarantee.
LIENS
WRC Media will not, and will not permit any of its Restricted Subsidiaries
to, create, incur, assume or otherwise cause or suffer to exist or become
effective any Lien of any kind securing
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Indebtedness (other than Permitted Liens) upon any of their property or assets,
now owned or hereafter acquired, unless all payments due under the notes
indenture and the notes are secured on an equal and ratable basis with the
obligations so secured until such time as such obligations are no longer secured
by such Lien.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
WRC Media will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) (a) pay dividends or make any other distributions on its Capital Stock
to WRC Media or any of its Restricted Subsidiaries, or with respect to
any other interest or participation in, or measured by, its profits, or
(b) pay any indebtedness owed to WRC Media or any of its Restricted
Subsidiaries;
(2) make loans or advances to WRC Media or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to WRC Media or any of its
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) contractual encumbrances or restrictions in effect on the date of the
notes indenture, including, without limitation, pursuant to Existing
Indebtedness or the Credit Agreement as in effect on the date of the
notes indenture and any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or
refinancings thereof, PROVIDED that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacement
or refinancings are, in the good faith judgment of the Board of Directors
of WRC Media, no more restrictive in any material respect, taken as a
whole, with respect to such dividend and other payment restrictions than
those contained in such Existing Indebtedness, as in effect on the date
of the notes indenture;
(2) contractual encumbrances or restrictions in any preferred stock of any
Issuer issued in exchange for the Senior Preferred Stock; PROVIDED that
such contractual encumbrances or restrictions are, in the good faith
judgment of the Board of Directors of WRC Media, no more restrictive in
any material respect, taken as a whole, with respect to such dividend and
other payment restrictions than those contained in the Senior Preferred
Stock, as in effect on the date of the notes indenture;
(3) the notes indenture, the notes and the Note Guarantees;
(4) applicable law or any applicable rule, regulation or order;
(5) any instrument governing Indebtedness or Capital Stock of a Person
acquired by WRC Media or any of its Restricted Subsidiaries as in effect
at the time of such acquisition (except to the extent such Indebtedness
was incurred in connection with or in contemplation of such acquisition),
which encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, PROVIDED that, in the case
of Indebtedness, such Indebtedness was permitted by the terms of the
notes indenture to be incurred;
(6) customary non-assignment provisions in leases entered into in the
ordinary course of business;
(7) purchase money obligations for property acquired in the ordinary course
of business that impose restrictions on the property so acquired of the
nature described in clause (3) of the preceding paragraph;
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(8) any agreement for the sale or other disposition of all or substantially
all of the Capital Stock or assets of a Subsidiary that restricts
distributions by that Subsidiary pending its sale or other disposition;
PROVIDED that with respect to a sale of less than all of the assets of
such Restricted Subsidiary such agreement only encumbers the assets
subject to such sale;
(9) Liens securing Indebtedness that limit the right of the debtor to
dispose of the assets subject to such Lien;
(10) provisions with respect to the disposition or distribution of assets or
property in joint venture agreements, assets sale agreements, stock sale
agreements and other similar agreements entered into in the ordinary
course of business;
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business; and
(12) any encumbrances or restrictions imposed by any amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings of the contracts, instruments or
obligations referred to in clauses (1) through (11) or any Permitted
Refinancing Indebtedness, PROVIDED that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements,
refinancings or Permitted Refinancing Indebtedness are, in the good faith
judgment of the Board of Directors of WRC Media, no more restrictive in
any material respect, taken as a whole, with respect to such dividend and
other payment restrictions than those in existence prior to such
amendment, modification, restatement, renewal, increase, supplement,
refunding, replacement or refinancing.
MERGER, CONSOLIDATION OR SALE OF ASSETS
An Issuer may not, directly or indirectly: (1) consolidate or merge with or
into another Person (whether or not such Issuer is the surviving corporation);
or (2) sell, assign, transfer, convey, lease or otherwise dispose of all or
substantially all of the properties or assets of any such Issuer and its
Restricted Subsidiaries taken as a whole, in one or more related transactions,
to another Person; unless:
(1) either: (a) an Issuer is the surviving corporation; or (b) the Person
formed by or surviving any such consolidation or merger (if other than an
Issuer) or to which such sale, assignment, transfer, conveyance, lease or
other disposition shall have been made is a corporation organized or
existing under the laws of the United States, any state thereof or the
District of Columbia (such Issuer or Person, as the case may be, being
herein referred to as the "Successor Company");
(2) the Successor Company (if other than any of the Issuers) expressly
assumes all the obligations of such Issuer under the notes, the notes
indenture and the Registration Rights Agreement pursuant to agreements
reasonably satisfactory to the Trustee;
(3) immediately after such transaction no Default or Event of Default
exists; and
(4) such Issuer or the Person formed by or surviving any such consolidation
or merger (if other than any of the Issuers), or to which such sale,
assignment, transfer, conveyance, lease or other disposition shall have
been made, and its Restricted Subsidiaries will, on the date of such
transaction after giving pro forma effect thereto and any related
financing transactions as if the same had occurred at the beginning of
the applicable four-quarter period, have a Debt to EBITDA Ratio equal to
or less than the Debt to EBITDA Ratio for WRC Media and its Restricted
Subsidiaries immediately prior to such transaction.
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In addition, an Issuer may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation or Sale of
Assets" covenant will not apply to a sale, assignment, transfer, conveyance or
other disposition of assets between or among the Issuers and any Note Guarantor.
Notwithstanding the foregoing, any Issuer may merge with an Affiliate
incorporated or organized solely for the purpose of reincorporating or
reorganizing such Issuer in another jurisdiction to realize tax or other
benefits and may, through merger or otherwise, become a limited liability
company; PROVIDED, HOWEVER, that at all times at least one Issuer must be a
corporation duly formed under the laws of the United States or any state thereof
or the District of Columbia.
TRANSACTIONS WITH AFFILIATES
WRC Media will not, and will not permit any of its Restricted Subsidiaries
to, make any payment to, or sell, lease, transfer or otherwise dispose of any of
its properties or assets to, or purchase any property or assets from, or enter
into or make or amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate (each, an
"Affiliate Transaction"), involving aggregate payments or consideration in
excess of $1.0 million unless:
(1) such Affiliate Transaction is on terms that are not materially less
favorable to WRC Media or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by WRC Media or
such Restricted Subsidiary with an unrelated Person; and
(2) WRC Media obtains:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$2.0 million, a resolution of the Board of Directors set forth in an
Officers' Certificate certifying that such Affiliate Transaction
complies with this covenant and that such Affiliate Transaction has
been approved by the Board of Directors in good faith; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$5.0 million, an opinion as to the fairness to the Holders of such
Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national
standing.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreement or other compensation plan or arrangement
entered into by WRC Media or any of its Restricted Subsidiaries in the
ordinary course of business;
(2) transactions between or among WRC Media and/or its Restricted
Subsidiaries;
(3) payment of reasonable fees and the provision of reasonable indemnities
to directors, officers or employees of WRC Media or any of its Restricted
Subsidiaries as determined in good faith by the Board of Directors of WRC
Media;
(4) sales of Equity Interests (other than Disqualified Stock) to Affiliates
of WRC Media;
(5) the payment of customary management, consulting and advisory fees and
related expenses made pursuant to any financial advisory, financing,
underwriting or placement agreement or in respect of other investment
banking activities, including, without limitation, in connection with
acquisitions or divestitures and, including without limitation, any such
fees and expenses paid to DLJ Merchant Banking Partners II, L.P. and its
Affiliates; PROVIDED, HOWEVER, that the agreement or arrangement
governing any such fees is approved by the Board of Directors of WRC
Media or such Restricted Subsidiary;
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(6) Restricted Payments that are permitted by the provisions of the notes
indenture described above under the caption "--Restricted Payments;"
(7) any agreement as in effect as of the date of the notes indenture
(including, without limitation, each of the agreements entered into in
connection with the transactions described under "Transactions") or any
amendment thereto (so long as any such amendment is not disadvantageous
to the Holders in any material respect) and any transactions contemplated
thereby;
(8) payments pursuant to the Tax Sharing Agreement as in effect on the date
of the notes indenture and as amended thereafter so long as any such
amendment is not disadvantageous to the Holders of Notes in any material
respect;
(9) the existence of, or the performance by WRC Media or any of its
Restricted Subsidiaries of its obligations under the terms of, any
stockholders agreement (including any registration rights agreement or
purchase agreement related thereto) to which it is a party as of the date
of the notes indenture and any similar agreements which it may enter into
thereafter; PROVIDED, HOWEVER, that the existence of, or the performance
by WRC Media or any of its Restricted Subsidiaries of obligations under
any future amendment to any such existing agreement or under any similar
agreement entered into after the date of the notes indenture shall only
be permitted by this clause (9) to the extent that the terms of any such
amendment or new agreement are not otherwise disadvantageous to the
Holders in any material respect; and
(10) transactions with customers, clients, suppliers, or purchasers or
sellers of goods or services, in each case in the ordinary course of
business and otherwise in compliance with the terms of the notes
indenture which are fair to WRC Media or its Restricted Subsidiaries, in
the reasonable determination of the Board of Directors of WRC Media or
its Restricted Subsidiaries, in the reasonable determination of the Board
of Directors of WRC Media or the senior management thereof, or are on
terms at least as favorable as might reasonably have been obtained at
such time from an unaffiliated party.
ADDITIONAL NOTE GUARANTEES
If WRC Media or any of its Restricted Subsidiaries acquires or creates
another Domestic Subsidiary after the date of the notes indenture, then that
newly acquired or created Domestic Subsidiary must become a Note Guarantor and
execute a supplemental indenture and deliver an Opinion of Counsel to the
Trustee within ten Business Days of the date on which it was acquired or
created; PROVIDED that all Subsidiaries that have been properly designated as
Unrestricted Subsidiaries in accordance with the notes indenture shall not
become Note Guarantors for so long as they continue to constitute Unrestricted
Subsidiaries.
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The Board of Directors may designate any Restricted Subsidiary of WRC Media
(other than Weekly Reader or CompassLearning) to be an Unrestricted Subsidiary
if that designation would not cause a Default. If a Restricted Subsidiary of WRC
Media is designated as an Unrestricted Subsidiary, the aggregate fair market
value of all outstanding Investments owned by WRC Media and its Restricted
Subsidiaries in the Subsidiary so designated will be deemed to be an Investment
made as of the time of such designation and will either reduce the amount
available for Restricted Payments under the first paragraph of the covenant
described above under the caption "--Restricted Payments" or reduce the amount
available for future Investments under one or more clauses of the definition of
Permitted Investments, as WRC Media shall determine. That designation will only
be permitted if such Investment would be permitted at that time and if such
Restricted Subsidiary otherwise meets the
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definition of an Unrestricted Subsidiary. The Board of Directors may redesignate
any Unrestricted Subsidiary to be a Restricted Subsidiary if the redesignation
would not cause a Default.
BUSINESS ACTIVITIES
WRC Media will not, and will not permit any Restricted Subsidiary to, engage
in any business other than Permitted Businesses, except to such extent as would
not be material to WRC Media and its Restricted Subsidiaries taken as a whole.
PAYMENTS FOR CONSENT
WRC Media will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, pay or cause to be paid any consideration to or for
the benefit of any Holder of notes for or as an inducement to any consent,
waiver or amendment of any of the terms or provisions of the notes indenture or
the notes unless such consideration is offered to be paid or is paid to all
Holders of the notes that consent, waive or agree to amend in the time frame set
forth in the solicitation documents relating to such consent, waiver or
agreement.
REPORTS
Whether or not required by the Securities and Exchange Commission, so long
as any notes are outstanding, the Issuers will furnish to the Holders of notes,
within the time periods specified in the Securities and Exchange Commission's
rules and regulations:
(1) all quarterly and annual financial information that would be required to
be contained in a filing with the Securities and Exchange Commission on
Forms 10-Q and 10-K if WRC Media were required to file such Forms,
including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information
only, a report on the annual financial statements by WRC Media's
certified independent accountants; and
(2) all current reports that would be required to be filed with the
Securities and Exchange Commission on Form 8-K if WRC Media were required
to file such reports.
In addition, following the consummation of the exchange offer contemplated
by the Registration Rights Agreement, whether or not required by the Securities
and Exchange Commission, the Issuers will file a copy of all of the information
and reports referred to in clauses (1) and (2) above with the Securities and
Exchange Commission for public availability within the time periods specified in
the Securities and Exchange Commission's rules and regulations (unless the
Securities and Exchange Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, the Issuers and the Note Guarantors have agreed that, for
so long as any notes remain outstanding, they will furnish to the Holders and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act of 1933.
If WRC Media has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph shall include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes to the financial
statements, and in Management's Discussion and Analysis of Financial Condition
and Results of Operations, of the financial condition and results of operations
of WRC Media and its Restricted Subsidiaries separate from the financial
condition and results of operations of the Unrestricted Subsidiaries of WRC
Media.
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EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to the notes, whether or not prohibited
by the subordination provisions of the notes indenture;
(2) default in payment when due of the principal of, or premium, if any, on
the notes, whether or not prohibited by the subordination provisions of
the notes indenture;
(3) failure by WRC Media or any of its Subsidiaries to comply for 30 days
after written notice by the Trustee or Holders of at least 25% in
principal amount of the notes then outstanding with the provisions
described under the captions "--Repurchase at the Option of
Holders--Change of Control," "--Repurchase at the Option of
Holders--Asset Sales," "--Material Covenants--Restricted Payments,"
"--Material Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock" or "--Material Covenants--Merger, Consolidation or Sale
of Assets;"
(4) failure by WRC Media or any of its Subsidiaries for 60 days after
written notice given by the Trustee or the Holders of at least 25% in
principal amount of the notes then outstanding to comply with any of the
other agreements in the notes indenture;
(5) default under any mortgage, indenture or instrument under which there is
issued or by which there may be secured or evidenced any Indebtedness for
money borrowed by WRC Media or any of its Restricted Subsidiaries or the
payment of which is guaranteed by WRC Media or any of its Restricted
Subsidiaries (other than Indebtedness owed to WRC Media or one of its
Restricted Subsidiaries) whether such Indebtedness or guarantee now
exists, or is created after the date of the notes indenture, if that
default:
(a) is caused by a failure to pay any such Indebtedness at its stated
final maturity (after giving effect to any applicable grace period
provided in such Indebtedness) (a "Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its stated
final maturity,
and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $5.5 million or more;
(6) failure by WRC Media or any of its Restricted Subsidiaries to pay final
non-appealable judgments (net of any amounts with respect to which a
reputable and creditworthy insurance company has acknowledged liability
in writing) aggregating in excess of $5.5 million, which judgments have
remained outstanding and have not been paid, discharged or stayed for a
period of 60 days after having been rendered;
(7) except as permitted by the notes indenture, any Note Guarantee shall be
held in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect or any Note
Guarantor, or any Person acting on behalf of any Note Guarantor, shall
deny or disaffirm its obligations under its Note Guarantee; and
(8) certain events of bankruptcy or insolvency with respect to the Issuers
or any of their Restricted Subsidiaries.
In the case of an Event of Default arising from certain events of bankruptcy
or insolvency, with respect to an Issuer or any Restricted Subsidiary that is a
Significant Subsidiary, all outstanding notes will become due and payable
immediately without further action or notice. If any other Event of Default
occurs and is continuing, the Trustee or the Holders of at least 25% in
principal amount of the
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then outstanding notes may declare all the notes to be due and payable
immediately. However, so long as any Indebtedness permitted to be incurred
pursuant to the Credit Agreement shall be outstanding, that acceleration shall
not be effective until the earlier of: (1) an acceleration of any such
Indebtedness under the Credit Agreement; or (2) five business days after receipt
by the Issuers and the administrative agent under the Credit Agreement of
written notice of that acceleration.
Holders of the notes may not enforce the notes indenture or the notes except
as provided in the notes indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest or Liquidated Damages) if it determines that withholding notice is in
their interest. In addition, the Trustee shall have no obligation to accelerate
the notes if the acceleration does not result from a payment default and in the
best judgment of the Trustee acceleration is not in the best interests of the
Holders.
The Holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the notes indenture except a continuing Default or Event of Default in the
payment of interest or Liquidated Damages on, or the principal of, the notes.
The Issuers are required to deliver to the Trustee annually a statement
regarding compliance with the notes indenture. Upon becoming aware of any
Default or Event of Default, the Issuers are required to deliver to the Trustee,
within five business days, a statement specifying such Default or Event of
Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of any of the
Issuers or any Note Guarantor, as such, shall have any liability for any
obligations of the Issuers or the Note Guarantors under the notes, the notes
indenture, the Note Guarantees, or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of notes by accepting
a note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the notes. The waiver may not be effective
to waive liabilities under the Federal securities laws and it is the view of the
Securities and Exchange Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuers may, at their option and at any time, elect to have all of their
obligations discharged with respect to the outstanding notes and all obligations
of the Note Guarantors discharged with respect to their Note Guarantees ("Legal
Defeasance") except for:
(1) the rights of Holders of outstanding notes to receive payments in
respect of the principal of, or interest or premium and Liquidated
Damages, if any, on such notes when such payments are due from the trust
referred to below;
(2) the Issuers' obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost or
stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the Trustee, and
the Issuers' and the Note Guarantor's obligations in connection with the
rights, powers, trusts, duties and immunities of the Trustee; and
(4) the Legal Defeasance provisions of the notes indenture.
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In addition, the Issuers may, at their option and at any time, elect to have
the obligations of the Issuers and the Note Guarantors released with respect to
certain covenants that are described in the notes indenture ("Covenant
Defeasance") and thereafter any omission to comply with those covenants shall
not constitute a Default or Event of Default with respect to the notes. In the
event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Issuers must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will
be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, or interest and
premium and Liquidated Damages, if any, on the outstanding notes on the
stated maturity or on the applicable redemption date, and the Issuers
must specify whether the notes are being defeased to maturity or to a
particular redemption date;
(2) in the case of Legal Defeasance, the Issuers shall have delivered to the
Trustee an Opinion of Counsel reasonably acceptable to the Trustee
confirming that, subject to customary assumptions and exclusions,
(a) the Issuers have received from, or there has been published by, the
Internal Revenue Service a ruling or
(b) since the date of the notes indenture, there has been a change in the
applicable U.S. Federal income tax law, in either case to the effect
that, and based thereon such Opinion of Counsel shall confirm that,
subject to customary assumptions and exclusions, the Holders of the
outstanding notes will not recognize income, gain or loss for U.S.
Federal income tax purposes as a result of such Legal Defeasance and
will be subject to U.S. Federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Issuers shall have delivered to
the Trustee an Opinion of Counsel reasonably acceptable to the Trustee
confirming that the Holders of the outstanding notes will not recognize
income, gain or loss for U.S. Federal income tax purposes as a result of
such Covenant Defeasance and will be subject to U.S. Federal income tax
on the same amounts, in the same manner and at the same times as would
have been the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing
either: (a) on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such
deposit); or (b) or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the
91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in a breach
or violation of, or constitute a default under any material agreement or
instrument (other than the notes indenture) to which the Issuers or Note
Guarantors is a party or by which WRC Media or any of its Subsidiaries is
bound;
(6) 91 days shall have passed between the date of deposit and no intervening
bankruptcy of the Issuers shall have occurred under applicable bankruptcy
law;
(7) the Issuers shall have delivered to the Trustee an Officers' Certificate
stating that the deposit was not made by the Issuers with the intent of
preferring the Holders of notes over the other
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creditors of the Issuers with the intent of defeating, hindering,
delaying or defrauding any creditors of the Issuers, Note Guarantors or
others; and
(8) each of the Issuers shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel (which opinion of counsel may be
subject to customary assumptions and exclusions), each stating that all
conditions precedent relating to the Legal Defeasance or the Covenant
Defeasance, as the case may be, have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next three succeeding paragraphs, the notes
indenture or the notes may be amended or supplemented with the consent of the
Holders of at least a majority in principal amount of the notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, notes), and any existing default or
compliance with any provision of the notes indenture or the notes may be waived
with the consent of the Holders of a majority in principal amount of the then
outstanding notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting Holder):
(1) reduce the principal amount of notes whose Holders must consent to an
amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note or
alter the provisions with respect to the redemption of the notes (other
than provisions relating to the covenants described above under the
caption "--Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on any
note;
(4) waive a Default or Event of Default in the payment of principal of, or
interest or premium, or Liquidated Damages, if any, on the notes (except
a rescission of acceleration of the notes by the Holders of at least a
majority in aggregate principal amount of the notes and a waiver of the
payment default that resulted from such acceleration);
(5) make any note payable in money other than that stated in the notes;
(6) make any change in the provisions of the notes indenture relating to
waivers of past Defaults or the rights of Holders of notes to receive
payments of principal of, or interest or premium or Liquidated Damages,
if any, on the notes;
(7) waive a redemption payment with respect to any note (other than a
payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders");
(8) impair the right of any Holder to receive payment of or interest on such
Holder's notes on or after the due dates therefor or to institute suit
for the enforcement of any payment on or with respect to such Holder's
notes;
(9) release any Note Guarantor from any of its obligations under its Note
Guarantee or the notes indenture, except in accordance with the terms of
the notes indenture; or
(10) make any change in the preceding amendment and waiver provisions.
In addition, any amendment to, or waiver of, the provisions of the notes
indenture relating to subordination that adversely affects the rights of the
Holders of the notes will require the consent of the Holders of at least 75% in
aggregate principal amount of notes then outstanding.
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Notwithstanding the preceding, without the consent of any Holder of notes,
the Issuers, the Note Guarantors and the Trustee may amend or supplement the
notes indenture or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of any Issuer's or any Note Guarantor's
obligations to Holders of notes under the notes indenture;
(4) to make any change that would provide any additional rights or benefits
to the Holders of notes or that does not adversely affect the legal
rights under the notes indenture of any such Holder;
(5) to evidence and provide for the acceptance and appointment under the
notes indenture of a successor Trustee;
(6) to add a Note Guarantor under the notes indenture;
(7) to add to the covenants of the Issuers and the Note Guarantors for the
benefit of the Holders or to surrender any right or power conferred upon
the Issuers;
(8) to secure the notes;
(9) to make any change in the subordination provisions of the notes
indenture that would limit or terminate the benefits available to any
holder of Senior Debt of WRC Media (or any representative thereof) under
such subordination provisions; or
(10) to comply with requirements of the Securities and Exchange Commission
in order to effect or maintain the qualification of the notes indenture
under the Trust Indenture Act of 1939.
SATISFACTION AND DISCHARGE
The notes indenture will be discharged and will cease to be of further
effect as to all notes issued thereunder, when either:
(1) all notes that have been authenticated and delivered (except lost,
stolen or destroyed notes that have been replaced or paid and notes for
whose payment money has until that time been deposited in trust and
thereafter repaid to the Issuers) have been delivered to the Trustee for
cancellation; or
(2) (a) all notes that have not been delivered to the Trustee for
cancellation have become due and payable by reason of the making of
a notice of redemption or otherwise or will become due and payable
within one year and the Issuers or any Note Guarantor has
irrevocably deposited or caused to be deposited with the Trustee as
trust funds in trust solely for the benefit of the Holders, cash in
U.S. dollars, non-callable Government Securities, or a combination
thereof, in such amounts as will be sufficient without consideration
of any reinvestment of interest, to pay and discharge the entire
indebtedness on the notes not delivered to the Trustee for
cancellation for principal, premium and Liquidated Damages, if any,
and accrued interest to the date of maturity or redemption,
(b) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit or shall occur as a result of such
deposit and such deposit will not result in a breach or violation of,
or constitute a default under, any other instrument to which the
Issuers or any Note Guarantor is a party or by which the Issuers or
any Note Guarantor is bound,
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(c) the Issuers and the Note Guarantors have paid or caused to be paid
all sums payable by them under the notes indenture and
(d) the Issuers have delivered irrevocable instructions to the Trustee
under the notes indenture to apply the deposited money toward the
payment of the notes at maturity or the redemption date.
In addition, the Issuers must deliver an Officers' Certificate and an
Opinion of Counsel to the Trustee stating that all conditions precedent to
satisfaction and discharge have been satisfied.
CONCERNING THE TRUSTEE
If the Trustee becomes a creditor of any Issuer or Note Guarantor, the notes
indenture limits its right to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security or
otherwise. The Trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such conflict
within 90 days, apply to the Securities and Exchange Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The notes indenture provides that in case an Event of
Default shall occur and be continuing, the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the notes indenture at
the request of any Holder notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
GOVERNING LAW
The internal law of the state of New York shall govern and be used to
construe this indenture, the notes and the note guarantees without giving effect
to applicable principles of conflicts of law to the extent that the application
of the laws of another jurisdiction would be required thereby.
DEFINITIONS
Set forth below are defined terms used in the notes indenture which are used
in this "Description of New Notes." Reference is made to the notes indenture for
a full disclosure of all such terms. For purposes of the notes indenture, unless
otherwise specifically indicated, the term "consolidated" with respect to any
person refers to such person consolidated with its Restricted Subsidiaries, and
excludes from such consolidation any Unrestricted Subsidiary as if such
Unrestricted Subsidiary were not an Affiliate of such Person.
"ACQUIRED DEBT" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other Person
is merged with or into or became a Restricted Subsidiary of such
specified Person, whether or not such Indebtedness is incurred in
connection with, or in contemplation of, such other Person merging with
or into, or becoming a Restricted Subsidiary of, such specified Person;
and
(2) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"ADDITIONAL NOTES" means up to $100.0 million aggregate principal amount of
notes (other than the notes) issued under the notes indenture in accordance with
sections 2.02 and 4.09 of the notes indenture, as part of the same series as the
notes.
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"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; PROVIDED that beneficial ownership of 10% or more of the
Voting Stock of a Person shall be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" shall have correlative meanings.
"ASSET SALE" means:
(1) the sale, lease, conveyance, transfer or other disposition of any assets
or rights, other than sales of inventory in the ordinary course of
business; PROVIDED that the sale, conveyance or other disposition of all
or substantially all of the assets of WRC Media and its Subsidiaries
taken as a whole will be governed by the provisions of the notes
indenture described above under the caption "--Repurchase at the Option
of Holders--Change of Control" and/or the provisions described above
under the caption "--Material Covenants--Merger, Consolidation or Sale of
Assets" and not by the provisions of the covenant described under
"--Repurchase at Option of Holders--Asset Sales;" and
(2) the issuance of Equity Interests in any of WRC Media's Restricted
Subsidiaries (other than Weekly Reader or CompassLearning) or the sale of
Equity Interests in any of its Subsidiaries.
Notwithstanding the preceding, the following items shall not be deemed to be
Asset Sales:
(1) any single transaction or series of related transactions that involves
assets having a fair market value of less than $1.0 million;
(2) a transfer of assets between or among the Issuers and their Restricted
Subsidiaries,
(3) an issuance of Equity Interests by a Restricted Subsidiary to an Issuer
or to another Restricted Subsidiary;
(4) the sale or lease of equipment, accounts receivable or other real or
personal property in the ordinary course of business;
(5) the sale or other disposition of cash or Cash Equivalents;
(6) a Restricted Payment or Permitted Investment that is permitted by the
covenant described above under the caption "--Material
Covenants--Restricted Payments;"
(7) any sale of Equity Interests in, or Indebtedness or other securities of,
an Unrestricted Subsidiary;
(8) the exchange of Senior Preferred Stock for preferred stock of any Issuer
issued in exchange for the Senior Preferred Stock in accordance with the
terms thereof and the terms of the stockholders agreement related
thereto, the exchange of Unit Common Stock for Exchange Common Stock in
accordance with the stockholders agreement related thereto and the
issuance of common stock of an Issuer pursuant to the exercise of
warrants to purchase such common stock as such warrants are in effect on
the date of the notes indenture; and
(9) foreclosures on assets.
"BENEFICIAL OWNER" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), such "person" shall be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire by conversion or
exercise of other securities, whether such right is currently exercisable or is
exercisable only upon the
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occurrence of a subsequent condition. The terms "Beneficially Owns" and
"Beneficially Owned" shall have a corresponding meaning.
"BOARD OF DIRECTORS" means:
(1) with respect to a corporation, the board of directors of the
corporation;
(2) with respect to a partnership, the Board of Directors of the general
partner of the partnership; and
(3) with respect to any other Person, the board or committee of such Person
serving a similar function.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company, partnership
or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the right
to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"CASH EQUIVALENTS" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof
(PROVIDED that the full faith and credit of the United States is pledged
in support thereof) having maturities of not more than one year from the
date of acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities of
one year or less from the date of acquisition, bankers' acceptances with
maturities not exceeding one year, and overnight bank deposits, in each
case, with any lender party to the Credit Agreement or with any domestic
commercial bank having capital and surplus in excess of $500.0 million
and a Thomson Bank Watch Rating of "B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and
(3) above entered into with any financial institution meeting the
qualifications specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Rating Services and in each
case maturing within one year after the date of acquisition; and
(6) money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (1) through (5) of this
definition.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or other disposition
(other than by way of merger or consolidation), in one or a series of
related transactions, of all or substantially all of
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the properties or assets of WRC Media and its Restricted Subsidiaries
(other than CompassLearning) taken as a whole to any "person" (as that
term is used in Section 13(d)(3) of the Exchange Act) other than a
Principal or a Related Party of a Principal;
(2) the adoption of a plan of liquidation or dissolution of WRC Media or
Weekly Reader;
(3) the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that any "person" (as
defined above), other than the Principals and their Related Parties,
becomes the Beneficial Owner, directly or indirectly, of more than 50% of
the Voting Stock of either of WRC Media or Weekly Reader, measured by
voting power rather than number of shares; or
(4) the first day on which a majority of the members of the Board of
Directors of WRC Media or Weekly Reader are not Continuing Directors.
"CONSOLIDATED INDEBTEDNESS" means, with respect to any specified Person for
any date of determination, the sum, without duplication, of:
(1) the total amount of Indebtedness of such Person and its Restricted
Subsidiaries, PLUS
(2) the total amount of Indebtedness of any other Person, to the extent that
such Indebtedness has been guaranteed by the specified Person or one or
more of its Restricted Subsidiaries, PLUS
(3) the aggregate liquidation value of all Disqualified Stock of such Person
and its Restricted Subsidiaries and all the preferred stock of the
Restricted Subsidiaries of such Person (other than the Issuers), in each
case, determined on a consolidated basis and in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; PROVIDED that:
(1) the Net Income of any Person that is not a Restricted Subsidiary or that
is accounted for by the equity method of accounting shall be excluded
except that:
(a) WRC Media's equity in the net income of any such Person for such
period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during
such period to WRC Media or a Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution made to a Restricted Subsidiary, to the limitations
contained in clause (2) below) and
(b) WRC Media's equity in a net loss of any such Person for such period
shall be included in determining such Consolidated Net Income;
(2) the Net Income of any Restricted Subsidiary shall be excluded to the
extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental
approval (that has not been obtained) or, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its stockholders except that:
(a) WRC Media's equity in the net income of any such Restricted
Subsidiary for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by
such Restricted Subsidiary during such period to WRC Media or another
Restricted Subsidiary as a dividend or other distribution (subject,
in the case of a
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dividend or other distribution made to another Restricted Subsidiary,
to the limitation contained in this clause) and
(b) WRC Media's equity in a net loss of any such Restricted Subsidiary
for such period shall be included in determining such Consolidated
Net Income;
(3) unrealized gains or losses due solely to fluctuations in currency values
and the related tax effects according to GAAP shall be excluded;
(4) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded;
(5) one-time noncash charges recorded in accordance with GAAP resulting from
any merger, recapitalization or acquisition transaction shall be
excluded; and
(6) the cumulative effect of a change in accounting principles shall be
excluded.
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of WRC Media who:
(1) was a member of such Board of Directors on the date of the notes
indenture; or
(2) was nominated for election or elected to such Board of Directors with
the approval of a majority of the Continuing Directors who were members
of such Board at the time of such nomination or election.
"CREDIT AGREEMENT" means that certain Credit Agreement, dated as of
November 17, 1999, by and among CompassLearning, Weekly Reader, WRC Media as
guarantor and the various financial institutions from time to time parties
thereto, DLJ Capital Funding, Inc., as syndication agent for such financial
institutions, lead arranger and sole book running manager, Bank of America,
N.A., as administrative agent for such financial institutions, including any
related notes, guarantees, collateral documents, instruments and agreements
executed in connection therewith. Without limiting the generality of the
foregoing, the term "Credit Agreement" shall include any amendment, amendment
and restatement, supplement or other modification to such Credit Agreement and
ancillary documents and all renewals, extensions, refundings, replacements and
refinancings thereof, including, without limitation, any agreement or agreements
(1) extending or shortening the maturity of any Indebtedness incurred thereunder
or contemplated thereby, (2) adding or deleting borrowers or guarantors
thereunder or (3) increasing the amount of Indebtedness incurred thereunder or
available to be borrowed thereunder to the extent permitted under the notes
indenture.
"CREDIT FACILITIES" means, one or more debt facilities (including, without
limitation, the Credit Agreement) or commercial paper facilities, in each case
with banks or other institutional lenders or indentures providing for revolving
credit loans, term loans, receivables financing (including through the sale of
receivables to such lenders or to special purpose entities formed to borrow from
such lenders against such receivables), letters of credit or other long-term
Indebtedness, in each case, as amended, restated, modified, renewed, refunded,
replaced or refinanced in whole or in part from time to time.
"DEBT TO EBITDA RATIO" means, with respect to any Person as of the date of
determination (the "Calculation Date"), the ratio of the Consolidated
Indebtedness of WRC Media as of such date to the EBITDA of WRC Media for the
most recent full Reference Period ending immediately prior to such date for
which internal financial statements are available, determined on a pro forma
basis after giving effect to all acquisitions or dispositions of assets made by
WRC Media and its Restricted Subsidiaries from the beginning of such Reference
Period through and including such date of determination (including any financing
transactions in connection with such acquisitions or dispositions) as if such
194
acquisitions and dispositions had occurred at the beginning of such quarter. In
addition, for the purposes of making the computation referred to above, the
following shall be excluded:
(1) acquisitions that have been made by WRC Media or any of its Restricted
Subsidiaries, including through mergers or consolidations and including
any related financing transactions, during the reference period or
subsequent to such reference period and on or prior to the Calculation
Date shall be deemed to have occurred on the first day of the reference
period, and EBITDA for such reference period shall be calculated without
giving effect to clause (4) of the proviso set forth in the definition of
Consolidated Net Income, and
(2) the EBITDA attributable to discontinued operations, as determined in
accordance with GAAP, and operations of businesses disposed of prior to
the Calculation Date.
For purposes of this definition, whenever pro forma effect is to be given to
an acquisition of assets, the amount of income or earnings relating thereto and
the amount of Consolidated Interest Expense associated with any Indebtedness
incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting officer of WRC Media.
"DEFAULT" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"DESIGNATED SENIOR DEBT" means:
(1) any Indebtedness outstanding under the Credit Agreement; and
(2) any other Senior Debt permitted under the notes indenture the principal
amount of which is $25.0 million or more and that has been designated by
WRC Media as "Designated Senior Debt."
"DISQUALIFIED STOCK" means, with respect to any Person, any Capital Stock
that, by its terms (or by the terms of any security into which it is
convertible, or for which it is exchangeable, in each case at the option of the
holder thereof), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the notes mature. Notwithstanding the
preceding sentence, (a) any Capital Stock that would constitute Disqualified
Stock solely because the holders thereof have the right to require WRC Media to
repurchase such Capital Stock upon the occurrence of a change of control or an
asset sale shall not constitute Disqualified Stock if the terms of such Capital
Stock provide that WRC Media may not repurchase or redeem any such Capital Stock
pursuant to such provisions unless such repurchase or redemption complies with
the covenant described above under the caption "--Material Covenants--
Restricted Payments;" and (b) any Capital Stock that would constitute
Disqualified Stock solely because such Capital Stock is issued pursuant to any
plan for the benefit of employees of WRC Media or its Restricted Subsidiaries or
by any such plan to such employees and may be required to be repurchased by WRC
Media in order to satisfy applicable statutory or regulatory obligations shall
not constitute Disqualified Stock; PROVIDED that any amount of Disqualified
Stock shall be its mandatory maximum redemption price or liquidation preference,
as applicable, plus accrued dividends.
"DOMESTIC SUBSIDIARY" means (a) any Restricted Subsidiary that was formed
under the laws of the United States or any state thereof or the District of
Columbia or (b) any Restricted Subsidiary (including any Restricted Subsidiary
whose Note Guarantee was previously released in accordance with the notes
indenture) that guarantees or otherwise provides direct or indirect credit
support for any Indebtedness of any Issuer or Note Guarantor.
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"EBITDA" means, with respect to any specified Person for any period, the
Consolidated Net Income of such Person for such period PLUS:
(1) an amount equal to any extraordinary loss plus any net loss realized by
such Person or any of its Restricted Subsidiaries in connection with an
Asset Sale, to the extent such losses were deducted in computing such
Consolidated Net Income; PLUS
(2) provision for taxes based on income or profits of such Person and its
Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net
Income; PLUS
(3) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, noncash interest payments, the
interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net of the effect
of all payments made or received pursuant to Hedging Obligations), to the
extent that any such expense was deducted in computing such Consolidated
Net Income; PLUS
(4) depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were
paid in a prior period) and other noncash expenses (excluding any such
noncash expense to the extent that it represents an accrual of or reserve
for cash expenses in any future period or amortization of a prepaid cash
expense that was paid in a prior period) of such Person and its
Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other noncash expenses were deducted in
computing such Consolidated Net Income; PLUS
(5) any fees, expenses or charges related to any Equity Offering, Permitted
Investment, acquisition, disposition or recapitalization or Indebtedness
permitted to be incurred by the notes indenture (whether or not
successful) and fees, expenses or charges related to the transactions
contemplated by the Recapitalization Agreement (including fees to the
Principals); PLUS
(6) the amount of any minority interest expense of an Issuer deducted in
calculating Consolidated Net Income; PLUS
(7) the amount of non-recurring charges deducted in such period in computing
Consolidated Net Income; MINUS
(8) noncash items or non-recurring items increasing such Consolidated Net
Income for such period, other than the accrual of revenue in the ordinary
course of business, in each case, on a consolidated basis and determined
in accordance with GAAP.
Notwithstanding the preceding, the provision for taxes based on the income
or profits of, and the depreciation and amortization and other noncash expenses
of, a Restricted Subsidiary of WRC Media that is not an Issuer shall be added to
Consolidated Net Income to compute EBITDA of WRC Media only to the extent that a
corresponding amount would be permitted at the date of determination to be
dividended to the Issuers by such Restricted Subsidiary without prior
governmental approval (that has not been obtained), and without direct or
indirect restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Restricted Subsidiary or its stockholders.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
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"EQUITY OFFERING" means any public or private sale of any Equity Interests
(other than Disqualified Stock) of an Issuer, other than public offerings with
respect to Equity Interests registered on Form S-8 and any such public or
private sale that constitutes an Excluded Contribution.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE COMMON STOCK" means shares of common stock of Weekly Reader into
which the Unit Common Stock is exchangeable pursuant to the stockholders
agreement related thereto, as in effect on the date of the notes indenture.
"EXCLUDED CONTRIBUTION" means net cash proceeds, Cash Equivalents or
Qualified Proceeds, in each case, received by WRC Media from (a) contributions
to its common equity capital and (b) the sale (other than to a Subsidiary or to
any Company or Subsidiary management equity plan or stock option plan or any
other management or employee benefit plan or agreement) of Capital Stock (other
than Disqualified Stock) of WRC Media (other than a public Equity Offering), in
each case designated as Excluded Contributions pursuant to an Officers'
Certificate executed by the principal executive officer and the principal
financial officer of WRC Media on the date such capital contributions are made
or the date such Equity Interests are sold, as the case may be, which are
excluded from the calculation set forth in clause (3) of the first paragraph
under "Material Covenants--Restricted Payments."
"EXISTING INDEBTEDNESS" means Indebtedness of WRC Media and its Subsidiaries
(other than Indebtedness under the Credit Agreement) in existence on the date of
the notes indenture, until such amounts are repaid.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the notes indenture.
"GOVERNMENT SECURITIES" means direct obligations of, or obligations
guaranteed by, the United States of America, and the payment for which the
United States pledges its full faith and credit.
"GUARANTEE" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"HEDGING OBLIGATIONS" means, with respect to any specified Person, the
obligations of such Person under:
(1) interest rate swap agreements, interest rate cap agreements and interest
rate collar agreements; and
(2) other agreements or arrangements designed to protect such Person against
fluctuations in interest rates, the value of foreign currencies or
commodity prices.
"HOLDER" means a person in whose name a note is registered.
"INDEBTEDNESS" means, with respect to any specified Person, any indebtedness
of such Person, whether or not contingent, in respect of:
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or letters
of credit (or reimbursement agreements in respect thereof);
(3) banker's acceptances;
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(4) representing Capital Lease Obligations;
(5) the balance deferred and unpaid of the purchase price of any property,
except any such balance that constitutes an accrued expense or trade
payable; or
(6) representing any Hedging Obligations,
if and to the extent any of the preceding items (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance sheet
(excluding the footnotes thereto) of the specified Person prepared in accordance
with GAAP. In addition, the term "Indebtedness" includes all Indebtedness of
others secured by a Lien on any asset of the specified Person (whether or not
such Indebtedness is assumed by the specified Person) and, to the extent not
otherwise included, the Guarantee by the specified Person of any indebtedness of
any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness issued with
original issue discount; and
(2) the principal amount thereof, together with any interest thereon that is
more than 30 days past due, in the case of any other Indebtedness.
"INVESTMENTS" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including Affiliates) in the forms
of loans (including Guarantees or other obligations), advances or capital
contributions (excluding accounts receivable, trade credit, advances to
customers, commission, travel and similar advances to officers and employees
made in the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, together
with all items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP. If WRC Media or any Subsidiary of WRC Media
sells or otherwise disposes of any Equity Interests (other than by way of a
public Equity Offering) of any direct or indirect Subsidiary of WRC Media such
that, after giving effect to any such sale or disposition, such Person is no
longer a Subsidiary of WRC Media, WRC Media shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Equity Interests of such Subsidiary not sold or disposed of in an
amount determined as provided in the final paragraph of the covenant described
above under the caption "--Material Covenants--Restricted Payments." The
acquisition by WRC Media or any Subsidiary of WRC Media of a Person that holds
an Investment in a third Person shall be deemed to be an Investment by WRC Media
or such Subsidiary in such third Person in an amount equal to the fair market
value of the Investment held by the acquired Person in such third Person in an
amount determined as provided in the final paragraph of the covenant described
above under the caption "--Material Covenants--Restricted Payments;" PROVIDED
that any such acquisition will not be deemed to be an Investment by WRC Media or
such Subsidiary in such third Person to the extent that all such Investments,
taken as a whole, are not material to such Person and all such Investments were
not made in contemplation of such acquisition.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law, including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction; PROVIDED that in
no event shall an operating lease be deemed to constitute a Lien.
"LIQUIDATED DAMAGES" means all liquidated damages then owing pursuant to
section 5 of the registration rights agreement.
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"NET INCOME" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:
(1) any gain (or loss), together with any related provision for taxes on
such gain (or loss), realized in connection with: (a) any Asset Sale; or
(b) the disposition of any securities by such Person or any of its
Restricted Subsidiaries or the extinguishment of any Indebtedness of such
Person or any of its Restricted Subsidiaries; and
(2) any extraordinary gain (or loss), together with any related provision
for taxes on such extraordinary gain (or loss).
"NET PROCEEDS" means the aggregate cash proceeds received by WRC Media or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
noncash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale, including, without limitation, legal, accounting
and investment banking fees, and sales commissions, and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof, in each
case, after taking into account any available tax credits or deductions and any
tax sharing arrangements, and amounts required to be applied to the repayment of
Indebtedness, other than Senior Debt under a Credit Facility, secured by a Lien
on the asset or assets that were the subject of such Asset Sale and any
deduction of appropriate amounts to be provided by WRC Media as a reserve in
accordance with GAAP against any liabilities associated with the asset disposed
of in such Asset Sale and retained by WRC Media after such Asset Sale or other
disposition thereof, including, without limitation, pension and other
post-employment benefit liabilities and liabilities related to environmental
matters or against any indemnification obligations associated with such
transaction.
"NON-RECOURSE DEBT" means Indebtedness:
(1) as to which neither WRC Media nor any of its Restricted Subsidiaries
(a) provides credit support of any kind (including any undertaking,
agreement or instrument that would constitute Indebtedness), (b) is
directly or indirectly liable as a guarantor or otherwise, or
(c) constitutes the lender;
(2) no default with respect to which (including any rights that the holders
thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit upon notice, lapse of time or both any holder of
any other Indebtedness (other than the notes) of WRC Media or any of its
Restricted Subsidiaries to declare a default on such other Indebtedness
or cause the payment thereof to be accelerated or payable prior to its
stated maturity; and
(3) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of WRC Media or any of its
Restricted Subsidiaries.
"NOTE GUARANTEE" means any Guarantee of the obligations of the Issuer under
the notes indenture and the notes in accordance with the provisions of the notes
indenture.
"NOTE GUARANTOR" means each of WRC Media's Domestic Subsidiaries that
executes a Note Guarantee in accordance with the provisions of the notes
indenture, and its respective successors and assigns.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFICERS' CERTIFICATE" means a certificate signed on behalf of an Issuer
(or, if the context requires, a Note Guarantor) by two officers of such Issuer
(or such Note Guarantor, if applicable), one of whom must be the principal
executive officer, the principal financial officer, the treasurer or the
principal
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accounting officer of such Issuer (or such Note Guarantor), that meets the
requirements of section 13.05 of the notes indenture.
"OPINION OF COUNSEL" means an opinion from legal counsel, who is reasonably
acceptable to the Trustee, that meets the requirements of section 13.05 of the
notes indenture. The counsel may be an employee of or counsel to WRC Media, any
subsidiary of WRC Media or the Trustee.
"PERMITTED BUSINESS" means the business conducted by WRC Media and its
Subsidiaries on the date of the notes indenture and reasonable extensions
thereof and such other business activities that are incidental or related
thereto.
"PERMITTED INVESTMENTS" means:
(1) any Investment in an Issuer or in a Restricted Subsidiary of an Issuer;
(2) any Investment in Cash Equivalents;
(3) any Investment by WRC Media or any Subsidiary of WRC Media in a Person,
if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of an Issuer; or
(b) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is
liquidated into, an Issuer or a Restricted Subsidiary of an Issuer;
(4) any Investment made as a result of the receipt of noncash consideration
from an Asset Sale that was made pursuant to and in compliance with the
covenant described above under the caption "--Repurchase at the Option of
Holders--Asset Sales;"
(5) Hedging Obligations;
(6) any Investment existing on the date of the notes indenture;
(7) any Investment acquired by WRC Media or any of its Restricted
Subsidiaries (a) in exchange for any other Investment or accounts
receivable held by WRC Media or any such Restricted Subsidiary in
connection with or as a result of a bankruptcy, workout, reorganization
or recapitalization of the issuer of such other Investment or accounts
receivable or (b) as a result of a foreclosure by WRC Media or any of its
Restricted Subsidiaries with respect to any secured Investment or other
transfer of title with respect to any secured Investment in default;
(8) Investments the payment for which consists solely of Equity Interests of
WRC Media (exclusive of Disqualified Stock); PROVIDED, HOWEVER,that such
Equity Interests will not increase the amount available for Restricted
Payments under clause (3) of the first paragraph of the "Restricted
Payments" covenant;
(9) loans and advances to officers, directors and employees for
business-related travel, expenses, moving expenses and other similar
expenses, in each case incurred in the ordinary course of business;
(10) Guarantees (including Note Guarantees) of Indebtedness of WRC Media or
a Restricted Subsidiary which Indebtedness is permitted under the
covenant "Incurrence of Indebtedness and Issuance of Preferred Stock;"
(11) Investments consisting of the licensing or contribution of intellectual
property pursuant to joint marketing arrangements with other Persons made
in the ordinary course of business; and
(12) other Investments in any Person having an aggregate fair market value
(measured on the date each such Investment was made and without giving
effect to subsequent changes in value),
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when taken together with all other Investments made pursuant to this
clause (9) not to exceed $10.0 million.
"PERMITTED JUNIOR SECURITIES" means:
(1) Equity Interests in WRC Media, an Issuer or any Note Guarantor; or
(2) debt securities of WRC Media, an Issuer or the relevant Note Guarantor
that are subordinated to all Senior Debt and any debt securities issued
in exchange for Senior Debt to substantially the same extent as, or to a
greater extent than, the notes and the Note Guarantees are subordinated
to Senior Debt under the notes indenture.
"PERMITTED LIENS" means:
(1) Liens of the Issuers and any Note Guarantor securing Senior Debt that
was permitted by the terms of the notes indenture to be incurred;
(2) Liens in favor of the Issuers or the Note Guarantors;
(3) Liens on property of a Person existing at the time such Person is merged
with or into or consolidated with WRC Media or any Restricted Subsidiary
of WRC Media; PROVIDED that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with
WRC Media or the Restricted Subsidiary;
(4) Liens on property existing at the time of acquisition thereof by WRC
Media or any Restricted Subsidiary of WRC Media, PROVIDED that such Liens
were in existence prior to the contemplation of such acquisition;
(5) Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(6) Liens to secure Indebtedness (including Capital Lease Obligations)
permitted by clause (4) of the second paragraph of the covenant entitled
"--Material Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock" covering only the assets acquired with such Indebtedness
or assets ancillary thereto;
(7) Liens existing on the date of the notes indenture;
(8) Liens for taxes, assessments or governmental charges or claims that are
not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
PROVIDEDthat any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(9) Liens securing (a) Indebtedness (including, without limitation, all
Obligations) under the Credit Agreement and (b) Hedging Obligations
payable to a lender under the Credit Agreement or an Affiliate thereof or
to a Person that was a lender or an Affiliate thereof at the time the
agreement relating to such Hedging Obligations was entered into to the
extent such Hedging Obligations are secured by Liens on assets also
securing Indebtedness (including, without limitation, all Obligations)
under the Credit Agreement;
(10) Liens securing Permitted Refinancing Indebtedness permitted to be
incurred under the notes indenture to refinance Indebtedness secured by a
Lien permitted under the notes indenture or amendments or renewals of
Liens that were permitted to be incurred, PROVIDED, in each case, that
such Liens do not extend to an additional property or asset of WRC Media
or any restricted Subsidiary; and
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(11) Liens incurred in the ordinary course of business of WRC Media or any
Subsidiary of WRC Media with respect to obligations that do not exceed
$5.0 million at any one time outstanding.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of WRC Media or
any of its Restricted Subsidiaries issued in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of WRC Media or any of its Restricted Subsidiaries (other than
intercompany Indebtedness); PROVIDED that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount
(or accreted value, if applicable) of the Indebtedness so extended,
refinanced, renewed, replaced, defeased or refunded (plus all accrued
interest thereon and the amount of all expenses and premiums incurred in
connection therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes,
such Permitted Refinancing Indebtedness has a final maturity date equal
to or later than the final maturity date of, and is subordinated in right
of payment to, the notes on terms at least as favorable in all material
respects to the Holders of notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and
(4) such Indebtedness is incurred by (a) an Issuer or a Note Guarantor or
(b) the Restricted Subsidiary that is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"PRINCIPALS" means Ripplewood Partners, L.P., DLJ Merchant Banking Partners
and any member of management of any of the Issuers as of the date of the notes
indenture.
"QUALIFIED PROCEEDS" means assets that are used or useful in, or a majority
of the Voting Stock of any Person engaged in, a Permitted Business; PROVIDED
that the fair market value of any such assets or Capital Stock shall be
determined by the Board of Directors in good faith, except that in the event the
value of any such assets or Capital Stock may exceed $5.0 million or more, the
fair value shall be determined in writing by an independent investment banking
firm of nationally recognized standing.
"RECAPITALIZATION AGREEMENT" means the recapitalization agreement described
under the caption "Transactions."
"REFERENCE PERIOD" means the most recently ended four full fiscal quarters
for which internal financial statements are available.
"RELATED PARTY" means:
(1) any controlling stockholder, majority (or more) owned Subsidiary, or
immediate family member (in the case of an individual) of any Principal;
or
(2) any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding a majority
or more controlling interest of which consist of any one or more
Principals and/or such other Persons referred to in the immediately
preceding clause (1).
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"RESTRICTED INVESTMENT" means any Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary. In the case of WRC Media,
Restricted Subsidiary shall include Weekly Reader and CompassLearning.
"SENIOR DEBT" means:
(1) all Obligations of an Issuer or any Note Guarantor outstanding under
Credit Facilities and all Hedging Obligations payable to a Person that
was a lender under the Credit Facilities (or an affiliate of a lender
under the Credit Facilities) at the time the agreement relating to such
Hedging Obligations pursuant to which such Obligations are payable was
entered into, including, in each case, interest accruing subsequent to
the filing of, or which would have accrued but for the filing of, a
petition for bankruptcy, reorganization or similar proceeding, whether or
not such interest is an allowable claim in such proceeding;
(2) any other Indebtedness of an Issuer or any Note Guarantor permitted to
be incurred under the terms of the notes indenture, unless the instrument
under which such Indebtedness is incurred expressly provides that it is
on a parity with or subordinated in right of payment to the notes or any
Note Guarantee; and
(3) all Obligations with respect to the items listed in the preceding
clauses (1) and (2).
Notwithstanding anything to the contrary in the preceding, Senior Debt will
not include:
(1) any liability for Federal, state, local or other taxes owed or owing by
an Issuer;
(2) any Obligations of an Issuer to any of its Subsidiaries or other
Affiliates;
(3) any trade payables (including Guarantees thereof or instruments
evidencing such liabilities;
(4) the portion of any Indebtedness that is incurred in violation of the
notes indenture; or
(5) Non-Recourse Debt;
(6) Any Indebtedness, Guarantee or Obligation of the Issuers or the Note
Guarantors which is subordinate or junior to any other Indebtedness,
Guarantee or Obligation of the Issuers or the Note Guarantors;
(7) Indebtedness evidenced by the notes and the Note Guarantees; and
(8) Capital Stock of an Issuer or a Note Guarantor.
"SENIOR PREFERRED STOCK" means $75.0 million in initial liquidation
preference of senior accreting preferred stock of WRC Media issued on the date
of the notes indenture and including any preferred stock of any Issuer issued in
exchange therefor in accordance with the terms thereof and the terms of the
stockholders agreement related thereto, in each case, as in effect on the date
of the notes indenture.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act of 1933, as such Regulation is in effect on the
date hereof.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
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"SUBORDINATED NOTE OBLIGATIONS" means all Obligations with respect to the
notes, including, without limitation, principal, premium, if any, interest and
liquidated damages, if any, payable pursuant to the terms of the notes
(including, without limitation, upon the acceleration or redemption thereof),
together with and including, without limitation, any amounts received or
receivable upon the exercise of rights of rescission or other rights of action,
including, without limitation, claims for damages, or otherwise.
"SUBSIDIARY" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which more than
50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned
or controlled, directly or indirectly, by such Person or one or more of
the other Subsidiaries of that Person (or a combination thereof); and
(2) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are such Person or one or more
Subsidiaries of such Person (or any combination thereof).
"TAX SHARING AGREEMENT" means the Tax Sharing Agreement among the Issuers
and their Subsidiaries, as in effect on the date of the notes indenture.
"TOTAL TANGIBLE ASSETS" means the total consolidated assets, excluding
goodwill and other intangible assets, of WRC Media and its Restricted
Subsidiaries determined in accordance with GAAP, as set forth on WRC Media's
most recent consolidated balance sheet.
"UNIT COMMON STOCK" means the 205,656 shares of common stock of WRC Media
initially offered with the notes as a unit.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of WRC Media (other than
Weekly Reader and CompassLearning) that is designated by the Board of Directors
as an Unrestricted Subsidiary pursuant to a Board Resolution, but only to the
extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or understanding
with WRC Media or any Restricted Subsidiary of WRC Media unless the terms
of any such agreement, contract, arrangement or understanding are no less
favorable to WRC Media or such Restricted Subsidiary than those that
might be obtained at the time from Persons who are not Affiliates of WRC
Media;
(3) is a Person with respect to which neither WRC Media nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results; and
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of WRC Media or any of its Restricted
Subsidiaries.
Any designation of a Subsidiary of WRC Media as an Unrestricted Subsidiary
shall be evidenced to the Trustee by filing with the Trustee a certified copy of
the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the preceding
conditions and was permitted by the covenant described above under the caption
"--Material Covenants--Restricted Payments." If, at any time, any Unrestricted
Subsidiary would fail to meet the preceding requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the notes indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of WRC Media as of such date
and, if such
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Indebtedness is not permitted to be incurred as of such date under the covenant
described under the caption "--Material Covenants--Incurrence of Indebtedness
and Issuance of Preferred Stock," WRC Media shall be in default of such
covenant. The Board of Directors of WRC Media may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of WRC Media of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (1) such Indebtedness
is permitted under the covenant described under the caption "--Material
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock,"
calculated on a pro forma basis as if such designation had occurred at the
beginning of the four-quarter reference period; and (2) no Default or Event of
Default would be in existence following such designation.
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of each
then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect thereof, by (b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such
payment; by
(2) the then outstanding principal amount of such Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any specified Person means a
Restricted Subsidiary of such Person all of the outstanding Capital Stock or
other ownership interests of which (other than directors' qualifying shares and
shares of its Capital Stock pursuant to the exercise of warrants outstanding on
the date of the notes indenture) shall at the time be owned by such Person or by
one or more Wholly Owned Restricted Subsidiaries of such Person and one or more
Wholly Owned Restricted Subsidiaries of such Person.
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DESCRIPTION OF NEW SENIOR PREFERRED STOCK
The old senior preferred stock was and the new senior preferred stock will
be issued under a Certificate of Designations, Preferences and Rights of 15%
Series A Senior Preferred Stock and 15% Series B Senior Preferred Stock, a copy
of which is filed as an exhibit to the registration statement of which this
prospectus constitutes a part. The following description is a summary of the
material provisions of the certificate of designations and the senior preferred
stockholders agreement and does not restate the certificate of designations and
the senior preferred stockholders agreement in their entirety. We urge you to
read the certificate of designations and the senior preferred stockholders
agreement because they, and not this description, define your rights as holders
of the senior preferred stock. Copies of the certificate of designations and the
senior preferred stockholders agreement are available as stated under "Where You
Can Find More Information." In this description, the terms "we," "our" and "us"
refer only to WRC Media and not to any of its subsidiaries.
The terms of the new senior preferred stock and the old senior preferred
stock are identical except that the new senior preferred stock (1) will not
contain terms with respect to transfer restrictions and (2) will not require us
to consummate a registered exchange offer. Except as described in the previous
sentence, the new senior preferred stock will evidence the same rights and
obligations as the old senior preferred stock and will be entitled to the same
benefits under the preferred stockholders agreement and the certificate of
designations as the old senior preferred stock.
Senior preferred stockholders whose shares of old senior preferred stock are
accepted for exchange will receive new senior preferred stock having a
liquidation preference equal to that of the surrendered old senior preferred
stock. All old senior preferred stock and new senior preferred stock will be
treated as a single class of securities under the certificate of designations.
GENERAL
The certificate of designations designates 6,400,000 shares of our
authorized preferred stock as 15% Series A Senior Preferred Stock due 2011 and
6,400,000 shares of our authorized preferred stock as 15% Series B Senior
Preferred Stock, in each case with an original liquidation preference of $25.00
per share. The old senior preferred stock was and the new senior preferred stock
will, when issued, be fully paid and nonassessable and the senior preferred
stockholders will have no preemptive rights in connection therewith.
The liquidation preference of the senior preferred stock is not necessarily
indicative of the price at which shares of the senior preferred stock will
actually trade at or after the time of their issuance, and the senior preferred
stock may trade at prices below its liquidation preference. The market price of
the senior preferred stock can be expected to fluctuate with changes in the
financial markets and economic conditions, our financial condition and prospects
and other factors that generally influence the market prices of securities.
All "distributions" with respect to the senior preferred stock, including
the payment of dividends, the accrual of dividends, the exchange of the senior
preferred stock for preferred stock of Weekly Reader and/or CompassLearning,
redemptions, repurchases and distributions upon a liquidation, dissolution or
winding up of WRC Media, are subject to the provisions of the Delaware Business
Corporation Law, including provisions which prohibit any "distributions" if,
after giving effect thereto, we would be unable to pay our debts as they become
due in the usual course of our business or our total assets would be less than
our total liabilities. See "Risk Factors--Dividends."
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RANKING
The old senior preferred stock does and the new senior preferred stock will,
with respect to dividend rights and rights on liquidation, winding up and
dissolution of WRC Media, rank:
- senior to all classes or series of our common stock, par value $0.01 per
share, and each other class of capital stock (including any rights or
options exercisable for or convertible into such capital stock) issued by
us the terms of which do not expressly provide that such series will rank
senior to, or on a parity with, the senior preferred stock or which do not
specify any rank relative to the senior preferred stock (collectively
referred to herein as "JUNIOR SECURITIES");
- on a parity with each other class of capital stock (including any rights
or options exercisable for or convertible into such capital stock) issued
by us the terms of which specifically provide that such series will rank
on a parity with the senior preferred stock (collectively referred to as
"PARITY SECURITIES"); and
- junior to each other class of capital stock (including any rights or
options exercisable for or convertible into such capital stock) issued by
us the terms of which specifically provide that such series will rank
senior to the senior preferred stock (collectively referred to as "SENIOR
SECURITIES").
Without the written consent of the holders of a majority of the then
outstanding senior preferred stock or the majority vote of holders of the then
outstanding senior preferred stock at a meeting of the senior preferred
stockholders called for such purpose, we may not authorize, create (by way of
reclassification or otherwise) or issue:
(1) Parity Securities or Senior Securities; or
(2) any obligation or security convertible or exchangeable into, or
evidencing a right to purchase, shares of any class or series of Senior
Securities or Parity Securities.
Notwithstanding the foregoing, we may, without the consent of the senior
preferred stockholders, authorize, create (by way of reclassification or
otherwise) or issue Parity Securities for the purpose of using the proceeds of
such Parity Securities for the redemption of all outstanding shares of senior
preferred stock. See "--Voting Rights."
DIVIDENDS
The new senior preferred stock will accrue dividends at an annual rate of
(1) 15% and (2) 15.5% if we fail to comply with our registration obligations
with respect to the old senior preferred stock. See "Registration Rights--The
Senior Preferred Stock." In addition, if we are unable or fail to discharge our
obligation to redeem all outstanding shares of the senior preferred stock in
connection with a mandatory redemption or a change of control, the dividend rate
will increase by 0.50% each quarter or portion thereof following the date on
which such redemption was required to be made until such default is cured;
however, the aggregate increase in such dividend rate will not exceed 10%. See
"--Redemption of Senior Preferred Stock--Change of Control" and "--Redemption of
Senior Preferred Stock--Mandatory." The board of directors will declare
dividends out of legally available funds. We will pay dividends on the new
senior preferred stock quarterly in arrears on March 31, June 30, September 30
and December 31 of each year, commencing on December 31, 2000.
Prior to December 31, 2004, or such earlier dividend payment date as we may
elect in our sole discretion, dividends will not be payable in cash, but will
accrete to the liquidation preference of the shares of the senior preferred
stock, except as described in the next sentence. Prior to December 31, 2004, at
the request of a majority of the holders of the senior preferred stock, we will
pay dividends in additional fully-paid and nonassessable shares of senior
preferred stock having an aggregate liquidation preference equal to the amount
of such accrued and unpaid cash dividends in lieu of the dividends
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accreting to the liquidation preference of the shares of the senior preferred
stock. After December 31, 2004, we will pay dividends only in cash on the
liquidation preference per share of the senior preferred stock.
Dividends will be payable to holders of record as of a record date preceding
the relevant quarterly dividend payment date, not more than 60 days or less than
10 days preceding the payment of such dividends, as fixed by our board of
directors. Following December 31, 2004, any accrued and unpaid cash dividends
may be declared and paid at any time to holders of record as of such date, but
not more than 45 days preceding the payment date of such dividends, as may be
fixed by our board of directors.
We do not expect to pay any dividends in cash before December 31, 2004.
Holders of shares of senior preferred stock will not be entitled to any
dividends, whether in cash, property or stock, in excess of the cumulative
dividends payable on the senior preferred stock. No interest or sum of money in
lieu of interest will be payable in respect of any dividend payment on the
senior preferred stock that may be in arrears unless specifically provided for
in the certificate of designations.
Dividends payable on the new senior preferred stock will accrue from the
most recent date to which dividends have been paid on the old senior preferred
stock, or if no dividends have been paid on the old senior preferred stock, from
November 17, 1999. Dividends will be computed on the basis of a 360-day year
comprised of twelve 30-day months. Accordingly, registered holders of the new
senior preferred stock on the relevant record date for the first dividend
payment date following the consummation of the exchange offer will receive
dividends accruing from December 31, 1999, the most recent date to which
dividends have been paid or accreted. All dividends will be cumulative from the
date of issuance of the senior preferred stock, whether or not in any dividend
period we have funds legally available for the payment of such dividends.
With respect to the old senior preferred stock accepted for exchange, the
holders of such old senior preferred stock will receive new senior preferred
stock having a liquidation preference equal to that of the surrendered old
senior preferred stock. Dividends will cease to accrue in respect of shares of
the old senior preferred stock on the date that such shares are exchanged or on
the date of their earlier redemption or repurchase by us. See "Certain U.S.
Federal Tax Considerations." Holders of old senior preferred stock whose old
senior preferred stock is accepted for exchange will not receive any payment in
respect of accrued dividends on such old senior preferred stock.
REDEMPTION OF SENIOR PREFERRED STOCK
OPTIONAL. On or after November 17, 1999 (but not including from
November 17, 2002 to November 17, 2004), we may, to the extent we have funds
legally available for such redemption, at our option in whole but not in part,
at the redemption prices per share in cash listed in the table below, together
with all accrued and unpaid cash dividends thereon to the date of redemption,
without interest on such redemption price, if redeemed during the 12-month
period beginning on November 17 of the years indicated below:
PERCENTAGE OF
YEAR LIQUIDATION VALUE
- ---- -----------------
1999........................................................ 115.000%
2000........................................................ 115.000
2001........................................................ 115.000
2004........................................................ 107.500
2005........................................................ 105.625
2006........................................................ 103.750
2007........................................................ 101.875
2008 and thereafter......................................... 100.000
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MANDATORY. To the extent we have funds legally available for such payment,
on November 17, 2011, if any shares of the senior preferred stock are
outstanding, we will be required to redeem all outstanding shares of senior
preferred stock at a redemption price equal to the aggregate liquidation value
of the shares redeemed, in cash, together with any accrued and unpaid cash
dividends, if any, to the date of redemption, without interest on such
redemption price.
CHANGE OF CONTROL. If a change of control occurs, we, to the extent we have
legally available funds for such payment and to the extent permitted by the
notes indenture, will offer to redeem the shares of senior preferred stock then
outstanding and will redeem the senior preferred stock of any holder who will
consent to such redemption upon a date that is no later than 30 days following
the change of control (or, if a later date is required in order to comply with
the federal securities laws, the first date thereafter on which such redemption
is permitted), at the redemption prices per share in cash listed in the table
below, together with accrued and unpaid cash dividends to the date of
redemption, without interest on such redemption price, if redeemed during the
12-month period beginning on November 17 of the years indicated below:
PERCENTAGE OF
YEAR LIQUIDATION VALUE
- ---- -----------------
1999........................................................ 107.5000%
2000........................................................ 107.5000
2001........................................................ 107.5000
2002........................................................ 100.0000
2003........................................................ 100.0000
2004........................................................ 103.7500
2005........................................................ 102.8125
2006........................................................ 101.8750
2007........................................................ 100.9375
2008 and thereafter......................................... 100.0000
The definition of "change of control" under the certificate of designations
is substantially the same as the definition of such term under the notes
indenture. See "Description of New Notes--Definitions."
EXCHANGE
We may, at our option, but only in connection with a reorganization (as
described below), redeem all, but not less than all, of the shares of the senior
preferred stock then outstanding in exchange for an equivalent number of shares
of preferred stock of Weekly Reader, of identical type and liquidation
preference, having identical terms and conditions as the senior preferred stock
(except that the issuer of such preferred stock shall be Weekly Reader), with
equal amounts of accrued and unpaid cash dividends.
The DLJMB Investors and their permitted transferees may, pursuant to the
senior preferred stockholders agreement, at their option, cause us to exchange
all, but not less than all, outstanding shares of the senior preferred stock for
an equal number of shares of preferred stock of Weekly Reader and/or
CompassLearning, of identical type and liquidation preference, having
substantially identical terms and conditions as the senior preferred stock
(except that the issuer of such preferred stock shall be Weekly Reader and/or
CompassLearning, as applicable), with equal amounts of accrued and unpaid cash
dividends.
A "reorganization" means a reorganization completed in connection with an
initial public offering, pursuant to which we will transfer, or cause to be
transferred, all or substantially all of our assets to Weekly Reader in exchange
for the assumption by Weekly Reader of all or substantially all of our
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liabilities, the issuance to us by Weekly Reader of new common stock and a
number of shares of Weekly Reader preferred stock equal to the number of shares
of senior preferred stock then outstanding in exchange for the senior preferred
stock; PROVIDED that after giving effect to such reorganization the overall
economic position of a holder of Weekly Reader preferred stock is not worse than
the overall economic position of a holder of the senior preferred stock
immediately prior to such transaction with respect to the investment by such
holder in us (and relative to our other creditors, lenders and equity holders).
Pursuant to the senior preferred stockholders agreement, such reorganization
will also be conditional upon whether:
(1) the assets and liabilities Weekly Reader immediately subsequent to such
a reorganization are substantially identical to our assets and
liabilities prior to such reorganization; and
(2) Weekly Reader delivered to the senior preferred stockholders who are
party to the senior preferred stockholders agreement an opinion of
outside counsel from a firm that is reasonably acceptable to such
stockholders that
(a) the reorganization should qualify as a reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended; and
(b) there should be no adverse tax consequences to such stockholders or
to Weekly Reader that result from, are caused by, or are incurred by
such stockholder or Weekly Reader in connection with the consummation
of the reorganization.
LIQUIDATION RIGHTS
Except as provided in the certificate of designations, the holders of senior
preferred stock will not be entitled to any distribution in the event of
liquidation, dissolution or winding up of WRC Media. In the event of any
voluntary or involuntary liquidation, dissolution or winding up, each holder of
the new senior preferred stock will be entitled to payment, out of our assets
available for distribution, before any payment or distribution is made on any
Junior Securities, including, without limitation, our common stock. We will pay
to each holder of senior preferred stock an amount equal to the liquidation
value per share of senior preferred stock held by such holder, plus accrued and
unpaid cash dividends, if any, to the date fixed for liquidation, dissolution or
winding up.
Liquidation value with respect to shares of senior preferred stock (other
than those distributed as dividends to the senior preferred stockholders upon
their request in lieu of accretion of interest to the liquidation value as
described under "--Dividends" above) means, as of any date, the sum of
(1) $25.00 per share and (2) the aggregate of all dividends accreted on such
share until the most recent dividend payment date upon which an accretion to
liquidation value has occurred (or if such date is a dividend payment date upon
which an accretion to liquidation value has occurred, such date). In the event
of an actual liquidation, dissolution or winding up of WRC Media or the
redemption of senior preferred stock, such amount will be calculated by
including dividends to the actual date of such liquidation, dissolution, winding
up or redemption rather than the most recent dividend payment date. In addition,
dividends will in no event accrete beyond the earlier of (1) December 31, 2004
(or such earlier dividend payment date as we may elect to pay dividends in cash)
and (2) the most recent dividend payment date prior to the dividend payment date
on which we begin paying dividends on the new senior preferred stock in
additional shares of senior preferred stock in lieu of accretion of interest to
the liquidation value. Shares distributed as dividends to the senior preferred
stockholders upon their request in lieu of accretion to the liquidation value
will have the liquidation value of the senior preferred stock outstanding
immediately prior to the first dividend payment date occurring after the senior
preferred stockholders request payment of dividends in additional shares of
senior preferred stock.
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If upon any voluntary or involuntary liquidation, dissolution or winding up
of our assets, the application of all amounts available for payments with
respect to the senior preferred stock and all other Parity Securities would not
result in payment in full of the preferential amounts on the senior preferred
stock and liquidating payments on any Parity Securities, holders of the senior
preferred stock and the Parity Securities will share ratably in any distribution
of our assets, or the proceeds of such assets, in proportion to the full amount
payable upon liquidation to which each is entitled. After payment in full of all
amounts to which holders of senior preferred stock are entitled, such holders
will not be entitled to any further participation in any distribution of our
assets. However, neither the voluntary sale, conveyance, exchange or transfer
(for cash, shares of stock, securities or other consideration) of all or
substantially all of our property or assets nor the consolidation or merger of
WRC Media with one or more corporations will be deemed to be a voluntary or
involuntary liquidation, dissolution or winding up, unless such sale,
conveyance, exchange or transfer shall be in connection with a liquidation,
dissolution or winding up of our business.
The certificate of designations does not contain any provision requiring
funds to be set aside to protect the liquidation preference of the senior
preferred stock, although such liquidation preference will be substantially in
excess of the par value of such shares of senior preferred stock.
VOTING RIGHTS
Holders of the new senior preferred stock will not have any voting rights
other than (1) those required by law and (2) those specified in the certificate
of designations, including those described herein. Upon our failure to:
- pay in full four consecutive or six quarterly cash dividends;
- discharge any obligation in connection with a mandatory redemption or a
change of control with respect to the senior preferred stock for any
reason (including because there are no funds legally available for a
redemption);
- give notice required to be given in connection with mandatory redemption
provided for in the certificate of designations; or
- comply with our covenants described in the certificate of designations,
the number of directors constituting our board of directors will be increased by
one and the majority holders of the new senior preferred stock, voting together
as a single class with holders of other classes or series of our preferred stock
having similar voting rights, will be entitled to elect one additional member of
our board of directors.
The term of office of any director elected as a result of any of the events
described above will continue until all dividends in arrears on the senior
preferred stock are paid in full and all other such events or defaults have been
cured or waived, at which time the term of office of any such directors shall
terminate and the number of directors constituting our board of directors will
be reduced accordingly.
In addition, as provided above under "--Ranking," we may not authorize,
create (by way of reclassification or otherwise) or issue any Parity Securities
or Senior Securities, or any obligation or security convertible into or
evidencing the right to purchase Parity Securities or Senior Securities without
the consent of the holders of a majority of the then outstanding senior
preferred stock, except that we may, without the consent of the senior preferred
stockholders, authorize, create (by way of reclassification or otherwise) or
issue Parity Securities for the purpose of using the proceeds of such Parity
Securities for the redemption of all outstanding shares of senior preferred
stock.
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Under Delaware law, holders of preferred stock are entitled to vote as a
class upon a proposed amendment to the certificate of incorporation if the
amendment would:
(1) increase or decrease the par value of the shares of that class of
preferred stock; or
(2) alter or change the powers, preferences or special rights of the shares
of that class of preferred stock in a way that would affect the Holders
of that preferred stock adversely.
COVENANTS
Without the consent of a majority of the then outstanding senior preferred
stock, we may not amend, alter or repeal any provision of our certificate of
incorporation (by merger or otherwise) so as to adversely affect the
preferences, rights or powers of the senior preferred stock, PROVIDED that any
such amendment that decreases the dividend payable on or the liquidation value
of the senior preferred stock shall require the affirmative vote of holders of
each share of senior preferred stock at a meeting of senior preferred
stockholders called for such purpose or written consent of each such senior
preferred stockholder.
PAYMENTS TO PARITY SECURITIES. So long as any shares of the senior
preferred stock are outstanding, except as described in the next paragraph, we
will not (1) declare, pay or set apart for payment on any Parity Securities any
dividends or declare or make any other distribution on any Parity Securities; or
(2) redeem, purchase or otherwise acquire any Parity Securities for any
consideration, directly or indirectly; or (3) pay or make available any monies
for a sinking for the redemption of any shares of any Parity Securities, unless,
in each case, we declare and pay, or set apart for payment a sum sufficient for
the payment of, full cumulative dividends (to the extent such dividends on the
senior preferred stock are payable in cash) on the senior preferred stock for
all quarterly dividend periods terminating on or prior to the payment of the
dividend on, or the acquisition of, the Parity Securities.
When dividends (to the extent such dividends on the senior preferred stock
are payable in cash) are not paid in full or a sum sufficient for the payment
thereof is not set apart as described in the preceding paragraph, all dividends
declared upon the shares of senior preferred stock and all dividends declared
upon any Parity Securities shall (in each case, to the extent payable in cash)
be declared ratably in proportion to the respective amounts of dividends
accumulated and unpaid on the senior preferred stock and accumulated and unpaid
on such Parity Securities.
PAYMENTS TO JUNIOR SECURITIES. So long as any shares of senior preferred
stock are outstanding, we will not (1) declare, pay or set apart for payment on
any Junior Securities any dividends (other than pay-in-kind dividends or
distributions paid in shares of, or options, warrants or rights to subscribe for
or purchase shares of Junior Securities) or declare or make any other
distribution on the Junior Securities; or (2) redeem, purchase or otherwise
acquire any Junior Securities for any consideration, directly or indirectly
(except by conversion into or exchange for Junior Securities); or (3) pay or
make available any monies for a sinking fund for the redemption of any Junior
Securities, unless, in each case; (a) the full cumulative dividends to which the
holders of senior preferred stock and any Parity Securities will have been
entitled at the time of such payment to Junior Securities will have been paid or
declared and (b) a sum of money sufficient for the payment of such dividends for
the current dividend period has been set apart. The foregoing provisions will
not prohibit the redemption, purchase or other acquisition of any shares of WRC
Media common stock for purposes of any of our or our subsidiaries' employee
benefit or incentive plans.
MERGER, CONSOLIDATION AND ASSET SALES. Without the written consent of the
majority of the senior preferred stockholders or the majority vote of the senior
preferred stockholders at a meeting called for such purpose, we may not merge or
consolidate, or sell, exchange or convey all or substantially all of our assets,
property or business unless in the case of a merger or consolidation:
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(1) if we are not the surviving corporation, the seniority, rights, powers
or preferences of the senior preferred stock continue unimpaired and on
identical terms after such transaction; or
(2) the surviving corporation has a consolidated net worth (immediately
following such transaction) at least equal to that of WRC Media prior to
such transaction.
For purposes of this covenant, "consolidated net worth" (at any date and
with respect to any person) is defined in the certificate of designations as
(1) the consolidated stockholders' equity of such person and its consolidated
subsidiaries, LESS (2) their consolidated intangible assets (as defined in the
certificate of designations).
Notwithstanding any of the foregoing, this covenant will not prohibit any
reorganization described under "--Exchange" consummated in compliance with the
terms of the senior preferred stock.
REPORTS. So long as any shares of senior preferred stock are outstanding,
we will furnish the senior preferred stockholders with the quarterly and annual
financial reports that we are required to file with the Securities and Exchange
Commission pursuant to section 13 or section 15(d) of the Securities Exchange
Act of 1934 or, if we are not required to file such reports, reports containing
the same information as would be required in such reports.
SENIOR PREFERRED STOCKHOLDERS AGREEMENT
The relative rights and relationships of the senior preferred stockholders
are determined pursuant to the senior preferred stockholders agreement. See
"Certain Relationships and Related Transactions--Senior Preferred Stockholders
Agreement."
TRANSFER AGENT AND REGISTRAR
We will act as the transfer agent and registrar for the new senior preferred
stock until and unless we select a successor.
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BOOK-ENTRY, DELIVERY AND FORM
THE NEW NOTES
The new notes will be issued in the form of one or more fully registered new
notes in the form of global notes.
DEPOSITARY PROCEDURES
The global notes will be deposited upon issuance with, or on behalf of, DTC
and registered in the name of DTC or its nominee. Except as described below, the
global notes may be transferred, in whole and not in part, only to DTC or
another nominee of DTC. Investors may hold their beneficial interests in the
global notes directly through DTC if they have an account with DTC or indirectly
through organizations which have accounts with DTC. Upon the issuance of the
global notes, DTC or its nominee will credit, on its book-entry registration and
transfer system, the number of new notes represented by such global notes to the
accounts of institutions that have accounts with DTC or its nominee
("participants"). The accounts to be credited shall be designated by the initial
purchasers.
Ownership of beneficial interests in the global notes will be limited to
participants or persons that may hold interests through participants. Ownership
of beneficial interests in the global notes will be shown on, and the transfer
of those ownership interests will be effected only through, records maintained
by DTC or its nominee (with respect to participants' interests) for such global
notes, or by participants or persons that hold interests through participants
(with respect to beneficial interests in the global notes of persons other than
participants). The laws of some jurisdictions may require that some purchasers
of securities take physical delivery of such securities in definitive form. Such
limits and laws may impair the ability to transfer or pledge beneficial
interests in the global notes.
So long as DTC, or its nominee, is the registered holder and owner of any
global notes, DTC or such nominee, as the case may be, will be considered the
sole legal owner and holder of such new notes represented by such global notes
for all purposes under the notes indenture. Except as set forth below, owners of
beneficial interests in the global notes will not:
- be entitled to have such global notes or new notes represented thereby
registered in their names;
- receive or be entitled to receive physical delivery of certificated notes
in definitive form; and
- be considered to be the owners or holders of such global notes or any new
notes represented thereby for any purpose under the notes indenture.
We understand that under existing industry practice, in the event an owner
of a beneficial interest in a global note desires to take any action that DTC,
as the holder of such global note, is entitled to take, DTC would authorize the
participants to take such action, and that the participants would authorize
beneficial owners owning through such participants to take such action or would
otherwise act upon the instructions of beneficial owners owning through them.
Any payment of principal or interest due on the global notes on any payment
date or at maturity or upon mandatory redemption will be made available by us to
the trustee by such date. As soon as possible thereafter, the trustee will make
such payments to DTC or its nominee, as the case may be, as the registered owner
of the global notes in accordance with existing arrangements between the trustee
and DTC.
We expect that:
- DTC or its nominee, upon receipt of any payment of principal or interest
in respect of the global notes, DTC will credit immediately the accounts
of the related participants with payments
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in amounts proportionate to their respective beneficial interests in such
global note as shown on the records of DTC; and
- payments by participants to owners of beneficial interests in the global
notes held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities
held for the accounts of customers in bearer form or registered in "street
name," and will be the responsibility of such participants.
None of us, the trustee and any payment agent for the global notes will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in any of the global
notes or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests or for other aspects of the relationship between
DTC and its participants or the relationship between such participants and the
owners of beneficial interests in the global notes owning through such
participants.
As long as the new notes are represented by a global note, DTC's nominee
will be the holder of such new notes and therefore will be the only entity that
can exercise a right to repayment or repurchase of such new notes, including
following a change of control or a tender offer for such new notes. Notice by
participants or by owners of beneficial interests in a global note held through
such participants of the exercise of the option to elect repayment of beneficial
interests in the new notes represented by a global note must be transmitted to
DTC in accordance with its procedures on a form required by DTC and provided to
participants. In order to ensure that DTC's nominee will timely exercise a right
to repayment with respect to a particular new note, the beneficial owner of such
new note must instruct the broker or other participant to exercise a right to
repayment. Different firms have cut-off times for accepting instructions from
their customers, and, accordingly, each beneficial owner should consult the
broker or other participant through which it holds an interest in a security in
order to ascertain the cut-off time by which such an instruction must be given
in order for timely notice to be delivered to DTC. We will not be liable for any
delay in delivery of notices of the exercise of the option to elect repayment.
Unless and until exchanged in whole or in part for certificated notes in
definitive form, the global notes may not be transferred except as a whole by
DTC to a nominee of such DTC or by a nominee of such DTC to such DTC or another
nominee of such DTC.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the global notes among participants of DTC, it is
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the trustee nor we will have
any responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
DTC has advised us that DTC is:
- a limited-purpose trust company organized under the laws of the State of
New York;
- a member of the Federal Reserve System;
- a "clearing corporation" within the meaning of the New York Uniform
Commercial Code; and
- a "clearing agency" registered pursuant to the provisions of Section 17A
of the Exchange Act.
DTC was created to hold securities of institutions that have accounts with
DTC and to facilitate the clearance and settlement of securities transactions
among its participants in such securities through electronic book-entry changes
in accounts of the participants, thereby eliminating the need for physical
movement of securities certificates. DTC's participants include securities
brokers and dealers (which may include Donaldson, Lufkin & Jenrette Securities
Corporation and Banc of America Securities LLC), banks, trust companies,
clearing corporations and other organizations. Access to DTC's
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book-entry system is also available to others, such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a participant, whether directly or indirectly.
EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES
A global note shall be exchangeable for corresponding certificated notes
registered in the name of persons other than DTC or its nominee only if:
- DTC (1) notifies us that it is unwilling or unable to continue as
depositary for such global note or (2) at any time ceases to be a clearing
agency registered under the Securities Exchange Act of 1934 and a
successor depositary is not appointed by us within 90 days;
- we in our discretion at any time determine not to have all of the
securities represented by the global notes; or
- an Event of Default (as defined in the notes indenture) with respect to
the new notes (has) occurred and is continuing.
Any new note that is exchangeable pursuant to the preceding sentence is
exchangeable for certificated notes issuable in authorized denominations and
registered in such names as DTC shall direct. Subject to the foregoing, the
global notes are not exchangeable, except for global notes of the same aggregate
denomination to be registered in the name of DTC or its nominee.
SAME-DAY PAYMENT
The notes indenture requires that payments in respect of the new notes
(including principal, premium and interest) be made by wire transfer of
immediately available U.S. dollar funds to the accounts specified by the holders
of such new note, or, if no such account is specified, by mailing a check to
each such holder's registered address.
THE NEW SENIOR PREFERRED STOCK
Shares of the new senior preferred stock will be issued only in registered,
certificated (I.E., non-global form). Shares of the new senior preferred stock
may not be exchanged for beneficial interests in any new senior preferred stock
in global form.
The certificate of designations for the senior preferred stock requires that
cash payments in respect of the new senior preferred stock shall be payable to
holders of record on a date that is not more than 45 days prior to the date of
such payment, as fixed by our board of directors. Any cash payment of dividends
due on the new senior preferred stock on any dividend payment date or upon
mandatory redemption will be made by us directly to the holders of such new
senior preferred stock. We will make any cash payments in respect of the new
senior preferred stock by mailing a check to each holder's registered address.
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REGISTRATION RIGHTS
The following description is a summary of the material provisions of the
registration rights agreement relating to the notes and the senior preferred
stockholders agreement. It does not restate these agreements in their entirety.
We urge you to read the registration rights agreement relating to the notes and
the senior preferred stockholders agreement in their entirety because they, and
not this description, define your registration rights as holders of the new
notes or the new senior preferred stock. Holders of new notes are not entitled
to any registration rights with respect to the new notes except for shelf
registration rights under the circumstances described below. Holders of new
senior preferred stock will have limited demand registration rights, piggy back
registration rights and shelf registration rights as described in this section.
Pursuant to the registration rights agreement relating to the notes, we and
the note guarantors agreed to file with the Securities and Exchange Commission
an exchange offer registration statement on the appropriate form under the
Securities Act of 1933 with respect to the old notes. Pursuant to the senior
preferred stockholders agreement, WRC Media agreed to file with the Securities
and Exchange Commission an exchange offer registration statement on the
appropriate form under the Securities Act of 1933 with respect to the old senior
preferred stock. The registration statement of which this prospectus is a part
constitutes the exchange offer registration statement for both the old notes and
the old senior preferred stock. The exchange offer being made hereby, if
commenced and consummated within the time periods described under "The Exchange
Offer--Expiration Date; Extensions; Amendments," will satisfy these requirements
under the registration rights agreement relating to the notes and the senior
preferred stockholders agreement.
THE NOTES
If:
(1) we and the note guarantors are not permitted to consummate the exchange
offer because the exchange offer is not permitted by applicable law or
Securities and Exchange Commission policy; or
(2) any holder of transfer restricted securities notifies us prior to the
20th day following consummation of the exchange offer that:
(a) it is prohibited by law or Securities and Exchange Commission policy
from participating in the exchange offer; or
(b) that it may not resell the new notes acquired by it in the exchange
offer to the public without delivering a prospectus and the
prospectus contained in the exchange offer registration statement is
not appropriate or available for such resales; or
(c) that it is a broker-dealer and owns notes acquired directly from us
or our "affiliate" (as defined in Rule 405 under the Securities Act
of 1933),
we and the note guarantors will file with the Securities and Exchange Commission
a shelf registration statement to cover resales of the notes by each holder
thereof who provides the information specified in Item 507 or 508 of
Regulation S-K under the Securities Act of 1933 and any additional information
required to be disclosed in order to make the information previously furnished
by the holder not materially misleading.
We and the note guarantors will use our respective best efforts to cause the
applicable registration statement to be declared effective as promptly as
possible by the Securities and Exchange Commission.
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For purposes of the preceding, "transfer restricted securities" means each
old note until:
(1) the date on which such old note has been exchanged by a person other
than a broker-dealer for a new note in the exchange offer;
(2) following the exchange by a broker-dealer in the exchange offer of an
old note for a new note, the date on which such new note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of
such sale a copy of the prospectus contained in the exchange offer
registration statement;
(3) the date on which such old note has been effectively registered under
the Securities Act of 1933 and disposed of in accordance with the shelf
registration statement; or
(4) the date on which such old note is distributed to the public pursuant to
Rule 144 under the Securities Act of 1933.
The registration rights agreement provides that:
(1) we and the note guarantors will file an exchange offer registration
statement with the Securities and Exchange Commission on or prior to
90 days after the closing of the offering of the old notes.
(2) we and the note guarantors will use our respective best efforts to have
the exchange offer registration statement declared effective by the
Securities and Exchange Commission on or prior to 210 days after the
closing of the offering of the old notes.
(3) unless the exchange offer would not be permitted by applicable law or
Securities and Exchange Commission policy, we and the note guarantors
will
(a) commence the exchange offer; and
(b) use respective best efforts to issue on or prior to 30 business days,
or longer, if required by the Federal securities laws, after the date
on which the exchange offer registration statement was declared
effective by the Securities and Exchange Commission, new notes in
exchange for all old notes tendered prior thereto in the exchange
offer; and
(4) if obligated to file the shelf registration statement, we and the note
guarantors will use our respective best efforts to file the shelf
registration statement with the Securities and Exchange Commission on or
prior to 45 days after such filing obligation arises and to cause the
shelf registration to be declared effective by the Securities and
Exchange Commission on or prior to 90 days after such obligation arises.
The exchange offer being made hereby, if commenced and consummated within the
time periods described in this paragraph, will satisfy the requirements under
the registration rights agreement listed in (1), (2) and (3) of this paragraph.
If:
(1) we and the note guarantors fail to file any of the registration
statements required by the registration rights agreement on or before the
date specified for such filing; or
(2) any of such registration statements is not declared effective by the
Securities and Exchange Commission on or prior to the date specified for
such effectiveness; or
(3) we and the note guarantors fail to consummate the exchange offer within
30 business days of the date specified for effectiveness with respect to
the exchange offer registration statement; or
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(4) the shelf registration statement or the exchange offer registration
statement is declared effective but thereafter ceases to be effective or
usable in connection with resales of transfer restricted securities
during the periods specified in the registration rights agreement (each
such event referred to in clauses (1) through (4) above, a "registration
default"),
then we and the note guarantors will pay liquidated damages to each holder of
the old notes, with respect to the first 90-day period immediately following the
occurrence of the first registration default in an amount equal to $0.05 per
week per $1,000 principal amount of the old notes held by such holder.
The amount of the liquidated damages will increase by an additional $0.05
per week per $1,000 principal amount of the old notes with respect to each
subsequent 90-day period until all registration defaults have been cured, up to
a maximum amount of liquidated damages for all registration defaults of $0.50
per week per $1,000 principal amount of the old notes.
All accrued liquidated damages will be paid by us and the note guarantors on
each damages payment date to the global note holder by wire transfer of
immediately available funds or by Federal funds check and to holders of
certificated notes by wire transfer to the accounts specified by them or by
mailing checks to their registered addresses if no such accounts have been
specified.
Following the cure of all registration defaults, the accrual of liquidated
damages will cease.
THE SENIOR PREFERRED STOCK
If:
(1) WRC Media is not permitted to consummate the exchange offer because the
exchange offer is not permitted by applicable law or Securities and
Exchange Commission policy; or
(2) any holder of transfer restricted securities notifies WRC Media prior to
the 20th day following consummation of the exchange offer that:
(a) it is prohibited by law or Securities and Exchange Commission policy
from participating in the exchange offer; or
(b) that it may not resell the new senior preferred stock acquired by it
in the exchange offer to the public without delivering a prospectus
and the prospectus contained in the exchange offer registration
statement is not appropriate or available for such resales; or
(c) that it is a broker-dealer and owns senior preferred stock acquired
directly from us or our "affiliate" (as defined in Rule 405 under the
Securities Act of 1933),
WRC Media will file with the Securities and Exchange Commission a shelf
registration statement to cover resales of the senior preferred stock by each
holder thereof who provides the information specified in Item 507 or 508 of
Regulation S-K under the Securities Act of 1933 and any additional information
required to be disclosed in order to make the information previously furnished
by the holder not materially misleading.
WRC Media will use its best efforts to cause the applicable registration
statement to be declared effective as promptly as possible by the Securities and
Exchange Commission.
For purposes of the preceding, "transfer restricted securities" means each
share of old senior preferred stock until:
(1) the date on which such share of old senior preferred stock is exchanged
in the exchange offer for a share of new senior preferred stock which is
entitled to be resold to the public by the holder thereof without
complying with the prospectus delivery requirements of the Securities Act
of 1933;
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(2) the date on which such share of old senior preferred stock has been
disposed of in accordance with a shelf registration statement (and the
purchasers thereof have been issued new senior preferred stock); or
(3) the date on which such share of old senior preferred stock is
distributed to the public pursuant to Rule 144 under the Securities Act
of 1933.
The senior preferred stockholders agreement provides that:
(1) WRC Media will file an exchange offer registration statement with the
Securities and Exchange Commission on or prior to 90 days after
November 17, 1999, the closing of the offering of the old senior
preferred stock;
(2) WRC Media will use its best efforts to have the exchange offer
registration statement declared effective by the Securities and Exchange
Commission on or prior to 210 days after the closing of the offering of
the old senior preferred stock;
(3) unless the exchange offer would not be permitted by applicable law or
Securities and Exchange Commission policy, WRC Media will
(a) commence the exchange offer; and
(b) use its best efforts to issue on or prior to 30 business days, or
longer, if required by the Federal securities laws, after the date on
which the exchange offer registration statement was declared
effective by the Securities and Exchange Commission, new senior
preferred stock in exchange for all old senior preferred stock
tendered prior thereto in the exchange offer; and
(4) if obligated to file the shelf registration statement, WRC Media will
use its best efforts to file the shelf registration statement with the
Securities and Exchange Commission on or prior to 45 days after such
filing obligation arises and to cause the shelf registration to be
declared effective by the Securities and Exchange Commission on or prior
to 90 days after such obligation arises.
The exchange offer being made hereby, if commenced and consummated within the
time periods described in this paragraph, will satisfy the requirements under
the senior preferred stockholders agreement listed in (1), (2) and (3) of this
paragraph.
If:
(1) WRC Media fails to file any of the registration statements required by
the senior preferred stockholders agreement on or before the date
specified for such filing; or
(2) any of such registration statements is not declared effective by the
Securities and Exchange Commission on or prior to the date specified for
such effectiveness; or
(3) WRC Media fails to consummate the exchange offer within 30 business days
of the date specified for effectiveness with respect to the exchange
offer registration statement; or
(4) the shelf registration statement or the exchange offer registration
statement is declared effective but thereafter ceases to be effective or
usable in connection with resales of transfer restricted securities
during the periods specified in the preferred stockholders agreement
(each such event referred to in clauses (1) through (4) above, a
"registration default"),
the holders of shares of the senior preferred stock will be entitled to receive
15.5% per annum for each week or portion thereof that the registration default
continues. Notwithstanding anything to the contrary set forth in the certificate
of designations,
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(1) upon filing of the exchange offer registration statement (and/or, if
applicable, the shelf registration statement); or
(2) upon the effectiveness of the exchange offer registration statement
(and/or, if applicable, the shelf registration statement); or
(3) upon consummation of the exchange offer; or
(4) upon the filing of a post-effective amendment to the registration
statement or an additional registration statement that causes the
exchange offer registration statement (and/or, if applicable, the shelf
registration statement) to again be declared effective or made usable;
the dividend rate shall return to 15% (before giving effect to any applicable
default dividend).
Even if the exchange offer for the old senior preferred stock is
consummated, the remaining old senior preferred stockholders will have the
following additional registration rights with respect to old senior preferred
stock. Pursuant to the senior preferred stockholders agreement the DLJMB
Investors and their permitted transferees will be entitled to require WRC Media,
Weekly Reader or CompassLearning, as applicable, to register under the
Securities Act of 1933 (1) the old senior preferred stock and any other
securities into which such old senior preferred stock is exchangeable on two
separate occasions and (2) the Preferred Stockholder Warrants (described under
"Transactions") and the shares of the Weekly Reader common stock or
CompassLearning common stock into which such Preferred Stockholders Warrants are
exchangeable on two separate occasions.
In addition, pursuant to the senior preferred stockholders agreement, the
old senior preferred stockholders will be entitled to "piggy back" registration
rights with respect to the old senior preferred stock, Preferred Stockholder
Warrants and any securities of WRC Media, Weekly Reader or CompassLearning into
which such old senior preferred stock or Preferred Stockholder Warrants are
convertible or exchangeable. The piggy back registration rights provide that
when WRC Media proposes to register any of its capital stock or rights under the
Securities Act of 1933 for sale in a public offering, including, without
limitation, in connection with its initial public offering, it will give written
notice to the senior preferred stockholders who hold registrable securities.
Upon an old senior preferred stockholder's written request to include its
registrable securities issued by WRC Media, Weekly Reader or CompassLearning
under the registration statement, WRC Media will use its best efforts to
register all of the registrable securities that the old senior preferred
stockholders have requested to be registered.
In addition to the registration rights outlined above, the new senior
preferred stockholders will have the following additional registration rights
with respect to new senior preferred stock. Pursuant to the senior preferred
stockholders agreement, the DLJMB Investors and their permitted transferees will
be entitled to require WRC Media, Weekly Reader or CompassLearning, as
applicable, to register under the Securities Act of 1933 (1) the new senior
preferred stock and the securities into which such new senior preferred stock is
exchangeable on two separate occasions and (2) the Preferred Stockholder
Warrants (described under "Transactions") and the shares of the Weekly Reader
common stock or CompassLearning common stock into which such Preferred
Stockholders Warrants are exchangeable on two separate occasions.
Also, pursuant to the senior preferred stockholders agreement the new senior
preferred stockholders will be entitled to "piggy back" registration rights with
respect to the new senior preferred stock, the Preferred Stockholder Warrants
and any securities of WRC Media, Weekly Reader or CompassLearning into which the
new senior preferred stock or preferred stockholder warrants are convertible or
exchangeable. The piggy back registration rights provide that when WRC Media
proposes to register any of its capital stock or rights under the Securities Act
of 1933 for sale in a public offering, including, without limitation, in
connection with its initial public offering, it will give written notice to the
senior preferred stockholders who hold registrable securities. Upon a senior
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preferred stockholder's written request to include its registrable securities
issued by WRC Media Weekly Reader or CompassLearning under the registration
statement, WRC Media will use its best efforts to register all of the
registrable securities that the senior preferred stockholders have requested to
be registered.
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CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
The following is a discussion of material United States Federal income tax
consequences and other tax consequences of the acquisition, ownership and
disposition of the notes and the senior preferred stock. Unless otherwise
stated, this discussion is limited to the tax consequences to original
beneficial owners of the notes and the senior preferred stock who acquired the
old notes and the old senior preferred stock at their initial issuance and who
hold such notes and senior preferred stock as capital assets ("Holders"). This
discussion does not purport to be a comprehensive description of all tax
considerations that may be relevant to a particular investor and does not
address specific tax consequences that may be relevant to particular persons
(including, for example, financial institutions, broker-dealers, insurance
companies, tax-exempt organizations, persons that have a functional currency
other than the U.S. dollar and persons in special situations, such as those who
hold the notes or the senior preferred stock as part of a straddle, hedge,
conversion transaction or other integrated investment). This discussion does not
address U.S. Federal alternative minimum tax consequences, and does not describe
any tax consequences arising under U.S. Federal gift and estate or other Federal
tax laws or under the tax laws of any state, local or foreign jurisdiction. This
discussion is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), the Treasury Department regulations promulgated thereunder, and
administrative and judicial interpretations thereof, all as of the date hereof
and all of which are subject to change, possibly on a retroactive basis.
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS CONCERNING THE U.S.
FEDERAL INCOME TAX CONSEQUENCES TO THEM, AS A RESULT OF THEIR INDIVIDUAL
CIRCUMSTANCES, FROM THE EXCHANGE OF THE OLD NOTES FOR THE NEW NOTES AND OF THE
OLD SENIOR PREFERRED STOCK FOR THE NEW SENIOR PREFERRED STOCK AND OF THE
OWNERSHIP AND DISPOSITION OF THE NEW NOTES AND THE NEW SENIOR PREFERRED STOCK
RECEIVED IN THE EXCHANGE OFFER, INCLUDING THE APPLICATION OF STATE, LOCAL AND
FOREIGN INCOME AND OTHER TAX LAWS.
U.S. FEDERAL INCOME TAXATION OF U.S. HOLDERS
The following discussion is limited to the U.S. Federal income tax
consequences relevant to a Holder that is a citizen or individual resident of
the United States, a U.S. domestic corporation or any other person that is
subject to U.S. Federal income tax on a net income basis in respect of its
investment in the notes or senior preferred stock, as applicable, (a "U.S.
Holder").
EXCHANGE OFFER
The exchange of old notes for new notes and old senior preferred stock for
new senior preferred stock, as applicable, in the exchange offer will not
constitute a taxable event for U.S. Holders. A U.S. Holder's holding period for
a new note or new senior preferred stock, as applicable, will include the
holding period for the old note or the old senior preferred stock exchanged
pursuant to the exchange offer, and such Holder's adjusted basis in a new note
or new senior preferred stock will be the same as such Holder's adjusted basis
in the old note or the old senior preferred stock. The new notes will have the
same U.S. Federal income tax characteristics as the old notes. The new senior
preferred stock will have the same U.S. Federal income tax characteristics as
the old senior preferred stock.
STATED INTEREST ON THE NOTES
Stated interest on a note will generally be includible in a U.S. Holder's
gross income as ordinary income at the time it is accrued or received in
accordance with the U.S. Holder's regular method of accounting for U.S. Federal
income tax purposes.
ORIGINAL ISSUE DISCOUNT ON THE NOTES
A debt obligation that has an issue price that is less than its stated
redemption price at maturity by more than a DE MINIMIS amount will be treated as
issued with original issue discount for U.S. Federal
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income tax purposes. The stated redemption price at maturity of a debt
obligation is the sum of all payments to be made on such debt obligation that
are not "qualified stated interest" payments. "Qualified stated interest"
generally means stated interest that is unconditionally payable at least
annually at a single fixed rate (or at certain qualifying variable rates). The
semi-annual interest payments on the notes should constitute qualified stated
interest. Accordingly, the stated redemption price at maturity of the notes
should equal their principal amount.
The issue price of a debt obligation is less than its stated redemption
price at maturity by more than a DE MINIMIS amount for this purpose if the
difference between the stated redemption price at maturity of such debt
obligation and its issue price is at least 0.25 percent of the stated redemption
price at maturity multiplied by the number of complete years to maturity.
Because the old notes were issued with original issue discount in excess of
a DE MINIMIS amount, U.S. Holders of the notes must generally include original
issue discount in gross income (as interest) for U.S. Federal income tax
purposes on an annual basis under a constant yield method without regard to the
Holder's method of accounting for tax purposes. As a result, U.S. Holders
generally will be required to include original issue discount in income in
advance of the receipt of some or all of the related cash payments. The amount
of original issue discount includible in income by a U.S. Holder of a note is
the sum of the "daily portions" of original issue discount with respect to such
note for each day during the Holder's taxable year on which it held such note.
The daily portion is determined by allocating to each day in any "accrual
period" a pro rata portion of the original issue discount allocable to that
accrual period. The accrual period for a note may be of any length and may vary
in length over the term of the note, provided that each accrual period is no
longer than one year and each scheduled payment of principal or interest occurs
on the first day or the final day of an accrual period.
In general, the amount of original issue discount allocable to an accrual
period is an amount equal to the excess (if any) of (1) the product of the
note's "adjusted issue price" at the beginning of such accrual period and its
yield to maturity (determined on the basis of compounding at the close of each
accrual period and properly adjusted for the length of the accrual period) over
(2) the sum of any qualified stated interest allocable to the accrual period.
The following rules apply to determine original issue discount allocable to an
accrual period:
- if an interval between payments of qualified stated interest contains more
than one accrual period,
-- the amount of qualified stated interest payable at the end of the
interval is allocated on a pro rata basis to each accrual period in
the interval and the adjusted issue price at the beginning of each
accrual period in the interval must be increased by the amount of any
qualified stated interest that has accrued prior to the beginning of
the first day of the accrual period but is not payable until the end
of the interval;
- if the accrual period is the final accrual period,
-- the amount of original issue discount allocable to the final accrual
period is the difference between the amount payable at maturity
(other than a payment of qualified stated interest) and the adjusted
issue price of the note at the beginning of the final accrual period;
and
- if all accrual periods are of equal length, except for an initial short
accrual period,
-- the amount of original issue discount allocable to the initial short
accrual period may be computed under any reasonable method.
The adjusted issue price of a note at the beginning of any accrual period is
equal to its issue price increased by the accrued original issue discount for
each prior accrual period and reduced by any prior payments made on such note
that were not qualified stated interest payments. Under these rules, U.S.
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Holders of notes with original issue discount will be required to include in
income increasingly greater amounts of original issue discount in successive
accrual periods.
OPTIONAL REDEMPTION OF NOTES
The notes are redeemable at our option in whole or in part and subject to
certain conditions. For purposes of computing the yield to maturity on the
notes, we will be deemed to exercise our option to redeem the notes if such
deemed exercise could produce (realizing the redemption price on any date on
which the option could be exercised as the stated redemption price at maturity)
a lower yield on the notes than the stated yield to maturity. Our option to
redeem the notes prior to their stated maturity date should not affect the
computation of the amount of original issue discount on the notes.
REDEMPTION PREMIUM ON THE SENIOR PREFERRED STOCK AND ADDITIONAL PREFERRED SHARES
Under Section 305 of the Code and the applicable Treasury Regulations, if
the redemption price of preferred stock exceeds its issue price by more than a
DE MINIMIS amount, then such excess will be treated as a series of constructive
distributions over the life of the preferred stock under a constant yield
method. The issue price of preferred stock is less than its redemption price by
more than a DE MINIMIS amount if the difference between the redemption price and
the issue price is at least 0.25 percent of the redemption price of the
preferred stock multiplied by the number of complete years to mandatory
redemption. The redemption price of the senior preferred stock exceeds its issue
price by more than a DE MINIMIS amount. The amount of each constructive
distribution will be treated in the same manner as actual dividends as described
below under "Distributions on the Senior Preferred Stock."
The issue price of an additional preferred share will be the fair market
value of such share on the date of distribution. If the redemption price of an
additional preferred share exceeds the issue price of such share by more than a
DE MINIMIS amount, then a U.S. Holder thereof would be required to treat such
excess as a series of constructive distributions over the term of the additional
preferred share (as described above), which distributions would be treated in
the same manner as distributions described below under "Distributions on the
Senior Preferred Stock." Because additional preferred shares may be issued at
different times, it is possible that a U.S. Holder would own additional
preferred shares with different issue prices. Consequently, if WRC Media had
current or accumulated earnings and profits in such a case, a U.S. Holder would
be treated as having received constructive dividends on its additional preferred
shares in differing amounts depending on the issue price of each additional
preferred share, and those shares would not be fungible with each other or with
the old senior preferred stock purchased in the transactions described under
"Transactions" (which term "senior preferred stock" shall hereinafter mean,
unless otherwise indicated, the senior preferred stock and the additional
preferred shares that shall have been issued with respect thereto) due to their
differing U.S. Federal income tax characteristics. As a result, WRC Media might
not be able to determine the proper amount of income to be accrued for any
particular share of senior preferred stock. Moreover, purchasers of senior
preferred stock in the secondary market might not be able to determine the
proper amount of income to be accrued with respect to such stock.
DISTRIBUTIONS ON THE SENIOR PREFERRED STOCK
Distributions on the senior preferred stock will constitute dividends
taxable as ordinary income for U.S. Federal income tax purposes to the extent of
the current or accumulated earnings and profits of WRC Media as determined under
U.S. Federal income tax principles. Any such dividends paid to U.S. Holders that
are U.S. corporations may qualify for the dividends-received deduction.
To the extent, if any, that a U.S. Holder receives a distribution on its
senior preferred stock that exceeds the current and accumulated earnings and
profits of WRC Media, the distribution will be
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treated first as a non-taxable return of capital reducing the Holder's basis in
its shares of senior preferred stock. Any such distribution in excess of the
Holder's basis in its senior preferred stock will be treated as capital gain.
If a distribution with respect to the senior preferred stock is paid in the
form of additional preferred shares, (1) the amount of the distribution will be
the fair market value of the additional preferred shares as of the date of
distribution, and (2) the distribution will be treated as described in the
preceding two paragraphs.
DISPOSITION OF THE NOTES OR THE SENIOR PREFERRED STOCK
Upon the sale, exchange, redemption, retirement at maturity or other
disposition of a note or senior preferred stock, as applicable, a U.S. Holder
generally will recognize taxable gain or loss equal to the difference between
(1) the sum of cash plus the fair market value of all other property received on
such disposition (less, in the case of a note, any accrued interest which would
be taxable as such) and (2) such beneficial owner's adjusted tax basis in the
note or the senior preferred stock, as applicable. Special rules may apply to
any redemptions of the senior preferred stock which may result in the amount
paid being treated as a dividend for U.S. Federal income tax purposes.
A U.S. Holder's adjusted tax basis in a note generally will equal the amount
of the original issue price of the old notes (net of accrued interest), less any
principal payments received by such Holder. A U.S. Holder's initial tax basis in
the senior preferred stock (other than additional preferred shares) will
generally be the price such Holder paid for the old senior preferred stock. A
U.S. Holder's initial tax basis in an additional preferred share will be the
fair market value of such additional preferred share on the date of
distribution. Thereafter, the initial tax basis in the senior preferred stock or
additional preferred shares will be (1) increased by the amount, if any, of any
constructive distributions the Holder is treated as having received pursuant to
the rules described above under "Redemption Premium on the Senior Preferred
Stock and Additional Preferred Shares" and (2) decreased by the portion of any
distribution (actual or constructive) that is treated as a tax-free recovery of
basis as described above under "Distributions on the Senior Preferred Stock."
Gain or loss recognized on the disposition of a note or senior preferred
stock, as applicable, generally will be capital gain or loss, and will be
long-term capital gain or loss if, at the time of such disposition, the U.S.
Holder's holding period for the note or the senior preferred stock, as
applicable, is more than 12 months. The maximum Federal long-term capital gain
rate is 20% for noncorporate U.S. Holders and 35% for corporate U.S. Holders.
The deductibility of capital losses by U.S. Holders is subject to limitations.
U.S. FEDERAL INCOME TAXATION OF NON-U.S. HOLDERS
EXCHANGE OFFER
The exchange of old notes for new notes and old senior preferred stock for
new senior preferred stock in the exchange offer will not constitute a taxable
event for a holder that is, with respect to the United States, a foreign
corporation or non-resident alien individual (a "Non-U.S. Holder"). A Non-U.S.
Holder's holding period for a new note or new senior preferred stock, as
applicable, will include the holding period for the old note or the old senior
preferred stock exchanged pursuant to the exchange offer, and such Holder's
adjusted basis in a new note or new senior preferred stock will be the same as
such Holder's adjusted basis in the old note or the old senior preferred stock.
The new notes will have the same U.S. Federal income tax characteristics as the
old notes. The new senior preferred stock will have the same U.S. Federal income
tax characteristics as the old senior preferred stock.
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PAYMENTS OF INTEREST ON THE NOTES
Subject to the discussion of backup withholding below, payments of principal
and interest on the notes by us or any of our agents to a Non-U.S. Holder will
not be subject to withholding of U.S. Federal income tax, provided that, with
respect to payments of interest, (1) the Non-U.S. Holder does not actually or
constructively own 10 percent or more of the combined voting power of all
classes of stock of any of WRC Media, Weekly Reader and CompassLearning and is
also not a controlled foreign corporation related to any of these entities
through stock ownership and (2) the beneficial owner provides a statement
signed, under penalties of perjury, that includes its name and address and
certifies that it is a Non-U.S. Holder in compliance with applicable
requirements (or, with respect to payments made after December 31, 2000,
satisfies certain documentary evidence requirements ("New Regulations") for
establishing that it is a Non-U.S. Holder).
DISTRIBUTIONS ON THE SENIOR PREFERRED STOCK
Dividends on the senior preferred stock (including dividends in the form of
additional preferred shares and constructive dividends) actually or deemed paid
to a Non-U.S. Holder of the senior preferred stock generally will be subject to
withholding tax at a rate of 30% or such lower rate as may be specified by an
applicable income tax treaty. Currently, for purposes of determining whether tax
is to be withheld at a rate of 30% or at a reduced rate, WRC Media ordinarily
will presume that dividends paid on or before December 31, 2000 to an address in
a foreign country are paid to a resident of such country absent knowledge that
such presumption is not warranted. After December 31, 2000, a Non-U.S. Holder
will be required to properly certify its entitlement to the treaty benefits on
Internal Revenue Service Form W-8BEN (or other appropriate successor form).
DISPOSITION OF THE NOTES OR THE SENIOR PREFERRED STOCK
No withholding of U.S. Federal income tax will be required with respect to
any gain or income realized by a Non-U.S. Holder upon the sale, exchange,
redemption, retirement at maturity or other disposition of a note or senior
preferred stock, as applicable. A Non-U.S. Holder will not be subject to U.S.
Federal income tax on gain realized on the sale or other disposition of a note
or senior preferred stock, as applicable, unless (1) the Non-U.S. Holder is an
individual who is present in the United States for a period or periods
aggregating 183 or more days in the taxable year of the disposition and certain
other conditions are met or (2) such gain or income is effectively connected
with the conduct by the Non-U.S. Holder of a trade or business in the United
States.
Notwithstanding the foregoing, a Non-U.S. Holder generally will be subject
to U.S. Federal income tax on gain recognized on the sale, exchange or
disposition of senior preferred stock if WRC Media is a "United States real
property holding corporation" for U.S. Federal income tax purposes at any time
within the shorter of the five-year period preceding the disposition or the
Holder's holding period for the senior preferred stock. WRC Media does not
believe that it currently is a "United States real property holding
corporation," and it expects that it will not become one in the future (although
there can be no assurance in that regard).
EACH NON-U.S. HOLDER IS URGED TO CONSULT THE HOLDER'S TAX ADVISOR AS TO THE
APPLICATION OF THE NEW REGULATIONS AND THE PROCEDURES FOR ESTABLISHING AN
EXEMPTION FROM WITHHOLDING TAX.
INFORMATION REPORTING AND BACKUP WITHHOLDING
We are required to file information returns with the Internal Revenues
Service for certain non-corporate U.S. Holders with respect to:
- payments made in respect of a note (including original issue discount);
- payment of the proceeds from the sale of a note;
227
- dividends received with respect to senior preferred stock; and
- payment of the proceeds from the sale of senior preferred stock.
In addition, non-corporate U.S. Holders may be subject to a 31% backup
withholding tax in respect of such payments if they:
- fail to furnish or certify their correct taxpayer identification number to
the payor in the manner required;
- are notified by the Internal Revenue Service that they have failed to
report payments of interest and dividends properly; or
- under certain circumstances, fail to certify, under penalties of perjury,
that they have not been notified by the Internal Revenue Service that they
are subject to backup withholding for failure to report interest and
dividend payments.
Non-U.S. Holders of the notes and the senior preferred stock may be required to
comply with applicable certification procedures to establish that they are not
U.S. holders in order to avoid the application of such information reporting
requirements and backup withholding tax. Any amounts withheld under the backup
withholding rules will be allowed as a refund or a credit against the person's
U.S. Federal income tax liability provided that the required information is
furnished to the Internal Revenue Service.
EACH NON-U.S. HOLDER IS URGED TO CONSULT SUCH HOLDER'S TAX ADVISOR AS TO THE
APPLICATION OF THE NEW REGULATIONS AND THE PROCEDURES FOR ESTABLISHING AN
EXEMPTION FROM BACKUP WITHHOLDING.
228
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes or new senior preferred stock for
its own account pursuant to the exchange offer must acknowledge that it will
deliver a prospectus in connection with any resale of such new notes or new
senior preferred stock. This prospectus, as it may be amended or supplemented
from time to time, may be used by a broker-dealer in connection with resales of
new notes or new senior preferred stock received in exchange for old notes or
old senior preferred stock where such old notes or old senior preferred stock
were acquired as a result of market-making activities or other trading
activities. We have agreed that for a period of one year after the expiration
date, we will make available a prospectus meeting the requirements of the
Securities Act of 1933 to any broker-dealer for use in connection with any such
resale. In addition, until , all dealers effecting transactions in the new
notes or the new senior preferred stock may be required to deliver a prospectus.
We will not receive any proceeds from any sale of new notes or new senior
preferred stock by broker-dealers. The new notes or the new senior preferred
stock received by broker-dealers for their own account pursuant to the exchange
offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the new notes or the new senior preferred stock or a combination of
such methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer or the purchasers of any such new notes or new senior
preferred stock. Any broker-dealer that resells the new notes or the new senior
preferred stock that were received by it for its own account pursuant to the
exchange offer and any broker or dealer that participates in a distribution of
such new notes or new senior preferred stock may be deemed to be an
"underwriter" within the meaning of the Securities Act of 1933 and any profit on
any such resale of such new notes or new senior preferred stock and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act of 1933. The letter of
transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act of 1933.
For a period of one year after the expiration date, we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any broker-dealer that requests such documents in the letter of
transmittal. We have agreed to pay all expenses incident to the exchange offer
(including the reasonable fees and expenses of one counsel for the holders of
the old notes and the old senior preferred stock) other than commissions or
concessions of any broker-dealers and will indemnify the holders of the old
notes and the old senior preferred stock (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act of 1933.
LEGAL MATTERS
Certain legal matters with respect to the new notes and the new senior
preferred stock offered hereby will be passed upon for us by Cravath, Swaine &
Moore, New York, New York. Certain legal matters with respect to the new notes
and the new senior preferred stock offered hereby will be passed upon for the
holders by Latham & Watkins, New York, New York and Davis Polk & Wardwell, New
York, New York.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements of WRC Media, Inc. and subsidiary as
of September 30, 1999 and for the period from July 14, 1999 to September 30,
1999 and the statement of operations and cash flows of the Company's predecessor
for the period from January 1, 1999 to July 13, 1999, included
229
in this prospectus and elsewhere in the registration statement have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
The consolidated financial statements of Weekly Reader as of December 31,
1997 and 1998 and for each of the three years in the period ended December 31,
1998, and the consolidated financial statements of American Guidance as of
June 30, 1997 and 1998 and for each of the three years in the period ended
June 30, 1998, included in this prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein,
and are included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of CompassLearning (formerly known as JLC Learning
Corporation) as of December 31, 1997 and 1998 and for each of the three years in
the period ended December 31, 1998, included in this prospectus have been
audited by PricewaterhouseCoopers LLP, independent public accountants, as stated
in their report appearing herein.
In September, 1999, pursuant to authorization of its Board of Directors,
CompassLearning (formerly known as JLC Learning Corporation) dismissed the firm
of PricewaterhouseCoopers LLP, the former accountants of CompassLearning, as its
auditor and retained Arthur Andersen LLP.
On December 13, 1999, pursuant to authorization of its Board of Directors,
Weekly Reader dismissed the firm of Deloitte & Touche LLP, the former
accountants of Weekly Reader, as its auditor and retained Arthur Andersen LLP.
During the fiscal years ended December 31, 1997, and December 31, 1998, and
the subsequent interim periods immediately preceding the change in accountants,
there were no disagreements with PricewaterhouseCoopers LLP or Deloitte & Touche
LLP on any matter of accounting principles or practice, financial statement
disclosure, or auditing scope or procedure, which if not resolved to the
satisfaction of PricewaterhouseCoopers LLP or Deloitte & Touche LLP would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports on CompassLearning's, Weekly Reader's or American
Guidance's financial statements. During the fiscal years ended December 31,
1997, and December 31, 1998, and the subsequent interim periods immediately
preceding the change in accountants, there were no reportable events, as that
term is used in Regulation S-K, Item 304(a)(1)(v)(A) through (D) of the
Securities Exchange Act of 1934.
230
INDEX TO FINANCIAL STATEMENTS
WEEKLY READER CORPORATION AND SUBSIDIARIES:
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS
ENDED DECEMBER 31, 1996, 1997 AND 1998:
Report of Independent Auditors--Deloitte & Touche LLP..... F-3
Consolidated Balance Sheets as of December 31, 1997 and
1998.................................................... F-4
Statements of Consolidated Operations and Accumulated
Deficit for the Years Ended December 31, 1996, 1997 and
1998.................................................... F-5
Statements of Consolidated Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998........................ F-6
Notes to Consolidated Financial Statements................ F-7
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF
SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1998 AND 1999:
Condensed Consolidated Balance Sheets (Unaudited) as of
December 31, 1998 and September 30, 1999................ F-19
Condensed Statements of Consolidated Operations
(Unaudited) for the Three-Month Periods and the
Nine-Month Periods Ended September 30, 1998 and 1999.... F-20
Condensed Statements of Consolidated Cash Flows
(Unaudited) for the Nine-Month Periods Ended September
30, 1998 and 1999....................................... F-21
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................. F-22
AMERICAN GUIDANCE SERVICE, INC.:
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS
ENDED JUNE 30, 1996, 1997 AND 1998:
Report of Independent Auditors--Deloitte & Touche LLP..... F-24
Consolidated Balance Sheets as of June 30, 1997 and
1998.................................................... F-25
Consolidated Statements of Income for the Years Ended June
30, 1996, 1997 and 1998................................. F-26
Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 1996, 1997 and 1998................ F-27
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1996, 1997 and 1998............................ F-28
Notes to Consolidated Financial Statements................ F-29
COMPASSLEARNING, INC.
FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER
31, 1996, 1997 AND 1998:
Report of Independent Accountants--PricewaterhouseCoopers
LLP..................................................... F-39
Balance Sheet as of December 31, 1997 and 1998............ F-40
Statement of Operations for the Years Ended December 31,
1996, 1997 and 1998..................................... F-41
Statement of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1996, 1997 and 1998.................. F-42
Statement of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998..................................... F-43
Notes to Financial Statements............................. F-44
UNAUDITED CONDENSED FINANCIAL STATEMENTS AS OF JUNE 30, 1999
AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999:
Condensed Balance Sheets (Unaudited) as of June 30, 1999
and December 31, 1998................................... F-55
Condensed Statements of Operations and Comprehensive
Income (Loss) (Unaudited) for the Three-Month Periods
and for the Six-Month Periods Ended June 30, 1998 and
1999.................................................... F-56
Condensed Statements of Cash Flows (Unaudited) for the
Six-Month Periods Ended June 30, 1998 and 1999.......... F-57
Notes to Condensed Financial Statements (Unaudited)....... F-58
F-1
UNAUDITED CONDENSED FINANCIAL STATEMENTS AS OF SEPTEMBER 30,
1998 AND FOR THE NINE MONTHS THEN ENDED:
Condensed Balance Sheet (unaudited) as of September 30,
1998.................................................... F-60
Condensed Statement of Operations and Comprehensive Income
(Loss) (unaudited) for the Three Months Ended September
30, 1998 and the Nine Months Ended September 30, 1998... F-61
Condensed Statements of Cash Flows (unaudited) for
Nine-Month Period Ended September 30, 1998.............. F-62
Notes to Condensed Financial Statements (unaudited)....... F-63
WRC MEDIA INC. AND ITS SUBSIDIARY (COMPASSLEARNING, INC.)
Report of Independent Public Accountants--Arthur Andersen
LLP..................................................... F-65
Balance Sheet as of September 30, 1999.................... F-66
Statement of Operations and Comprehensive Loss for the
Periods January 1, 1999 through July 13, 1999
(Predecessor) and July 14, 1999 through September 30,
1999 (Successor)........................................ F-67
Statement of Stockholders' Equity for the Periods January
1, 1999 through July 13, 1999 and July 14, 1999 through
September 30, 1999...................................... F-68
Statement of Cash Flows for the Periods January 1, 1999
through July 13, 1999 and July 14, 1999 through
September 30, 1999...................................... F-69
Notes to Financial Statements............................. F-70
F-2
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
PRIMEDIA Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Weekly
Reader Corporation and subsidiaries ("Weekly Reader"), a wholly-owned subsidiary
of PRIMEDIA Inc., as of December 31, 1997 and 1998, and the related statements
of consolidated operations and accumulated deficit, and of consolidated cash
flows for each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of Weekly Reader's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As further described in Notes 1 and 12, the consolidated financial
statements have been prepared depicting Weekly Reader as a separate business
unit of PRIMEDIA Inc.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Weekly Reader at December 31,
1997 and 1998, and the results of its operations and accumulated deficit, and
its cash flows for each of the three years in the period ended December 31, 1998
in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, Weekly
Reader changed its method of accounting for internal use computer software costs
to conform with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," of the American
Institute of Certified Public Accountants in 1998.
/s/ DELOITTE & TOUCHE LLP
New York, New York
August 30, 1999
(November 17, 1999 as to Note 1)
F-3
WEEKLY READER CORPORATION AND
SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
NOTES 1997 1998
-------- ---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash...................................................... $ 432 $ 1,962
Accounts receivable, net.................................. 4 18,770 24,933
Inventories, net.......................................... 5 6,144 13,641
Deferred income tax asset, net............................ 9 2,025 5,809
Prepaid expenses.......................................... 2,021 1,701
Other current assets...................................... 3 -- 19,405
-------- --------
Total current assets.................................... 29,392 67,451
Property and equipment, net................................. 6 3,071 6,608
Other intangible assets, net................................ 7 26,584 46,636
Excess of purchase price over net assets acquired, net...... 7 38,700 109,992
Deferred income tax asset, net.............................. 9 7,361 1,224
Other non-current assets.................................... 3,030 5,365
-------- --------
$108,138 $237,276
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 9,510 $ 16,327
Deferred revenues......................................... 19,524 21,270
Accrued expenses and other................................ 3,8 5,366 31,620
-------- --------
Total current liabilities............................... 34,400 69,217
-------- --------
Other non-current liabilities............................... 667 667
-------- --------
Commitments and contingencies............................... 11
Shareholder's equity:
Common stock ($.01 par value, 20,000,000 shares
authorized; 10,000,000 shares issued at December 31,
1997 and 1998).......................................... 1 100 100
Investment by PRIMEDIA, net............................... 12 91,397 183,853
Accumulated deficit....................................... (18,426) (16,561)
-------- --------
Total shareholder's equity.............................. 73,071 167,392
-------- --------
$108,138 $237,276
======== ========
See notes to consolidated financial statements.
F-4
WEEKLY READER CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS AND ACCUMULATED DEFICIT
YEARS ENDED DECEMBER 31,
------------------------------
NOTES 1996 1997 1998
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Sales, net.............................................. $ 89,733 $ 92,904 $118,236
Cost of goods sold...................................... 25,503 23,825 30,646
-------- -------- --------
Gross profit............................................ 64,230 69,079 87,590
Operating costs and expenses:
Marketing and selling................................. 13,067 11,745 17,636
Distribution, circulation and fulfillment............. 10,836 11,593 10,881
Editorial............................................. 8,889 9,030 10,596
General and administrative............................ 11,598 12,736 15,281
Corporate and group overhead.......................... 2,728 2,456 5,577
Depreciation and amortization......................... 6,7 13,168 11,428 12,212
-------- -------- --------
Operating income........................................ 3,944 10,091 15,407
Other income (expense):
Intercompany interest expense......................... (5,851) (6,968) (9,232)
Amortization of deferred financing costs.............. (963) (663) (184)
Other, net............................................ 7 1,545 (184)
-------- -------- --------
Income (loss) before income tax provision (benefit)..... (2,863) 4,005 5,807
Income tax provision (benefit).......................... 9 (1,108) 5,772 3,942
-------- -------- --------
Net income (loss)....................................... (1,755) (1,767) 1,865
Accumulated deficit at beginning of period.............. (14,904) (16,659) (18,426)
-------- -------- --------
Accumulated deficit at end of period.................... $(16,659) $(18,426) $(16,561)
======== ======== ========
See notes to consolidated financial statements.
F-5
WEEKLY READER CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
-------- -------- ---------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss)........................................... $ (1,755) $ (1,767) $ 1,865
Adjustments to reconcile net income (loss) to net cash
provided by
operating activities:
Depreciation and amortization............................. 13,168 11,428 12,212
Amortization of deferred financing costs.................. 963 663 184
Intercompany interest expense............................. 5,851 6,968 9,232
Corporate and group overhead.............................. 2,728 2,456 5,577
Deferred income taxes..................................... (1,108) 5,112 3,142
Other, net................................................ -- (1,531) (4)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net.................................. (723) 2,839 (2,578)
Inventories, net.......................................... 5,001 1,951 (1,211)
Prepaid expenses and other................................ 946 (575) 1,710
Increase (decrease) in:
Accounts payable.......................................... (1,513) (1,811) 3,976
Deferred revenues......................................... (506) (3,733) 1,746
Accrued expenses and other................................ (611) (1,390) (3,662)
-------- -------- ---------
Net cash provided by operating activities............... 22,441 20,610 32,189
-------- -------- ---------
INVESTING ACTIVITIES:
Additions to property, equipment and other, net........... (782) (387) (4,299)
Payments for businesses acquired.......................... (18,564) (17,941) (105,584)
-------- -------- ---------
Net cash used in investing activities................... (19,346) (18,328) (109,883)
-------- -------- ---------
FINANCING ACTIVITIES--Intercompany activity, net............ (3,159) (2,334) 79,224
-------- -------- ---------
Increase (decrease) in cash................................. (64) (52) 1,530
Cash, beginning of period................................... 548 484 432
-------- -------- ---------
Cash, end of period......................................... $ 484 $ 432 $ 1,962
======== ======== =========
Supplemental information--Income taxes paid................. $ 34 $ 195 $ 211
======== ======== =========
See notes to consolidated financial statements.
F-6
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Weekly Reader Corporation ("WRC"), PRIMEDIA Reference, Inc. ("PRI") and American
Guidance Service, Inc. ("American Guidance") are brother-sister companies and
are all wholly-owned subsidiaries of PRIMEDIA Inc. ("PRIMEDIA"). On August 13,
1999, PRIMEDIA entered into a Redemption, Stock Purchase and Recapitalization
Agreement (as amended as of October 26, 1999, the "Recapitalization Agreement")
with WRC Media Inc., formerly EAC II Inc. ("WRC Media"). The terms of the
Recapitalization Agreement require that all of the outstanding capital stock of
PRI and American Guidance be contributed to WRC prior to WRC Media's purchase of
a majority interest in WRC for a purchase price of $395,000. The presentation of
these financial statements reflects that on September 30, 1999, PRIMEDIA made a
capital contribution to WRC of all the PRI and American Guidance shares at their
historical carrying values. In addition, on October 5, 1999, the authorized
capital of WRC was amended to consist of 20,000,000 shares of common stock, par
value $.01/share, and WRC declared a 10,000-for-one stock split effective on
October 5, 1999. This amendment was retroactively reflected on the accompanying
financial statements. On November 17, 1999, WRC Media completed its
recapitalization of WRC. The consolidated financial statements include the
accounts of WRC and its subsidiary, Lifetime Learning Systems, Inc. ("Lifetime
Learning"), PRI and its subsidiaries, Funk & Wagnalls Yearbook Corporation and
Gareth Stevens, Inc. ("Gareth Stevens"), and American Guidance and its
subsidiary, AGS International Sales, Inc. (collectively referred to as "Weekly
Reader").
All significant intercompany accounts and transactions have been eliminated in
consolidation. The accompanying consolidated financial statements include the
accounts specifically attributed to Weekly Reader, including allocations of
certain assets, liabilities and expenses relating to shared services and
administrative functions incurred at the corporate and group levels of PRIMEDIA
(see Note 12, Related Party Transactions). The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amount of assets,
liabilities, revenues and expenses reported in the consolidated financial
statements. Significant accounting estimates used include estimates for sales
returns and allowances, bad debts and estimates for the realization of deferred
income tax assets. Management has exercised reasonableness in deriving these
estimates. However, actual results may differ from these estimates.
PRIMEDIA classifies the operations of Weekly Reader in one segment--educational
publishing. WRC is a publisher of classroom periodicals and skills books serving
the Pre-Kindergarten through twelfth grade ("Pre K-12") market. WRC's
subsidiary, Lifetime Learning, creates and distributes sponsored instructional
materials primarily for use in the Pre K-12 market. PRI is a publisher and
distributor of reference and informational materials targeted to kindergarten
through twelfth grade ("K-12") students, as well as other general reference and
informational materials. American Guidance is a publisher of individually
administered testing products primarily for K-12 students and supplemental
instructional materials primarily for low-performing students in middle and
secondary schools. Substantially all of Weekly Reader's sales are in the United
States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RECENT ACCOUNTING PRONOUNCEMENTS--In 1998, Weekly Reader adopted the American
Institute of Certified Public Accountants' ("AICPA") Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Under Weekly Reader's previous
F-7
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounting policy, internal use software costs, whether developed or obtained,
were generally expensed as incurred. In compliance with SOP 98-1, Weekly Reader
expenses costs incurred in the preliminary project stage and, thereafter,
capitalizes costs incurred in the developing or obtaining of internal use
software. Certain costs, such as maintenance and training, are expensed as
incurred. Capitalized costs are amortized over a period of not more than five
years and are subject to impairment evaluation in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The adoption of SOP 98-1, which primarily related to the non-recurring
replacement of a marketing and fulfillment system, resulted in an increase in
net income of approximately $700 for the year ended December 31, 1998.
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which becomes
effective for Weekly Reader's 2001 consolidated financial statements. SFAS
No. 133 requires that derivative instruments be measured at fair value and
recognized as assets or liabilities in a company's balance sheet. Weekly Reader
is currently evaluating the effect, if any, that SFAS No. 133 will have on its
consolidated financial statements.
In 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up
Activities," which requires that costs of start-up activities, including
organizational costs, be expensed as incurred. This SOP will be effective for
Weekly Reader's 1999 consolidated financial statements. In the opinion of Weekly
Reader's management, it is not anticipated that the adoption of SOP 98-5 will
have a material effect on its consolidated financial statements.
INVENTORIES--Inventories, including paper, are valued at the lower of cost or
market on a first-in, first-out ("FIFO") basis.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation of property and
equipment and the amortization of leasehold improvements were provided at rates
based on the estimated useful lives or lease terms, if shorter, using the
straight-line method. Improvements are capitalized while maintenance and repairs
are expensed as incurred.
PURCHASE ACCOUNTING--With respect to acquisitions, the total purchase price has
been allocated to tangible and intangible assets and liabilities based on their
respective fair values. The consolidated financial statements include the
operating results of these acquisitions subsequent to their respective date of
acquisition.
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED AND OTHER INTANGIBLE
ASSETS--Intangible assets are being amortized using both accelerated and
straight-line methods over periods ranging from 3 years to 40 years. The excess
of purchase price over net assets acquired is being amortized on a straight-line
basis over 40 years. The recoverability of the carrying values of the excess of
the purchase price over the net assets acquired and intangible assets is
evaluated quarterly to determine if an impairment in value has occurred. An
impairment in value will be considered to have occurred when it is determined
that the undiscounted future operating cash flows generated by the business are
not sufficient to recover the carrying values of such intangible assets. If it
has been determined that an impairment in value has occurred, the excess of the
purchase price over the net assets acquired and intangible assets
F-8
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
would be written down to an amount which will be equivalent to the present value
of the future operating cash flows to be generated by the business.
REVENUE RECOGNITION--Subscriptions are recorded as deferred revenue when
received and recognized as income over the term of the subscription. Sales of
books, tests and other items are generally recognized as revenue upon shipment,
net of an allowance for returns. Advertising revenues are recognized as income
on the issue date, net of provisions for rebates, adjustments and discounts.
EXPENSE RECOGNITION AND DIRECT--RESPONSE ADVERTISING COSTS--Marketing, selling,
distribution, editorial, and other general and administrative expenses are
generally expensed as incurred. Editorial costs relating to major revisions of
the FUNK & WAGNALLS ENCYCLOPEDIA and certain editorial costs relating to the
American Guidance product lines are deferred and amortized using both
straight-line and accelerated methods over a period of up to ten years.
Amortization of editorial costs, which is included in depreciation and
amortization on the accompanying statements of consolidated operations and
accumulated deficit, was $1,168, $66 and $12 for the years ended December 31,
1996, 1997 and 1998, respectively. Advertising and subscription acquisition
costs are expensed the first time the advertising takes place, except for
direct-response advertising, the primary purpose of which is to elicit sales
from customers who can be shown to have responded specifically to the
advertising and that results in probable future economic benefits.
Direct-response advertising consists of product promotional mailings, catalogs
and subscription promotions. These direct-response advertising costs are
capitalized as assets and amortized over the estimated period of future benefit
using a ratio of current period revenues to total current and estimated future
period revenues. The amortization periods range from six months to twelve months
subsequent to the promotional event. Amortization of direct-response advertising
costs is included in marketing and selling expenses on the accompanying
statements of consolidated operations and accumulated deficit. Direct response
advertising costs of approximately $2,600 and $2,500 at December 31, 1997 and
1998, respectively, included in other non-current assets on the accompanying
consolidated balance sheets, are net of accumulated amortization of
approximately $8,500 and $6,200 at December 31, 1997, and 1998, respectively.
Advertising and promotion expense, which includes amortization of direct
response advertising of approximately $6,600, $7,000 and $6,400 in 1996, 1997
and 1998, respectively, was approximately $8,600, $8,300 and $11,000 during the
years ended December 31, 1996, 1997 and 1998, respectively.
CONCENTRATION OF CREDIT RISK--Weekly Reader's customers include schools and
other institutions. Accounts receivable are generally unsecured. A provision for
estimated doubtful accounts is provided for accounts receivable. There are no
concentrations of business transacted with a particular customer or supplier,
nor concentrations of revenue from a particular service or geographic area that
could severely impact Weekly Reader in the near future.
INCOME TAXES--Weekly Reader's subsidiaries file their Federal income taxes as
members of PRIMEDIA's consolidated return and file their state and local income
taxes on either a separate basis or a combined basis in various jurisdictions.
Income taxes have been calculated on a separate return basis and are presented
in accordance with SFAS No. 109, "Accounting for Income Taxes", using the asset
and liability approach. Deferred taxes reflect the tax consequences in future
years of differences between the financial reporting and tax bases of assets and
liabilities. Income tax expense or benefit is the amount payable or refundable
for the period plus or minus the change during the period in deferred tax assets
and liabilities.
F-9
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS--For instruments including cash, accounts
receivable, accounts payable and accrued expenses and other, the carrying amount
approximates fair value because of the short maturity of these instruments.
3. ACQUISITIONS
Weekly Reader acquired Facts On File News Services ("FOF"), Gareth Stevens and
American Guidance in 1996, 1997 and 1998, respectively. These acquisitions were
financed through borrowings from PRIMEDIA. The cash payments for these
acquisitions on an aggregate basis (including certain immaterial purchase price
adjustments related to prior year acquisitions) were $18,564, $17,941 and
$105,584 for the years ended December 31, 1996, 1997 and 1998, respectively (net
of liabilities assumed of approximately $5,100, $4,700 and $34,700 for the years
ended December 31, 1996, 1997 and 1998, respectively). The excess purchase price
over net assets acquired was approximately $11,100, $12,700 and $73,400 for the
years ended December 31, 1996, 1997 and 1998, respectively.
Approximately $19,600 of the American Guidance purchase price was paid through
contributions to a Rabbi Trust. At December 31, 1998, approximately $19,400
related to the Rabbi Trust is included in other current assets and accrued
expenses and other current liabilities on the consolidated balance sheet.
Marketable securities in the Rabbi Trust have been recorded at fair value, based
on quoted market prices, on the accompanying consolidated balance sheet. The
marketable securities in the Rabbi Trust have been classified as trading
securities and investment income has been netted with the related expense on the
accompanying statement of consolidated operations and accumulated deficit.
The Gareth Stevens acquisition, had it occurred on January 1, 1996, would not
have had a material impact on the results of operations. The following unaudited
pro forma information presents the results of operations of Weekly Reader for
the years ended December 31 as if the acquisition of American Guidance had taken
place on January 1, 1997:
1997 1998
-------- --------
Sales, net.............................................. $131,971 $137,820
Operating income........................................ $ 7,958 $ 14,334
Net income (loss)....................................... $ (3,379) $ 664
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable consist of the following:
DECEMBER 31,
-------------------
1997 1998
-------- --------
Accounts receivable......................................... $23,589 $29,929
Less: Allowance for doubtful accounts....................... 1,499 1,737
Allowance for returns and rebates...................... 3,320 3,259
------- -------
$18,770 $24,933
======= =======
F-10
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
5. INVENTORIES, NET
Inventories consist of the following:
DECEMBER 31,
-------------------
1997 1998
-------- --------
Finished goods.............................................. $6,590 $14,581
Raw materials............................................... 806 929
Less: Allowance for obsolescence............................ 1,252 1,869
------ -------
$6,144 $13,641
====== =======
6. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
RANGE OF DECEMBER 31,
LIVES -------------------
(YEARS) 1997 1998
-------- -------- --------
Machinery, equipment and other.............................. 3-10 $3,604 $6,246
Furniture and fixtures...................................... 5-10 1,666 2,701
Leasehold improvements...................................... 5-10 664 1,092
Buildings and improvements.................................. 32 -- 670
------ ------
5,934 10,709
Less: Accumulated depreciation and amortization............. 2,863 4,101
------ ------
$3,071 $6,608
====== ======
Depreciation and amortization of property and equipment was $741, $910 and
$1,258 for the years ended December 31, 1996, 1997 and 1998, respectively.
F-11
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
7. OTHER INTANGIBLE ASSETS AND EXCESS OF PURCHASE PRICE OVER NET ASSETS
ACQUIRED, NET
Other intangible assets consist of the following:
RANGE OF DECEMBER 31,
LIVES -------------------
(YEARS) 1997 1998
-------- -------- --------
Customer and subscriber lists............................... 3-14 $58,671 $58,671
Non-compete agreements...................................... 3-6 25,100 25,100
Product titles.............................................. 7 -- 22,400
Trademarks.................................................. 40 11,069 17,569
Copyrights.................................................. 9 11,100 11,100
Databases................................................... 10 5,812 5,812
Trademark license agreements................................ 40 3,795 3,795
Advertiser lists............................................ 10 1,780 1,780
Other....................................................... 4-10 216 216
------- -------
117,543 146,443
Less: Accumulated amortization.............................. 90,959 99,807
------- -------
$26,584 $46,636
======= =======
The excess of purchase price over the fair market value of the net assets
acquired is net of accumulated amortization of $23,446 and $25,540 at
December 31, 1997 and 1998, respectively. Amortization of other intangible
assets and excess of purchase price over net assets acquired was $11,259,
$10,452 and $10,942 for the years ended December 31, 1996, 1997 and 1998,
respectively.
8. ACCRUED EXPENSES AND OTHER
Accrued expenses and other current liabilities consist of the following:
DECEMBER 31,
-------------------
1997 1998
-------- --------
Rabbi Trust (see Note 3).................................... $ -- $19,405
Payroll and related employee benefits....................... 2,018 4,135
Acquisition costs........................................... 1,019 2,882
Non-income taxes............................................ 48 1,417
Pension liability (see Note 10)............................. -- 1,036
Royalties................................................... 224 1,003
Professional fees........................................... -- 565
Deferred purchase price liability........................... 733 --
Other....................................................... 1,324 1,177
------ -------
$5,366 $31,620
====== =======
9. INCOME TAXES
At December 31, 1998, Weekly Reader had aggregate net operating loss ("NOLs")
carryforwards for Federal income tax purposes of approximately $18,500. The
utilization of such NOLs, however, is
F-12
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
9. INCOME TAXES (CONTINUED)
subject to certain limitations under Federal income tax laws. Specifically, as a
result of a certain tax election relating to the Recapitalization Agreement, the
NOLs, except those relating to American Guidance, are expected to remain with
PRIMEDIA. Therefore, it is expected that these losses will not be available to
Weekly Reader or its subsidiaries. The NOL of American Guidance will be limited,
by tax law, to a ratable portion of PRIMEDIA's consolidated NOL for the tax year
ended December 31, 1998. The amount so limited may be available to Weekly Reader
and its subsidiaries and is scheduled to expire in 2018.
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating loss
carryforwards. The tax effects of significant items comprising Weekly Reader's
net deferred income tax assets are as follows:
DECEMBER 31, 1997
------------------------------
FEDERAL STATE TOTAL
-------- -------- --------
DEFERRED INCOME TAX ASSETS:
Difference between book and tax basis of inventory.......... $ 279 $ 54 $ 333
Difference between book and tax basis of accrued expenses
and other................................................. 918 212 1,130
Reserves not currently deductible........................... 1,566 348 1,914
Difference between book and tax basis of other intangible
assets.................................................... 5,432 1,250 6,682
Operating loss carryforwards................................ 5,717 1,114 6,831
------- ------ -------
Total....................................................... 13,912 2,978 16,890
------- ------ -------
DEFERRED INCOME TAX LIABILITIES:
Difference between book and tax basis of other intangible
assets.................................................... 1,638 375 2,013
Difference between book and tax basis of property and
equipment................................................. 1,013 172 1,185
Other....................................................... 343 196 539
------- ------ -------
Total....................................................... 2,994 743 3,737
------- ------ -------
Net deferred income tax assets.............................. 10,918 2,235 13,153
Less: Valuation allowances.................................. 3,119 648 3,767
------- ------ -------
Net......................................................... $ 7,799 $1,587 $ 9,386
======= ====== =======
F-13
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
9. INCOME TAXES (CONTINUED)
DECEMBER 31, 1998
------------------------------
FEDERAL STATE TOTAL
-------- -------- --------
DEFERRED INCOME TAX ASSETS:
Difference between book and tax basis of inventory.......... $ 679 $ 117 $ 796
Difference between book and tax basis of accrued expenses
and other................................................. 8,628 1,467 10,095
Reserves not currently deductible........................... 1,596 346 1,942
Difference between book and tax basis of other intangible
assets.................................................... 5,815 1,331 7,146
Operating loss carryforwards................................ 6,082 1,073 7,155
------- ------ -------
Total....................................................... 22,800 4,334 27,134
------- ------ -------
DEFERRED INCOME TAX LIABILITIES:
Difference between book and tax basis of other intangible
assets.................................................... 8,920 1,523 10,443
Difference between book and tax basis of property and
equipment................................................. 1,514 254 1,768
Other....................................................... 2,472 446 2,918
------- ------ -------
Total....................................................... 12,906 2,223 15,129
------- ------ -------
Net deferred income tax assets.............................. 9,894 2,111 12,005
Less: Valuation allowances.................................. 4,170 802 4,972
------- ------ -------
Net......................................................... $ 5,724 $1,309 $ 7,033
======= ====== =======
Certain deferred tax assets are subject to a valuation allowance, as management
believes it is more likely than not that these assets will not be realized.
The net deferred tax assets, except those relating to American Guidance and
Gareth Stevens, are expected to remain with PRIMEDIA as a result of a certain
tax election relating to the Recapitalization Agreement.
The provision for Federal, state and local income taxes consists of the
following:
1996 1997 1998
-------- -------- --------
CURRENT--Federal............................................ $ -- $ 660 $ 800
-- 660 800
-------
DEFERRED:
State and local........................................... (380) 576 246
Federal................................................... (728) 4,536 2,896
------- ------ ------
(1,108) 5,112 3,142
------- ------ ------
Income tax provision (benefit).............................. $(1,108) $5,772 $3,942
======= ====== ======
F-14
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
9. INCOME TAXES (CONTINUED)
Weekly Reader's provision for income taxes differs from the amount computed by
applying the statutory U.S. Federal income tax rate to income (loss) before
income tax provision as follows:
1996 1997 1998
-------- -------- --------
Provision for taxes at the statutory rate................... $(1,002) $1,402 $2,032
State income taxes, net of Federal tax benefit.............. (247) 374 160
Non-deductible goodwill amortization........................ 131 219 555
Change in valuation allowance............................... -- 3,767 1,205
Other....................................................... 10 10 (10)
------- ------ ------
Total....................................................... $(1,108) $5,772 $3,942
======= ====== ======
10. RETIREMENT PLANS
Substantially all of Weekly Reader's employees are eligible to participate in a
defined contribution plan of PRIMEDIA. The expense recognized by Weekly Reader
for the plan was $438 in 1996, $502 in 1997 and $425 in 1998.
American Guidance sponsors a defined benefit pension plan (the "American
Guidance Plan") for the benefit of its employees. The allocation of the purchase
price of American Guidance included a liability of $792 related to this plan.
The benefits to be paid under the American Guidance Plan are based on years of
service and compensation amounts for the average of the highest five consecutive
plan years. The American Guidance Plan is funded by means of contributions to
the plan's trust. The pension funding policy is consistent with the funding
requirements of U.S. Federal and other governmental laws and regulations. Plan
assets consist primarily of fixed income, equity and other short-term
investments.
F-15
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
10. RETIREMENT PLANS (CONTINUED)
The following tables set forth the American Guidance Plan's funded status as of
December 31, 1998 and the amounts recognized in Weekly Reader's statement of
consolidated operations and accumulated deficit from the acquisition date
through December 31, 1998.
Change in benefit obligation:
Projected benefit obligation at acquisition date............ $ 8,682
Service cost.............................................. 318
Interest cost............................................. 287
Actuarial loss............................................ 308
Benefits paid............................................. (137)
-------
Projected benefit obligation at December 31, 1998........... 9,458
-------
Change in plan assets:
Fair value of plan assets at acquisition date............... 8,198
Actual return on plan assets.............................. (276)
Benefits paid............................................. (137)
-------
Fair value of plan assets at December 31, 1998.............. 7,785
-------
Funded status............................................... (1,673)
Unrecognized actuarial loss................................. 637
-------
Accrued pension cost........................................ $(1,036)
=======
Components of net periodic pension expense:
Service cost.............................................. $ 318
Interest cost............................................. 287
Expected return on plan assets............................ (361)
-------
Net periodic pension expense................................ $ 244
=======
Weighted-average assumptions as of December 31, 1998:
Discount rate............................................... 6.50%
Expected return on plan assets.............................. 9.00%
Rate of compensation increase............................... 4.50%
11. COMMITMENTS AND CONTINGENCIES
COMMITMENTS--Total rent expense under operating leases was $1,122, $1,776 and
$1,836 for the years ended December 31, 1996, 1997 and 1998, respectively.
Certain leases are subject to escalation clauses
F-16
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
and certain leases contain renewal options. Minimum rental commitments under
noncancelable operating leases are as follows:
YEARS ENDING DECEMBER 31,
- ------------------------------------------------------------
1999........................................................ $ 2,218
2000........................................................ 1,953
2001........................................................ 1,385
2002........................................................ 1,180
2003........................................................ 1,092
Thereafter.................................................. 2,586
-------
$10,414
=======
CONTINGENCIES--Weekly Reader is involved in ordinary and routine litigation
incidental to its business. In the opinion of management, there is no pending
legal proceeding that would have a material adverse affect on the consolidated
financial statements of Weekly Reader.
12. RELATED PARTY TRANSACTIONS
The consolidated financial statements include the net investment by PRIMEDIA
which relates to net transfers of cash under a centralized cash management
system, allocations of PRIMEDIA's debt with related deferred financing fees and
interest and allocations of PRIMEDIA's equity. Outstanding intercompany debt was
approximately $74,100 and $167,700 at December 31, 1997 and 1998, respectively.
PRIMEDIA's borrowings under its' bank credit facilities and senior notes are
guaranteed by Weekly Reader and each of PRIMEDIA's other domestic wholly-owned
subsidiaries. Deferred financing costs are being amortized by the straight-line
method over the terms of the related indebtedness of PRIMEDIA.
The consolidated financial statements also include costs allocated to Weekly
Reader from PRIMEDIA consisting of: (1) corporate overhead for services and
administrative functions shared with PRIMEDIA and its other operating companies
including, but not limited to, executive management costs, salaries and fringe
benefits for certain legal, financial, information technology and human
resources personnel, information technology expenses, real estate expenses and
third party costs; and (2) direct group overhead costs such as the salaries,
fringe benefits and expenses for PRIMEDIA staff directly involved in operating
Weekly Reader. Corporate overhead costs were allocated based on relative
budgeted profitability measures. Management believes that these allocations were
made on a reasonable basis. This accounting treatment is common in subsidiary
financial statements and may not reflect the actual access to financial
resources and actual expenses which Weekly Reader might have incurred as a
stand-alone operation.
Payment of trade payables and other disbursements are processed through the
centralized cash management system operated by PRIMEDIA. All receipts from
customers are collected in Weekly Reader's lock boxes and then transferred to
PRIMEDIA.
F-17
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
12. RELATED PARTY TRANSACTIONS (CONTINUED)
The activity in the Investment by PRIMEDIA, net account for the years ended
December 31, 1996, 1997 and 1998 is as follows:
1996 1997 1998
-------- -------- --------
Balance, beginning of year.................................. $77,758 $84,141 $ 91,397
Push down accounting relating to acquisitions............... 18,136 17,452 107,411
Transfers from PRIMEDIA and subsidiaries--net............... (11,753) (10,196) (14,955)
------- ------- --------
Balance, end of year........................................ $84,141 $91,397 $183,853
======= ======= ========
PRIMEDIA does not assess interest to Weekly Reader on its outstanding
intercompany balances other than on the outstanding intercompany debt.
Certain management members of Weekly Reader receive stock options for the
purchase of PRIMEDIA common stock. The stock options were granted with exercise
prices equal to the quoted market price at the time of issuance. The number of
stock options granted during 1996, 1997 and 1998 was 60,000, 0 and 110,660,
respectively. The number of stock options exercised during 1996, 1997 and 1998
was 26,460, 4,200 and 600, respectively. The number of stock options outstanding
at December 31, 1998 was 303,100.
F-18
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(DOLLARS IN THOUSANDS)
ASSETS
Current Assets:
Cash...................................................... $ 2,282 $ 1,962
Accounts receivable, net.................................. 41,363 24,933
Inventories, net.......................................... 14,269 13,641
Deferred income tax asset, net............................ -- 5,809
Prepaid expenses.......................................... 2,343 1,701
Other current assets...................................... 18,766 19,405
-------- --------
Total current assets.................................. 79,023 67,451
Property and equipment, net................................. 6,322 6,608
Other intangible assets, net................................ 38,634 46,636
Excess of purchase price over net assets acquired, net...... 107,766 109,992
Deferred income tax asset, net.............................. 5,854 1,224
Other non-current assets.................................... 10,845 5,365
-------- --------
$248,444 $237,276
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 14,499 $ 16,327
Deferred revenues......................................... 31,210 21,270
Accrued expenses and other................................ 32,486 31,620
-------- --------
Total current liabilities............................. 78,195 69,217
Other non-current liabilities........................... -- 667
-------- --------
Shareholder's equity:
Common stock ($.01 par value, 20,000,000 shares
authorized;
10,000,000 shares issued at September 30, 1998 and
1999)................................................... 100 100
Investment by PRIMEDIA, net............................... 187,316 183,853
Accumulated deficit....................................... (17,167) (16,561)
-------- --------
Total shareholder's equity.................................. 170,249 167,392
-------- --------
$248,444 $237,276
======== ========
See notes to condensed consolidated financial statements.
F-19
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30 SEPTEMBER 30, SEPTEMBER 30,
------------- ------------ ------------- -------------
1998 1999 1998 1999
------------- ------------ ------------- -------------
(DOLLARS IN THOUSANDS)
Sales, net................................ $37,376 $39,796 $74,002 $101,630
Cost of goods sold........................ 10,315 11,987 19,082 27,921
------- ------- ------- --------
Gross profit.............................. 27,061 27,809 54,920 73,709
Operating costs and expenses:
Marketing and selling................... 5,215 6,139 10,590 16,487
Distribution, circulation and
fulfillment........................... 2,629 3,191 7,130 8,436
Editorial............................... 2,600 2,481 7,423 7,251
General and administrative.............. 4,710 4,469 10,382 11,903
Corporate and group overhead............ 909 1,033 2,903 5,549
Depreciation and amortization........... 4,200 3,670 7,993 11,884
------- ------- ------- --------
Operating income.......................... 6,798 6,826 8,499 12,199
Other expense:
Intercompany interest expense........... (1,296) (3,442) (3,966) (10,133)
Amortization of deferred financing
costs................................. (47) (61) (137) (154)
Other, net.............................. (154) (65) (191) (582)
------- ------- ------- --------
Loss before income tax provision.......... 5,301 3,258 4,205 1,330
Income tax provision...................... (3,284) 2,193 (2,992) (1,938)
------- ------- ------- --------
Net Income loss........................... $ 2,017 $ 1,065 $ 1,213 $ (608)
======= ======= ======= ========
See notes to condensed consolidated financial statements.
F-20
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1999
-------- --------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss)......................................... $ 1,213 $ (608)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 7,993 11,884
Amortization of deferred financing costs................ 137 154
Intercompany interest expense........................... 3,966 10,133
Corporate and group overhead............................ 2,903 5,549
Deferred income taxes................................... 2,992 1,181
Other, net.............................................. 191 582
Changes in operating assets and liabilities:
Increase in:
Accounts receivable, net................................ (16,812) (16,430)
Inventories, net........................................ (778) (628)
Prepaid expenses and other.............................. (147) (1,624)
Increase (decrease) in:
Accounts payable........................................ (853) (1,828)
Deferred revenues....................................... 13,615 9,940
Accrued expenses and other.............................. (1,778) 866
------- -------
Net cash provided by operating activities............. 12,642 19,171
------- -------
INVESTING ACTIVITIES:
Additions to property, equipment and other, net........... (2,039) (4,114)
Payments for businesses acquired.......................... (733) (667)
------- -------
Net cash used in investing activities................. (2,772) (4,781)
------- -------
FINANCING ACTIVITIES--Intercompany activity, net............ (8,239) (14,070)
------- -------
Increase in cash............................................ 1,631 320
Cash, beginning of period................................... 3,569 1,962
------- -------
Cash, end of period......................................... $ 5,200 $ 2,282
======= =======
Supplemental information--Income taxes paid................. $ 105 $ 74
======= =======
See notes to condensed consolidated financial statements.
F-21
WEEKLY READER CORPORATION AND SUBSIDIARIES NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION
Weekly Reader Corporation ("WRC"), PRIMEDIA Reference, Inc. ("PRI") and American
Guidance Service, Inc. ("American Guidance") are brother-sister companies and
are all wholly-owned subsidiaries of PRIMEDIA Inc. ("PRIMEDIA"). On August 13,
1999, PRIMEDIA entered into a Redemption, Stock Purchase and Recapitalization
Agreement (as amended as of October 26, 1999, the "Recapitalization Agreement")
with WRC Media Inc., formerly EAC II Inc. ("WRC Media"). The terms of the
Recapitalization Agreement require that all of the outstanding capital stock of
PRI and American Guidance be contributed to WRC prior to WRC Media's purchase of
a majority interest in WRC for a purchase price of $395,000. The presentation of
these financial statements reflects that on September 30, 1999, PRIMEDIA made a
capital contribution to WRC of all the PRI and American Guidance shares at their
historical carrying values. In addition, on October 5, 1999, the authorized
capital of WRC was amended to consist of 20,000,000 shares of common stock, par
value $.01/share, and WRC declared a 10,000-for-one stock split effective on
October 5, 1999. This amendment was retroactively reflected on the accompanying
financial statements. On November 17, 1999, WRC Media completed its
recapitalization of WRC. The consolidated financial statements include the
accounts of WRC and its subsidiary, Lifetime Learning Systems, Inc. ("Lifetime
Learning"), PRI and its subsidiaries, Funk & Wagnalls Yearbook Corporation and
Gareth Stevens, Inc. ("Gareth Stevens"), and American Guidance and its
subsidiary, AGS International Sales, Inc. (collectively referred to as "Weekly
Reader").
In the opinion of Weekly Reader's management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. The accompanying condensed consolidated financial statements
include the accounts specifically attributed to Weekly Reader, including
allocations of certain assets, liabilities and expenses relating to shared
services and administrative functions incurred at the corporate and group levels
of PRIMEDIA. All significant intercompany accounts and transactions have been
eliminated in consolidation. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amount of assets, liabilities,
revenues and expenses reported in the consolidated financial statements.
Significant accounting estimates used include estimates for sales returns and
allowances, bad debts and estimates for the realization of deferred income tax
assets. Management has exercised reasonableness in deriving these estimates.
However, actual results may differ from these estimates. These statements should
be read in conjunction with Weekly Reader's annual financial statements and
related notes for the year ended December 31, 1998. The operating results for
the nine-month period ended September 30 are not necessarily indicative of the
results that may be expected for a full year.
F-22
WEEKLY READER CORPORATION AND SUBSIDIARIES NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. INVENTORIES, NET
Inventories consist of the following:
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
Finished goods.............................................. $14,581 $15,634
Raw materials............................................... 929 1,507
------- -------
15,510 17,141
Less: Allowance for obsolescence............................ 1,869 2,872
------- -------
$13,641 $14,269
======= =======
3. ACQUISITIONS
During the second half of 1998, Weekly Reader acquired the stock of American
Guidance for approximately $105,000 and Weekly Reader's results of operations
include American Guidance for the period subsequent to the acquisition date.
This acquisition was financed through borrowings from PRIMEDIA.
The following unaudited pro forma information presents the results of operations
of Weekly Reader for the period ended September 30, 1998 as if the acquisition
of American Guidance had taken place on January 1, 1998:
1998
--------
Sales, net.................................................. $93,586
Operating income............................................ $ 9,605
Net income.................................................. $ 1,904
F-23
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Guidance Service, Inc.
Circle Pines, Minnesota
We have audited the accompanying consolidated balance sheets of American
Guidance Service, Inc. (the "Company") as of June 30, 1997 and 1998 and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended June 30, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of June 30, 1997
and 1998 and the results of its operations and its cash flows for each of the
three years in the period ended June 30, 1998, in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
July 31, 1998
(August 5, 1998 as to Note 14)
F-24
AMERICAN GUIDANCE SERVICE, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30,
-----------------------
1997 1998
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 3,756 $ 3,137
Accounts and notes receivable:
Trade, less allowance for doubtful accounts and sales
returns of $490 and $445, respectively.................. 2,534 3,587
Author and other receivables (Note 5)..................... 132 14
Inventories (Note 2)........................................ 2,662 4,237
Prepaids and other.......................................... 103 1,414
Deferred income taxes (Note 9).............................. 1,230 700
------- -------
Total current assets.................................. 10,417 13,089
Other Assets:
Author and other receivables, less allowance for doubtful
accounts of $190 and $70, respectively, net of current
maturities (Note 5)....................................... -- 18
Intangibles, net of accumulated amortization of $4,323 and
$4,615, respectively (Note 2)............................. 90 798
Cash surrender value of life insurance, net of policy loans
of $1,206 and $1,930, respectively........................ 612 295
Deferred income taxes (Note 9).............................. 2,095 1,450
------- -------
Total other assets.................................... 2,797 2,561
Property, Equipment, and Leasehold Improvements, net (Note
4)........................................................ 1,265 1,202
------- -------
$14,479 $16,852
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable (Note 6)..................................... -- $ 1,500
Current maturities of long-term debt (Note 6)............. $ 1,277 --
Accounts payable.......................................... 2,295 2,843
Accrued liabilities:
Salaries and wages...................................... 1,746 1,832
Royalties............................................... 275 412
State, local, and payroll taxes......................... 258 261
Pension and other accrued liabilities................... 1,014 1,279
Income taxes............................................ 1,130 961
Current maturities of deferred compensation (Note 7)...... 173 39
------- -------
Total current liabilities........................... 8,168 9,127
Long-Term Debt, net of current maturities (Note 6).......... 176 --
Deferred Compensation, net of current maturities (Note 7)... 693 754
Commitments and Contingencies (Notes 8, 10, and 13)
Stockholders' Equity:
Common stock.............................................. 23 21
Additional paid-in capital................................ 2,356 2,866
Retained earnings......................................... 3,801 5,444
------- -------
6,180 8,331
Guaranteed ESOP debt obligations (Note 8)................. (738) --
Notes receivable from ESOP and Profit Sharing Plan (Note
8)...................................................... -- (1,360)
------- -------
Total stockholders' equity............................ 5,442 6,971
------- -------
$14,479 $16,852
======= =======
See notes to consolidated financial statements.
F-25
AMERICAN GUIDANCE SERVICE, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30,
--------------------------------------
1996 1997 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Sales....................................................... $29,390 $33,449 $42,680
Cost of Sales............................................... 8,548 9,480 11,779
------- ------- -------
Gross profit............................................ 20,842 23,969 30,901
Expenses:
Development............................................... 4,947 4,407 5,349
Sales..................................................... 6,824 7,455 8,447
General and administrative................................ 5,759 6,346 7,044
Pension................................................... 402 486 452
ESOP contribution......................................... 1,462 1,307 1,600
Interest expense.......................................... 372 229 159
Interest income........................................... (29) (129) (126)
Other expense (income).................................... (230) 835 732
------- ------- -------
Total expenses.......................................... 19,507 20,936 23,657
------- ------- -------
Income Before Income Tax (Expense) Benefit.................. 1,335 3,033 7,244
Income Tax (Expense) Benefit (Note 9)....................... 200 (775) (2,700)
------- ------- -------
Net Income.................................................. $ 1,535 $ 2,258 $ 4,544
======= ======= =======
See notes to consolidated financial statements.
F-26
AMERICAN GUIDANCE SERVICE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
VOTING PAR VOTING PAR NONVOTING PAR
VALUE $.01 VALUE $.01 VALUE $.01 ADDITIONAL
CLASS A CLASS B CLASS C PAID-IN RETAINED
COMMON STOCK COMMON STOCK COMMON STOCK CAPITAL EARNINGS
-------------------- ------------------- -------------------- ---------- --------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- -------- -------- -------- --------- --------
BALANCE AT JUNE 30, 1995........... 1,460,497 $14 10,800 $ 1 1,091,831 $11 $2,142 $3,429
Repurchases and retirement of
stock............................ (64,472) (1) (721)
Dividends paid..................... (929)
ESOP contributions to reduce
guaranteed debt..................
Issuance of stock options.......... 293
Tax benefit of dividends paid on
unallocated ESOP shares.......... 38
Net income......................... 1,535
--------- --- ------- ---- --------- --- ------ ------
BALANCE AT JUNE 30, 1996........... 1,460,497 14 10,800 1 1,027,359 10 1,714 4,073
Repurchases and retirement of
stock............................ (88,830) (1) (122,837) (1) (127) (2,530)
ESOP contributions to reduce
guaranteed debt..................
Issuance of stock options.......... 769
Net income......................... 2,258
--------- --- ------- ---- --------- --- ------ ------
BALANCE AT JUNE 30, 1997........... 1,371,667 13 10,800 1 904,522 9 2,356 3,801
Conversion to Class A Common
Stock............................ 915,322 10 (10,800) (1) (904,522) (9)
Repurchase and retirement of Class
A Common Stock................... (163,398) (2) (320) (2,901)
Advances on notes receivable to
ESOP and Profit Sharing Plan.....
ESOP contributions to reduce
guaranteed debt..................
ESOP contributions to reduce note
receivable from ESOP.............
Issuance of stock options.......... 795
Stock options exercised............ 14,000 35
Net income......................... 4,544
--------- --- -------
BALANCE AT JUNE 30, 1998........... 2,137,591 $21 -- $ -- -- $-- $2,866 $5,444
========= === ======= ==== ========= === ====== ======
NOTES
RECEIVABLE
GUARANTEED FROM ESOP TOTAL
ESOP DEBT AND PROFIT STOCKHOLDERS'
OBLIGATIONS SHARING PLAN EQUITY
----------- ------------ -------------
BALANCE AT JUNE 30, 1995........... $(3,438) $2,159
Repurchases and retirement of
stock............................ (722)
Dividends paid..................... 76 (168)
ESOP contributions to reduce
guaranteed debt.................. 1,462 1,462
Issuance of stock options.......... 293
Tax benefit of dividends paid on
unallocated ESOP shares.......... 38
Net income......................... 1,535
------- ------- ------
BALANCE AT JUNE 30, 1996........... (1,215) 4,597
Repurchases and retirement of
stock............................ (2,659)
ESOP contributions to reduce
guaranteed debt.................. 477 477
Issuance of stock options.......... 769
Net income......................... 2,258
------- ------- ------
BALANCE AT JUNE 30, 1997........... (738) 5,442
Conversion to Class A Common
Stock............................
Repurchase and retirement of Class
A Common Stock................... (3,223)
Advances on notes receivable to
ESOP and Profit Sharing Plan..... $(2,222) (2,222)
ESOP contributions to reduce
guaranteed debt.................. 738 738
ESOP contributions to reduce note
receivable from ESOP............. 862 862
Issuance of stock options.......... 795
Stock options exercised............ 35
Net income......................... 4,544
------
BALANCE AT JUNE 30, 1998........... $ -- $(1,360) $6,971
======= ======= ======
See notes to consolidated financial statements.
F-27
AMERICAN GUIDANCE SERVICE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
------------------------------
1996 1997 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Cash Flows From Operating Activities:
Net income................................................ $1,535 $2,258 $4,544
Adjustments to reconcile net income to net cash provided
by operating activities:
ESOP contributions to reduce guaranteed debt............ 1,462 477 738
ESOP contributions...................................... -- -- 862
Compensation from issuance of stock options............. 293 769 795
Depreciation and amortization........................... 728 624 742
Income tax benefit from dividends paid on unallocated
ESOP Shares........................................... 38 -- --
Deferred compensation expense........................... 148 209 394
Deferred income taxes................................... (375) 200 1,175
Change in assets and liabilities, net of acquisitions:
Accounts receivable--trade............................ 570 282 (1,053)
Inventories........................................... 548 (425) (1,355)
Prepaids and other.................................... (787) 1,374 (981)
Accounts payable...................................... (1,316) (139) 548
Accrued liabilities................................... 1,061 285 491
Income taxes.......................................... 637 456 (169)
------ ------ ------
Net cash provided by operating activities........... 4,542 6,370 6,731
Cash Flows From Investing Activities:
Acquisition of property and equipment..................... (354) (391) (387)
Net payments on author and other receivables.............. 124 28 100
Net increase in cash surrender value of life insurance.... (322) (263) (375)
Cash paid for business acquisitions (Note 12)............. (731) (782) (1,550)
Change in other assets.................................... 40 -- --
------ ------ ------
Net cash used in investing activities............... (1,243) (1,408) (2,212)
Cash Flows From Financing Activities:
Proceeds from note payable................................ -- -- 1,500
Proceeds from life insurance policy loans................. 1,075 -- 692
Payments of long-term debt................................ (1,658) (664) (1,453)
Payments of deferred compensation......................... (133) (128) (467)
Repurchase of common stock................................ (722) (2,659) (3,223)
Dividends paid on Class A common stock.................... (929) -- --
Advances on notes receivable to ESOP and Profit Sharing
Plan.................................................... -- -- (2,222)
Proceeds from exercise of stock options................... -- -- 35
------ ------ ------
Net cash used in financing activities............... (2,367) (3,451) (5,138)
------ ------ ------
Net (Decrease) Increase in Cash and Cash Equivalents........ 932 1,511 (619)
Cash and Cash Equivalents at Beginning of Year.............. 1,313 2,245 3,756
------ ------ ------
Cash and Cash Equivalents at End of Year.................... $2,245 $3,756 $3,137
====== ====== ======
See note to consolidated financial statements.
F-28
AMERICAN GUIDANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. NATURE OF BUSINESS
American Guidance Service, Inc. ("American Guidance") is a publisher of
individually administered testing products primarily for kindergarten through
twelfth grade students and supplemental instructional materials primarily for
low performing students in middle and secondary grades.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the
accounts of American Guidance and its 100%-owned subsidiary, AGS International
Sales, Inc. All significant intercompany accounts and transactions have been
eliminated.
CASH EQUIVALENTS--American Guidance considers investments with an original
maturity of three months or less at the time of purchase to be cash equivalents.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK--American Guidance's business
activity is conducted primarily in the United States. Customers include schools
and other institutions. Accounts receivable are generally unsecured. A provision
for estimated doubtful accounts is provided for accounts receivable. There are
no concentrations of business transacted with a particular customer or supplier
nor concentrations of revenue from a particular service or geographic area that
could severely impact American Guidance in the near future.
INVENTORIES--Inventories are valued at the lower of cost or market. Cost is
determined by the last-in, first-out ("LIFO") method. If the first-in, first-out
("FIFO") cost method had been used to value inventories, inventories would have
been greater by approximately $2,304 and $2,222 at June 30, 1997 and 1998,
respectively.
PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS--Property, equipment, and
leasehold improvements are depreciated over the estimated useful lives of the
assets using the straight-line method of depreciation.
AMORTIZATION OF OTHER ASSETS--Copyrights, noncompete agreements, and customer
lists are amortized by the straight-line method over their estimated lives,
which generally range from one to five years.
IMPAIRMENT OF LONG-LIVED ASSETS--Management of American Guidance periodically
reviews the carrying value of long-lived assets for potential impairment
whenever circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review of recoverability of such assets, American
Guidance compares the expected undiscounted future cash flows that result from
the use of the asset and its disposition and recognizes an impairment loss,
based on the discounted cash flows, when such undiscounted cash flows are less
than the carrying amount of the asset.
STOCK-BASED COMPENSATION--American Guidance has adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
This Statement defines a fair value based method of accounting for an employee
stock option or similar equity instrument and encourages all entities to adopt
that method of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES. Under the fair value based method, compensation cost is measured
at the grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period. Under the intrinsic value
based method,
F-29
AMERICAN GUIDANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date or other measurement date over the amount an employee must pay
to acquire the stock. American Guidance accounts for stock option grants and
awards to employees in accordance with APB Opinion No. 25 and related
interpretations.
REVENUE RECOGNITION AND EDITORIAL COSTS--Sales of books, tests and other items
are generally recognized as revenue upon shipment, net of an allowance for
returns. Editorial costs are expensed as incurred.
INCOME TAXES--American Guidance records income taxes in accordance with SFAS
No. 109, ACCOUNTING FOR INCOME TAXES. SFAS No. 109 requires an asset and
liability approach to financial accounting and reporting for income taxes.
Deferred income tax assets and liabilities are computed annually for the
differences between the financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Income tax expense is the
taxes payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. CASH FLOWS
Cash provided by operating activities includes the following for the years ended
June 30:
1996 1997 1998
-------- -------- --------
Interest paid......................................... $ 372 $229 $ 159
Income taxes paid (refunded).......................... (500) 119 1,715
4. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
ESTIMATED
1997 1998 USEFUL LIFE
-------- -------- -----------
Land and building............................... $ 495 $ 495 30 years
Office furniture and equipment.................. 3,589 3,795 3-10 years
Machinery and equipment......................... 847 1,034 5-10 years
Leasehold improvements.......................... 1,058 1,052 10-32 years
------ ------
5,989 6,376
Less: accumulated depreciation.................. 4,724 5,174
------ ------
$1,265 $1,202
====== ======
F-30
AMERICAN GUIDANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
5. AUTHOR RECEIVABLES
Receivables from authors consist of royalty advances made prior to publication
and the authors' portion of developmental costs related to the publication. All
amounts are secured by future royalties and are due in quarterly installments.
Of these receivables, approximately $30 and $0 at June 30, 1997 and 1998,
respectively, bear interest ranging from 6.0% to 10.0%.
6. FINANCING
NOTES PAYABLE--At June 30, 1998, American Guidance had a revolving credit
agreement (the "Revolver") with a bank providing up to $3,000 in borrowings
through August 31, 2000. The Revolver bears interest at the bank's reference
rate or, at American Guidance's option, a LIBOR advance rate. The LIBOR advance
rate may vary between 1.25% and 1.75% over the prevailing LIBOR rates based on
certain financial ratios of American Guidance. The interest rate on outstanding
borrowings of $1,500 at June 30, 1998 was 8.5%. American Guidance may borrow up
to 75% of eligible accounts receivable and 40% of eligible inventory, as
defined. At June 30, 1998, there was $1,500 borrowing availability under the
line. American Guidance's accounts receivable and inventories serve as
collateral under the Revolver.
If total Revolver borrowings exceed $1,000, American Guidance is required to
comply with restrictive covenants including ratios on cash flow leverage, fixed
charge coverage, and debt to tangible net worth, and restrictions on capital
expenditures, acquisitions, stock repurchases, and the payment of dividends. As
of June 30, 1998, American Guidance was in compliance with these financial
covenants.
LONG-TERM DEBT--Long-term debt consisted of the following at June 30, 1997:
Note payable, guaranteed ESOP obligation, paid in July
1997...................................................... $ 738
Note payable, paid in July 1997............................. 365
Note payable, paid in December 1997......................... 344
Note payable, paid in December 1997......................... 6
------
1,453
Less: current maturities.................................... 1,277
------
$ 176
======
7. DEFERRED COMPENSATION
American Guidance entered into deferred compensation agreements with an officer
of American Guidance in 1967 and 1985. The officer retired in 1992. Pursuant to
the terms of the 1967 agreement, minimum annual payments of $9 (adjusted for a
price index) will be made for a 12-year period beginning the first day of the
calendar month following the date of separation from active employment. The 1985
agreement, as amended, requires American Guidance to make payments of $100 per
year, including interest at 6%, through September 1999. In fiscal 1998, American
Guidance and the former officer agreed to terminate the agreements. In
connection with the termination of the agreements, American Guidance made a $383
lump-sum distribution to the former officer.
During 1996, American Guidance established two supplemental executive retirement
plans (a defined contribution plan and a defined benefit plan) for certain
officers of American Guidance. At June 30,
F-31
AMERICAN GUIDANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
7. DEFERRED COMPENSATION (CONTINUED)
1998, American Guidance has an accrued contribution to the defined contribution
plan of $356 and an accrued pension cost of $369 for the defined benefit plan.
The liability for the above agreements as of June 30 is as follows:
1997 1998
-------- --------
1967 agreement $261 --
1985 agreement 204 --
Supplemental executive retirement plans..................... 344 $725
Other....................................................... 57 68
---- ----
866 793
Less: current portion....................................... 173 39
---- ----
$693 $754
==== ====
Deferred compensation expense totaled $148, $209, and $394 for the years ended
June 30, 1996, 1997, and 1998, respectively.
8. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN--During 1990, American Guidance formed an Employee
Stock Ownership Plan and Trust ("ESOP") for the benefit of employees meeting
certain eligibility requirements. Simultaneously with the formation of the ESOP,
the ESOP entered into agreements with certain of its stockholders to purchase
3,100 shares of its Class B common stock and 787,762 shares of its Class C
common stock for $9,000. In addition, the ESOP subscribed to purchase 439,490
shares of Class A common stock from American Guidance for $5,001. During 1991,
the ESOP borrowed $11,650, which was guaranteed by American Guidance, the
proceeds of which were used by the ESOP to retire the notes payable to
stockholders and pay the stock subscription to American Guidance. In 1992,
American Guidance sold 230,769 shares of Class A common stock to the ESOP for
$3,000, which the ESOP financed with additional guaranteed ESOP borrowings.
American Guidance reflected the guaranteed ESOP borrowings as long-term debt in
the 1997 consolidated balance sheet. A like amount of "Guaranteed ESOP Debt
Obligations" was recorded as a reduction of stockholders' equity. As American
Guidance made annual contributions to the ESOP, these contributions, plus the
dividends paid, if any, on the Class A common stock held by the ESOP, are used
to repay the loans. The principal amount of the loans was repaid in fiscal 1998
and the amount of the "Guaranteed ESOP Debt Obligations" was reduced to zero.
Dividends paid on the Class A common stock totaled $929 for the year ended
June 30, 1996. Additionally, contributions to the ESOP totaled $1,462, $1,307,
and $1,600 for the years ended June 30, 1996, 1997, and 1998, respectively.
Terms of the ESOP and the Profit Sharing Plan require that, under certain
conditions, American Guidance purchase stock which has been distributed to
participants. As of June 30, 1998, 100% of American Guidance's stock is held by
the ESOP and the Profit Sharing Plan. Management currently believes that any
requirements to purchase stock distributed to participants for the next three to
five
F-32
AMERICAN GUIDANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
years can be met by cash reserves and future cash flows without adversely
affecting the financial resources of American Guidance.
NOTES RECEIVABLE FROM ESOP AND PROFIT SHARING PLAN--During 1998, American
Guidance entered into notes receivable aggregating $2,222 with the ESOP and the
Profit Sharing Plan. At June 30, 1998, the notes receivable from the ESOP and
the Profit Sharing Plan had a balance of $1,360.
DEFINED CONTRIBUTION PLAN--On July 1, 1998, the profit sharing and savings plan
was merged with the ESOP. The profit sharing and savings plan provided for an
annual contribution up to the maximum amount allowed as a deduction by the
Internal Revenue Code. The Board of Directors, at its sole discretion,
determined the amount of American Guidance's contribution. No American Guidance
contributions were made for the years ended June 30, 1996, 1997, and 1998.
During 1997, American Guidance repurchased 122,027 shares of its Class C common
stock at $12.00 per share from the profit sharing and savings plan. During 1996,
American Guidance repurchased 63,562 shares of American Guidance Class C common
stock at $11.20 per share from the profit sharing and savings plan. Per share
repurchase prices are based on annual independent appraisals of American
Guidance.
DEFINED BENEFIT PENSION PLAN--American Guidance has a defined benefit pension
plan covering substantially all of its employees. The benefits payable are based
on years of service and the employee's average compensation for the highest
salaried five years of employment.
The following table sets forth the plan's funded status and amounts recognized
in the consolidated balance sheets as of June 30:
1997 1998
-------- --------
Actuarial present value of benefit obligations--accumulated
benefit obligations, including vested benefits of $5,044
and $6,842, respectively.................................. $ 5,465 $ 7,214
======= =======
Plan assets at fair value................................... $ 7,082 $ 8,198
Projected benefit obligation................................ (6,616) (8,682)
Deferred transition obligation.............................. 37 32
Unrecognized prior service cost............................. (60) (56)
Unrecognized (gain) loss.................................... (679) 456
------- -------
Accrued pension cost........................................ $ (236) $ (52)
======= =======
Net pension cost includes the following components for the years ended June 30:
1996 1997 1998
-------- -------- --------
Service costs............................................... $ 332 $ 402 $ 396
Interest cost on projected benefit obligation............... 409 470 507
Actual return on plan assets................................ (825) (1,560) (955)
Net amortization and deferral............................... 406 1,074 315
----- ------- -----
$ 322 $ 386 $ 263
===== ======= =====
F-33
AMERICAN GUIDANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following rates were used in determining the actuarial present value of the
projected benefit obligations:
1997 1998
-------- --------
Weighted-average discount rate.............................. 8.0% 6.5%
Rate of increase in future compensation levels.............. 4.5 4.5
Expected long-term rate of return on assets................. 9.0 9.0
9. INCOME TAXES
Income tax (expense) benefit for the years ended June 30 consists of the
following:
1996 1997 1998
-------- -------- --------
Current:
Federal........................................... $(165) $ (475) $(1,300)
State............................................. (10) (100) (225)
----- ------ -------
(175) (575) (1,525)
Deferred:
Federal........................................... 415 (170) (1,000)
State............................................. (40) (30) (175)
----- ------ -------
375 (200) (1,175)
----- ------ -------
$ 200 $ (775) $(2,700)
===== ====== =======
Reconciliations of the expected Federal income tax expense at the statutory rate
with the actual income tax (expense) benefit for the years ended June 30 are as
follows:
1996 1997 1998
-------- -------- --------
Tax computed at Federal statutory rate............. $(467) $(1,062) $(2,535)
State tax (net of Federal benefit)................. (34) (86) (264)
Tax benefit of dividends paid to ESOP on allocated
shares........................................... 278 -- --
Nontaxable life insurance proceeds................. 366 -- --
Change in valuation allowance...................... 100 500 --
Other.............................................. (43) (127) 99
----- ------- -------
$ 200 $ (775) $(2,700)
===== ======= =======
F-34
AMERICAN GUIDANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
9. INCOME TAXES (CONTINUED)
The tax effect of temporary differences and income tax carryforwards comprising
the deferred taxes shown on the consolidated balance sheets as net assets at
June 30 is as follows:
1997 1998
-------- --------
Current:
Allowance for returns and doubtful accounts............... $ 221 $ 184
Inventory costs........................................... 922 785
Prepaid expenses.......................................... -- (475)
Accrued liabilities....................................... 87 206
------ ------
1,230 700
Noncurrent:
Depreciation and amortization............................. 337 153
Deferred compensation..................................... 332 304
Deferred gross profit..................................... (322) (397)
Options granted below fair market value................... 613 920
Net operating loss carryforwards.......................... 55 --
Alternative minimum tax carryforwards..................... 1,080 470
------ ------
2,095 1,450
------ ------
Total................................................... $3,325 $2,150
====== ======
At June 30, 1998, American Guidance has available alternative minimum tax credit
carryforwards of approximately $470 for Federal tax purposes; this Federal
credit can be carried forward indefinitely.
10. LEASES
American Guidance leases its building under an operating lease agreement from a
stockholder. The agreement, which was effective June 1995, calls for an initial
lease period of five years with an option to renew the lease for one additional
five-year term. In addition to the monthly lease payments, American Guidance is
responsible for all operating expenses and real estate taxes associated with the
building. American Guidance had previously leased this property under the
provisions of a 1985 lease agreement.
Future minimum requirements for the lease payments required under the operating
lease are $240 per year for fiscal years ending June 30, 1999 through June 30,
2000 or $480 in aggregate.
Rent expense was $288, $297, and $267 for the years ended June 30, 1996, 1997,
and 1998, respectively.
11. STOCK OPTIONS
During fiscal 1995, American Guidance established a stock option plan, which
provides for the granting of nonqualified stock options to purchase Class A
common stock to employees. The options become exercisable two years after the
date of grant or upon a change in control of American Guidance, as defined, and
expire ten years from the date of grant. American Guidance has also granted
options to its Board of Directors in lieu of compensation.
F-35
AMERICAN GUIDANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
11. STOCK OPTIONS (CONTINUED)
Stock option transactions are summarized as follows:
1996 1997 1998
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
Outstanding at beginning of year.............. 112,000 $12.27 172,500 $ 8.62 208,286 $ 8.18
Granted....................................... 60,500 1.85 62,786 6.83 127,528 7.23
Terminated.................................... -- -- (27,000) 7.81 (907) 7.23
Exercised..................................... -- -- -- -- (14,000) 2.57
------- ------ ------- ------ ------- ------
Outstanding at end of year.................... 172,500 $ 8.62 208,286 $ 8.18 320,907 $ 8.09
------- ------ ------- ------ ------- ------
Options exercisable at end of year............ 52,000 $13.11 98,786 $12.04 222,314 $10.48
======= ====== ======= ====== ======= ======
The following table summarizes information about stock options at June 30, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
- --------------------- --------------- ---------------- -------- ----------- --------
$0.00 89,528 7 $ 0.00 36,528 $ 0.00
5.75 46,500 8 5.75 -- --
11.20-13.25..... 184,879 7 12.60 185,786 12.54
------- ------- ------- ------
$0.00-$13.25.... 320,907 $ 8.09 222,314 $10.48
======= ======= ======= ======
During the years ended June 30, 1996, 1997, and 1998, American Guidance recorded
an increase in additional paid-in capital and compensation expense of $293,
$702, and $735 related to the granting of options to purchase 51,000, 52,000,
and 52,500 shares, respectively, of common stock to officers and employees of
American Guidance in accordance with an established variable compensation plan.
The exercise price per share of these options was dependent on American
Guidance's fiscal 1996, 1997, and 1998 performance. These options will have
exercise prices ranging from $0 to $5.75.
During the years ended June 30, 1997 and 1998, American Guidance also recorded
an increase in additional paid-in capital and compensation expense of $67 and
$60 relating to the granting of options to purchase 5,700 and 4,528 shares of
Class A common stock, respectively, to certain Board members. These options will
have an exercise price of $0.
Had compensation costs for the stock options issued in 1996, 1997, and 1998 been
determined based on the fair value at the grant date, consistent with the
provisions of SFAS No. 123, American Guidance's 1996, 1997, and 1998 pro forma
net income would have been $1,365, $2,220, and $4,404, respectively, compared
with actual net income of $1,535, $2,258, and $4,544, respectively.
Under SFAS No. 123, the value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: dividend yield of 0%; a
F-36
AMERICAN GUIDANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
11. STOCK OPTIONS (CONTINUED)
risk-free interest rate of 6.28%, 6.86%, and 5.50% in 1996, 1997, and 1998,
respectively; and an expected life of ten years.
12. ACQUISITIONS
In October 1997, American Guidance acquired certain assets of Craig-Hart
Publishing Company. The acquisition was accounted for as a purchase. Craig-Hart
Publishing Company publishes and sells test preparation and other educational
materials. Craig-Hart Publishing Company was purchased for $1,550 cash. The
purchase price was allocated as follows:
Copyrights.................................................. $ 50
Other current assets........................................ 330
Inventory................................................... 220
Customer lists.............................................. 950
------
$1,550
======
In March 1997, American Guidance acquired certain assets of International
Thomson Publishing Inc. ("ITP"). The acquisition was accounted for as a
purchase. ITP publishes and sells adult educational materials. ITP was purchased
for $782 in cash. The purchase price was allocated as follows:
Copyrights.................................................. $ 60
Other current assets........................................ 300
Inventory................................................... 422
------
$ 782
======
In April 1996, American Guidance acquired certain assets of Lake Publishing
Company ("Lake"). The acquisition was accounted for as a purchase. Lake develops
various renditions of literature classics. Lake was purchased for $731 in cash.
The purchase price was allocated as follows:
Inventory................................................... $ 410
Other assets................................................ 285
Author receivables.......................................... 36
------
$ 731
======
Pro forma results were not materially different than actual operating results.
13. COMMITMENTS AND CONTINGENCIES
American Guidance has employment agreements with certain executives that require
it to pay those executives' salary, bonus, and benefits for up to the greater of
the term of the agreement or 30 months if American Guidance terminates that
executive's employment for reasons other than disability or for cause, as
defined. American Guidance would also have to pay the executive's nonvested
portion of American Guidance's employee stock ownership plan. The employment
agreements also provide that in
F-37
AMERICAN GUIDANCE SERVICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
the event of a sale or merger of American Guidance, the executives will receive
a percentage of the sale price if American Guidance's value exceeds $65,000. No
provision has been recorded in the consolidated financial statements for this
contingency.
In 1998, American Guidance entered into various Share Redemption Agreements
requiring it to pay the former stockholders an amount greater than the original
repurchase price in the event of a sale or merger of American Guidance before
June 30, 2001. No provision has been recorded in the consolidated financial
statements for this contingency.
14. SUBSEQUENT EVENT
Subsequent to year end, American Guidance's Board of Directors, which has
authority under the ESOP and Profit Sharing Plan, signed a letter of intent to
sell all of the issued and outstanding common stock for approximately $100,000.
F-38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
CompassLearning, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, stockholders' equity (deficit) and cash flows present fairly, in all
material respects, the financial position of CompassLearning, Inc. (formerly
known as JLC Learning Corporation) at December 31, 1997 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of CompassLearning
Inc.'s management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
July 14, 1999
F-39
COMPASSLEARNING, INC.
BALANCE SHEET--(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, 1997 AND 1998
1997 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 860 $ --
Accounts receivable, less allowance of $2,393 and $1,327,
respectively............................................ 29,440 21,087
Inventories............................................... 1,050 1,011
Prepaid expenses.......................................... 1,238 2,743
Investment in equity securities........................... -- 314
--------- ---------
Total current assets.................................. 32,588 25,155
Other assets:
Software development costs, net........................... 4,879 2,690
Intangible assets, net.................................... 1,204 959
Deferred financing fees, net.............................. -- 859
Fixed assets, net........................................... 3,145 2,090
--------- ---------
Total assets.......................................... $ 41,816 $ 31,753
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 2,817 $ 2,678
Due to related parties.................................... 1,070 955
Salaries and related items................................ 5,388 5,942
Other accrued liabilities................................. 8,976 9,587
--------- ---------
18,251 19,162
Deferred revenue.......................................... 25,648 20,936
Senior subordinated debt.................................. 17,000 17,000
--------- ---------
Total current liabilities............................. 60,899 57,098
Non-current portion of deferred revenue..................... 3,873 1,723
Non-current portion of due to related parties............... 712 2,901
Revolving line of credit.................................... 8,500 2,238
Non-current other accrued liabilities....................... 898 818
Term note payable to bank................................... -- 7,500
--------- ---------
Total liabilities..................................... 74,882 72,278
--------- ---------
Stockholders' deficit:
Mandatorily redeemable preferred stock, $0.01 par value;
10,000 shares authorized, issued and outstanding
($10,153 and $11,230 liquidation preference,
respectively)........................................... 10,153 11,230
Redeemable preferred stock, $.01 par value; 20,000 shares
authorized, issued and outstanding...................... -- --
Common stock, $.001 par value; 120,565,000 shares
authorized, 1,000 shares issued and outstanding......... -- --
Additional paid-in capital................................ 75,803 75,803
Accumulated deficit....................................... (101,041) (109,891)
Unallocated purchase consideration........................ (17,981) (17,981)
Accumulated other comprehensive income.................... -- 314
--------- ---------
Total stockholders' deficit........................... (33,066) (40,525)
--------- ---------
Total liabilities and stockholders' deficit........... $ 41,816 $ 31,753
========= =========
The accompanying notes are an integral part of these financial statements.
F-40
COMPASSLEARNING, INC.
STATEMENT OF OPERATIONS--(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1996 1997 1998
-------- -------- --------
Net revenue:
Software.................................................. $ 40,423 $ 29,159 $30,949
Service................................................... 35,385 36,029 33,935
Hardware.................................................. 10,924 6,624 4,014
-------- -------- -------
86,732 71,812 68,898
-------- -------- -------
Cost of products sold:
Software.................................................. 12,937 30,435 6,936
Service................................................... 28,973 23,399 19,235
Hardware.................................................. 8,251 5,550 3,229
-------- -------- -------
50,161 59,384 29,400
-------- -------- -------
Gross profit................................................ 36,571 12,428 39,498
-------- -------- -------
Selling and administrative expenses:
Sales and marketing....................................... 28,019 31,357 24,034
Research and development.................................. 11,715 11,177 8,022
General and administrative................................ 11,281 13,508 7,705
Amortization of intangibles............................... 3,245 5,449 245
Restructuring............................................. -- -- 3,012
-------- -------- -------
54,260 61,491 43,018
-------- -------- -------
Loss from operations........................................ (17,689) (49,063) (3,520)
Interest expense............................................ (4,590) (5,013) (4,286)
Other income (expense)...................................... -- (2,128) 33
-------- -------- -------
Loss before income taxes.................................... (22,279) (56,204) (7,773)
Income tax expense.......................................... -- -- --
-------- -------- -------
Net loss.................................................... $(22,279) $(56,204) $(7,773)
======== ======== =======
The accompanying notes are an integral part of these financial statements.
F-41
COMPASSLEARNING, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)--(IN THOUSANDS EXCEPT PER SHARE
DATA)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
MANDATORILY REDEEMABLE
REDEEMABLE PREFERRED COMMON
PREFERRED STOCK STOCK STOCK ADDITIONAL
------------------- ------------------- ------------------- PAID-IN ACCUMULATED
SHARES $ SHARES $ SHARES $ CAPITAL DEFICIT
-------- -------- -------- -------- -------- -------- ---------- ------------
BALANCE, December 31, 1995........ -- $ -- -- $ -- 1,000 $ -- $57,538 $ (21,481)
Issuance of redeemable preferred
stock........................... 20,000 18,165
Contribution from Holdings........ 100
Issuance of mandatorily redeemable
preferred stock................. 10,000 9,076
Net loss for the year ended
December 31, 1996...............
(22,279)
------ ------- ------ ---- ------ ---- ------- ---------
BALANCE, December 31, 1996........ 10,000 9,076 20,000 -- 1,000 -- 75,803 (43,760)
Accrued dividends on mandatorily
redeemable preferred stock...... 1,000 (1,000)
Accretion of stock issuance costs
and related discount............ 77 (77)
Net loss for the year ended
December 31, 1997...............
(56,204)
------ ------- ------ ---- ------ ---- ------- ---------
BALANCE, December 31, 1997........ 10,000 10,153 20,000 -- 1,000 -- 75,803 (101,041)
Accrued dividends on mandatorily
redeemable preferred stock...... 1,000 (1,000)
Accretion of stock issuance costs
and related discount............ 77 (77)
Comprehensive income (loss):
Net loss for the year ended
December 31, 1998............. (7,773)
Unrealized gain on available for
sale securities...............
Total comprehensive income
(loss)..........................
------ ------- ------ ---- ------ ---- ------- ---------
Balance at December 31, 1998...... 10,000 $11,230 20,000 $ -- 1,000 $ -- $75,803 $(109,891)
====== ======= ====== ==== ====== ==== ======= =========
ACCUMULATED
UNALLOCATED OTHER
PURCHASE COMPREHENSIVE
CONSIDERATION INCOME TOTAL
------------- -------------- --------
BALANCE, December 31, 1995........ $(17,981) $ -- $ 18,076
Issuance of redeemable preferred
stock........................... 18,165
Contribution from Holdings........ 100
Issuance of mandatorily redeemable
preferred stock................. 9,076
Net loss for the year ended
December 31, 1996...............
(22,279)
-------- ---- --------
BALANCE, December 31, 1996........ (17,981) -- 23,138
Accrued dividends on mandatorily
redeemable preferred stock...... --
Accretion of stock issuance costs
and related discount............ --
Net loss for the year ended
December 31, 1997...............
(56,204)
-------- ---- --------
BALANCE, December 31, 1997........ (17,981) -- (33,066)
Accrued dividends on mandatorily
redeemable preferred stock...... --
Accretion of stock issuance costs
and related discount............ --
Comprehensive income (loss):
Net loss for the year ended
December 31, 1998............. (7,773)
Unrealized gain on available for
sale securities............... 314 314
Total comprehensive income
(loss)..........................
-------- ---- --------
Balance at December 31, 1998...... $(17,981) 314 $(40,525)
======== ==== ========
The accompanying notes are an integral part of these financial statements
F-42
COMPASSLEARNING, INC.
STATEMENT OF CASH FLOWS--(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1996 1997 1998
-------- -------- --------
Cash flows used in operating activities:
Net loss.................................................. $(22,279) $(56,204) $ (7,773)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 15,746 33,733 4,025
Impairment of investments in equity securities.......... -- 2,157 --
Amortization of deferred financing fees................. 365 1,322 286
Amortization of debt discount........................... 270 980 --
Changes in assets and liabilities:
Decrease in accounts receivable....................... 26,240 5,348 8,353
Decrease in inventories............................... 396 1,483 39
Decrease (increase) in prepaid expenses............... (315) 2,872 106
Decrease in accounts payable.......................... (4,150) (1,120) (139)
Increase (decrease) in due to related parties......... (7,560) 700 (15)
Increase (decrease) in salaries and related items..... (1,042) 12 554
Decrease in current and noncurrent deferred revenue... (3,776) (2,333) (6,862)
Increase (decrease) in current and noncurrent accrued
liabilities......................................... (6,494) (3,603) 1,171
-------- -------- --------
Net cash used in operating activities............... (2,599) (14,653) (255)
-------- -------- --------
Cash flows used in investing activities:
Capital expenditures...................................... (901) (1,136) (536)
Software development costs capitalized.................... (2,841) (3,125) --
-------- -------- --------
Net cash used in investing activities............... (3,742) (4,261) (536)
-------- -------- --------
Cash flows provided by (used in) financing activities:
Decrease in due to former parent.......................... (219) (179) (162)
Repayments of borrowings on revolving line of credit...... (34,700) (14,300) (65,552)
Proceeds from revolving line of credit, net of financing
fees of $1,145 in 1998.................................. 24,000 22,800 66,645
Retirement of previous line of credit, net................ -- -- (8,500)
Borrowings on long-term note payable to bank.............. -- -- 7,500
Proceeds from sale of preferred stock, net................ 27,241 -- --
Contribution from Holdings................................ 100 -- --
-------- -------- --------
Net cash provided by (used in) financing
activities........................................ 16,422 8,321 (69)
-------- -------- --------
Increase (Decrease) in cash and cash equivalents............ 10,081 (10,593) (860)
Cash and cash equivalents, beginning of period.............. 1,372 11,453 860
-------- -------- --------
Cash and cash equivalents, end of period.................... $ 11,453 $ 860 $ --
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-43
COMPASSLEARNING, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. NATURE OF THE BUSINESS
CompassLearning, Inc. ("CompassLearning" or the "Company," formerly known as
Jostens Learning Corporation or JLC Learning Corporation), is a leading provider
of technology-based educational programs to school districts for kindergarten
through twelfth grade. CompassLearning is a wholly-owned subsidiary of Software
Systems Corporation ("SSC"), a wholly-owned subsidiary of JLC Learning
Holdings, Inc. ("Holdings").
CompassLearning operates in the education software industry and has
maintained a leadership position among a multitude of providers.
CompassLearning's products and services include fully integrated software
systems, standalone CD ROM delivery, connection to the Internet and a full
service offering, including installation, teacher training, onsite and remote
diagnostics and maintenance.
CompassLearning focuses its market efforts in the educational channel, with
sales and service coverage in the United States and several U.S. territories and
is exploring opportunities in international markets. The Company's selling and
distribution efforts include a direct sales force, telemarketing and catalog
sales.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid financial instruments with
maturities of three months or less at date of purchase to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on
the first-in, first-out ("FIFO") basis.
INVESTMENTS
The Company classifies its investments in marketable securities as
available-for-sale. Accordingly, investments are recorded at fair value with
unrealized gains or losses, net of the related tax effect, excluded from income
and reported as a separate component of stockholders' equity (deficit) until
realized. A loss included in other expense of $2,157 was realized on investments
in 1997 due to what was considered a nontemporary decline in fair value. During
1998, pursuant to a business combination involving the Company's investee, the
investment which was written down to zero in 1997 was exchanged for shares of a
publicly traded company. The unrealized gain of $314 at December 31, 1998
reflects the market value of this investment. There were no realized gains or
losses in 1998. During 1996, the Company sold one of its investments with a book
value of $0 for $500. In conjunction with the sale, the Company entered into a
royalty agreement with a former investee. The gain on the sale of this
investment was deferred and will be recovered over the life of the royalty
agreement on a units-of-production basis.
SOFTWARE DEVELOPMENT COSTS
The Company, in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed,"
F-44
COMPASSLEARNING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
capitalizes software development costs by project commencing when technological
feasibility is established and concluding when the product is ready for release.
Software development costs are amortized on a straight-line basis over five
years or the expected life of the product, whichever is less. The Company
periodically evaluates the net realizable value of capitalized software
development costs based on factors such as budgeted sales, product development
cycles and management's market emphasis. Research and development costs are
charged to expense when incurred.
INTANGIBLE ASSETS
Intangible assets include goodwill. Goodwill represents the excess of the
purchase price over the fair value of assets acquired and is being amortized
over seven years. Impairment of intangible assets, if any, is measured
periodically on the basis of whether anticipated undiscounted operating cash
flows generated by the acquired businesses will recover the recorded net
goodwill balances over the remaining amortization period.
DEFERRED FINANCING FEES
Deferred financing fees are direct costs paid by the Company in connection
with their revolving credit agreement (see Note 8). These costs are being
amortized over the term of the related debt. Amortization for the years ended
December 31, 1996, 1997 and 1998 approximated $365, $1,322 and $286,
respectively. Included in amortization for the year ended December 31, 1997 were
accelerated amortization charges of $1,047.
FIXED ASSETS
Fixed assets are recorded at cost and depreciated over the estimated useful
lives of the related assets. Depreciation is provided principally on the
straight-line method for financial reporting purposes and on accelerated methods
for income tax purposes. Leasehold improvements are depreciated over the shorter
of their useful life or the lease term.
REVENUE RECOGNITION
The Company adopted the provisions of Statement of Position 97-2 ("SOP
97-2"), "Software Revenue Recognition," as amended by Statement of Position
98-4, "Deferral of the Effective Date of Certain Provisions of SOP 97-2,"
effective January 1, 1998. SOP 97-2 supersedes Statement of Position 91-1,
"Software Revenue Recognition," and delineates the accounting for software
product and maintenance revenue. Under SOP 97-2, the Company recognizes revenue
for hardware and software sales upon shipment of the product provided collection
of the resulting receivable is deemed probable. Revenue from service contracts,
instruction and user training and post-contract customer support is recognized
ratably over the period of the related contract. Deferred revenue represents the
Company's obligation to perform under signed contracts.
For contracts with multiple obligations (e.g. deliverable and undeliverable
products, maintenance and other services,) the Company allocates revenue to each
component of the contract based on objective evidence of its fair value, which
is specific to the Company, or for products not being sold
F-45
COMPASSLEARNING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
separately, the price established by management. The Company recognizes revenue
allocated to undelivered products when the criteria for product revenue set
forth above are met.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense totaled
$2,279, $1,832 and $705 for the years ended December 31, 1996, 1997 and 1998,
respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 109,
"Accounting for Income Taxes," which requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of assets and
liabilities. A valuation allowance is required to offset any net deferred tax
assets if, based upon the available evidence, it is more likely than not that
some or all of the deferred tax asset will not be realized.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" for the
year ended December 31, 1998. SFAS 130 requires the Company to measure and
disclose all elements of comprehensive income that result from recognized
transactions and other events in the financial statements. Accordingly, the
Company has reported unrealized gains on marketable securities as a separate
component of stockholders' deficit.
3. BUSINESS ACQUISITION
Effective December 19, 1995, Holdings acquired all of the outstanding stock
of Ideal for $4,100 in cash, a $900 note payable and a warrant to purchase a
specified number of shares of Holdings Common Stock. The acquisition was
accounted for under the purchase method. Goodwill in the amount of $1,718 was
recorded in conjunction with the acquisition of Ideal. Effective July 1, 1996,
the assets and liabilities of Ideal were transferred to CompassLearning. Because
the transfer of assets occurred among entities under common control, the Company
has accounted for the transfer in a manner similar to a pooling of interests
and, accordingly, the Company's financial statements include the historical
results of Ideal from the date of acquisition by Holdings.
F-46
COMPASSLEARNING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. INVENTORIES
Inventories are as follows:
DECEMBER 31,
-------------------
1997 1998
-------- --------
Finished products........................................... $ 862 $ 836
Materials and supplies...................................... 188 175
------ ------
$1,050 $1,011
====== ======
5. SOFTWARE DEVELOPMENT COSTS
Software development costs are as follows:
DECEMBER 31,
-------------------
1997 1998
-------- --------
Capitalized software costs................................ $39,713 $39,713
Less accumulated amortization............................. (34,834) (37,023)
------- -------
$ 4,879 $ 2,690
======= =======
Amortization of capitalized computer software development costs is included
in cost of products sold and aggregated $7,201, $24,751 and $2,189 for the years
ended December 31, 1996, 1997 and 1998, respectively. Included in amortization
of capitalized computer software development costs for the year ended
December 31, 1997 were accelerated amortization charges of $17,269 for the
reduction of certain capitalized costs to their net realizable value due to a
change in the Company's product focus. Accelerated amortization charges in 1998
were not material.
6. INTANGIBLE ASSETS
Intangible assets are as follows:
DECEMBER 31,
-------------------
1997 1998
-------- --------
Goodwill, Ideal............................................. $1,718 $1,718
Less accumulated amortization............................... (514) (759)
------ ------
$1,204 $ 959
====== ======
Goodwill amounts at December 31, 1997 and 1998 are a result of the Company's
acquisition of Ideal Learning, Inc. ("Ideal") which took place in 1995.
Amortization expense related to intangible assets was $3,245, $5,449 and
$245 for the years ended December 31, 1996, 1997 and 1998, respectively.
Included in amortization for the year ended December 31, 1997 were accelerated
amortization charges of approximately $2,415. These charges were a result of an
impairment of the trade name, workforce in place, and goodwill assets, which had
been
F-47
COMPASSLEARNING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. INTANGIBLE ASSETS (CONTINUED)
established as a result of the original acquisition of the Company by Holdings,
due to a change in the Company's product focus.
7. FIXED ASSETS
Fixed assets are comprised of the following:
DECEMBER 31,
DEPRECIABLE -------------------
LIFE 1997 1998
------------ -------- --------
Computer equipment.......................................... 1 to 3 years $8,644 $2,914
Warehouse equipment......................................... 1 to 3 years 181 60
Leasehold improvements...................................... 3 to 5 years 349 252
Other furniture and fixtures................................ 2 to 7 years 3,298 2,012
------ ------
12,472 5,238
Less accumulated depreciation............................... (9,327) (3,148)
------ ------
$3,145 $2,090
====== ======
Depreciation expense aggregated $5,129, $3,532 and $1,591 for the years
ended December 31, 1996, 1997 and 1998, respectively. In 1998 the Company wrote
off $7,770 of fully depreciated fixed assets which are no longer in use.
8. REVOLVING CREDIT AGREEMENT
On June 29, 1995, the Company entered into a revolving credit agreement with
a maximum loan availability of $40,000, including up to $3,000 of letters of
credit (the "Loan Facility"). Borrowings outstanding under this agreement at
December 31, 1997 were $8,500. The original termination date for the revolving
line of credit was the last business day of June 2000; however in March 1998,
the Company paid all outstanding amounts under this agreement and terminated the
Loan Facility.
In March 1998, the Company entered into a new loan facility which includes a
new revolving line of credit agreement with a maximum loan availability of
$20,000, including up to $2,000 of letters of credit and a term loan of $7,500
(see Note 10). Advances on the line of credit are limited to the lesser of 75%
of eligible billed accounts plus 40% of eligible unbilled accounts or $2,000,
whichever is less, and the amount collected on accounts by the Company for a
defined period immediately preceding the advance. Loans under this agreement are
secured by 100% of all capital or other equity interests, as well as accounts
receivable, inventory, fixed assets, intangibles and contract rights. Interest
is computed at 0.0875% to 2.75%, depending on the amount outstanding, plus the
prime lending rate as most recently announced by Norwest Bank Minnesota, NA and
at a minimum, a rate of 9%. At December 31, 1998 the minimum rate was being
used. The agreement described above contains certain restrictive covenants,
which include requiring the Company to meet certain profitability levels and to
maintain a certain tangible net worth. The new line of credit agreement matures
in March 2001. Borrowings outstanding under this line of credit agreement at
December 31, 1998 were $2,238.
F-48
COMPASSLEARNING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. SENIOR SUBORDINATED NOTES
On June 29, 1995, the Company entered into a senior subordinated note
purchase agreement whereby the Company borrowed a total of $17,000 from two
lending institutions under note agreements which bear interest at 12.25% and
mature on the last business day of June 2002. Interest is payable quarterly. The
notes are secured by the same collateral as the $20,000 revolving credit
agreement (see Note 8) and are guaranteed by Holdings.
In connection with the issuance of the note agreements, the lending
institutions each received warrants to acquire a specified number of shares of
Holdings Common Stock. The value ascribed to the warrants of approximately
$1,260 was recorded as a discount from the face value of the debt and was being
amortized over the term of the Senior Subordinated Notes. During 1997, the
Company accelerated the amortization on the warrants due to an impairment in the
value.
The subordinated agreements require the Company to meet certain operating
ratios and limits. The Company failed to meet certain covenants during the years
ended December 31, 1997 and 1998. In addition, the Company failed to make
quarterly interest payments due on December 31, 1997 and for each of the four
quarters in 1998. Accordingly, amounts outstanding under the senior subordinated
notes have been classified as current liabilities at December 31, 1997 and 1998.
On July 14, 1999 the Company repaid the senior subordinated notes including
accrued interest in conjunction with a Stock Purchase Agreement (see Note 22).
10. TERM NOTE PAYABLE TO BANK
In March 1998, in connection with a new loan facility (see Note 8) the
Company obtained a term loan in the amount of $7,500, which matures in
March 2000. The term loan is secured by 100% of all capital or other equity
interests, as well as accounts receivable, inventory, fixed assets, intangibles
and contract rights. The term loan bears interest at 13.0% up to February 1,
1999 and at 15% thereafter. The loan agreement contains certain restrictive
covenants which are consistent with those described in Note 8.
11. LEASE OBLIGATIONS, COMMITMENTS AND CONTINGENCIES
The Company has operating leases for certain equipment, offices and
warehouse space that include remaining noncancelable minimum rental commitments
as follows:
AMOUNT
Year ending December 31: --------
1999...................................................... $ 3,485
2000...................................................... 3,159
2001...................................................... 2,098
2002...................................................... 1,370
2003...................................................... 600
-------
Total minimum lease payments.............................. 10,712
Total minimum noncancelable sublease rentals.............. (330)
-------
$10,382
=======
F-49
COMPASSLEARNING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. LEASE OBLIGATIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
Of the $10,382 minimum rental commitments net of sublease rentals, $1,005
has been accrued in the accompanying balance sheet at December 31, 1998 as they
represent excess space liabilities a portion of which are a result of the
Company's restructuring activities (see Note 20).
Rent expense for all operating leases aggregated $3,843, $4,370 and $3,060,
net of sublease rentals of $611, $647 and $447, for the years ended
December 31, 1996, 1997 and 1998, respectively.
The Company is a party to litigation arising in the normal course of
business. Management regularly analyzes current information and, as necessary,
provides accruals for probable liabilities on the eventual disposition of these
matters. Management believes that the effect on the Company's results of
operations and financial position, if any, for the disposition of these matters,
will not be material.
12. ROYALTY AGREEMENTS
At December 31, 1998 the Company had a minimum guaranteed royalty commitment
under a software license agreement of $900 and $600 for the years ended
December 31, 1999 and 2000, respectively, which have been accrued in the
accompanying balance sheet at December 31, 1998.
In June 1998, CompassLearning restructured a significant software license
agreement with a third party. CompassLearning returned investment securities
valued at $2,285 by the third party and also accepted reduced rights under the
license agreement in order to settle $5,500 in minimum future royalty
obligations which CompassLearning owed. CompassLearning retained the right to
sell product from this third party through 2001. CompassLearning has remaining
unamortized prepaid royalties with respect to this license agreement of $2,700
with a net carrying value of $1,420 as of December 31, 1998 to be amortized on a
units-of-production basis.
13. INCOME TAXES
Due to losses incurred from operations, the Company has no provision for
income tax for the years ended December 31, 1996, 1997 and 1998.
Significant components of the deferred tax balances are:
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------- -------------------
NON- NON-
CURRENT CURRENT CURRENT CURRENT
ASSETS ASSETS ASSETS ASSETS
-------- -------- -------- --------
Depreciation and amortization............................. $ -- $22,274 $ -- $20,427
Net operating loss carryovers............................. -- 19,266 -- 23,717
Accrued expenses.......................................... 1,751 -- 1,827 --
Asset reserves............................................ 2,490 -- 1,657 --
Capital loss carryover.................................... -- -- -- 871
Valuation allowance....................................... (4,241) (41,540) (3,484) (45,015)
------ ------- ------ -------
$ -- $ -- $ -- $ --
====== ======= ====== =======
In assessing the realizability of its deferred tax assets, the Company
considers whether it is more likely than not that some or all of such assets
will be realized. As a result of historical operating losses,
F-50
COMPASSLEARNING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. INCOME TAXES (CONTINUED)
the Company has fully reserved its net deferred tax assets as of December 31,
1997 and 1998. The Company will consider release of the valuation allowance once
profitable operations have been sustained.
As of December 31, 1998, the Company had net operating loss carryforwards of
approximately $60,400, which will begin to expire in 2010. Past and future
transactions in the Company's stock could result in restrictions on the
Company's ability to utilize its net operating loss carryforwards pursuant to
Section 382 (g) of the Internal Revenue Code.
14. RELATED PARTY TRANSACTIONS
The Company benefited from a management and advisory services agreement
between Holdings and an affiliate of Holdings' shareholders. Out-of-pocket
expenses were paid to this affiliate of $46, $50 and $25 during the years ended
December 31, 1996, 1997 and 1998, respectively. Approximately $427 of additional
fees were paid to this affiliate in the year ended December 31, 1996 and were
included as issuance costs of the Company's Preferred Stock (see Notes 15 and
16).
In conjunction with the issuance of the Class A Preferred Stock, the Company
entered into a consulting arrangement with an investor. The arrangement provided
for $500 per year to be paid to the investor for consulting services through
November 1999. At December 31, 1997 and 1998, prepaid consulting fees of $458
and $417, respectively, were included in prepaid expenses and the Company
incurred consulting expenses of $84, $459 and $499 for the years ended
December 31, 1996, 1997 and 1998, respectively, relating to this arrangement.
Amounts due to this investor for consulting fees at December 31, 1997 and 1998
are $1,400. The current portion of these amounts at December 31, 1997 and 1998
are $850 and $750, respectively, and are included in due to related parties.
In addition to the consulting arrangement, the Company entered into a sales
and marketing agreement with this investor whereby the Company would sell
product to the investor at a discount. Approximately $192, $736 and $354 in
sales were made to the investor during the years ended December 31, 1996, 1997
and 1998, respectively. Included in accounts receivable at December 31, 1997 and
1998, was $349 and $314, respectively, from sales to this investor.
In June 1998, the Company delivered a promissory note to this investor to
repurchase securities sold to the investor in November 1996. The note accrues
interest at 10% with principal and accrued interest payable on April 15, 2001.
The balance as of December 31, 1998 was $2,251 which is included in the non
current portion of due to related party on the accompanying balance sheet. As of
December 31, 1997, $500 was accrued and included in due to related parties
relating to this same agreement.
At December 31, 1997 and 1998 the Company had amounts due to its former
parent relating to the settlement of intercompany transactions of $382 and $205,
respectively. Of the amounts due at December 31, 1997 and 1998, $220 and $205,
respectively, were included in due to related parties.
During 1998, the Company re-engaged a consultant of an affiliate to explore
additional investment alternatives. Fees paid to this consultant for the year
ended December 31, 1998 were $647.
F-51
COMPASSLEARNING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15. MANDATORILY REDEEMABLE PREFERRED STOCK
On December 19, 1996, the Company issued 10,000 shares of $.01 par value
Class B Preferred Stock and recorded the stock at $10,000 less issuance costs of
approximately $900, its fair value on date of issuance. These shares represent
all of the authorized shares of the Class B Preferred Stock. The Company is
required to redeem all outstanding shares of the Class B Preferred Stock, at a
redemption price of $1,000 per share plus any accrued and unpaid dividends, by
December 19, 2008. Holders of Class B Preferred Stock have no voting rights, are
entitled to a preferential distribution of $1,000 per share plus accrued and
unpaid dividends in the event of a liquidation, and are entitled to annual
dividends of $100 per share until the Company redeems the stock. At
December 31, 1997 and 1998 accrued dividends of $1,000 and $2,000 are included
in stockholders' equity, respectively. The stock will be accreted to its
redemption value through charges to accumulated deficit.
16. STOCKHOLDERS' DEFICIT
On November 1, 1996, the Company issued 20,000 shares of $.01 par value
Class A Preferred Stock for $20,000 less issuance costs of $1,835. In
conjunction with the Class A Preferred Stock, $100 was paid to Holdings for a
warrant to purchase a specified number of shares of Holdings Common Stock.
Concurrent with the sale of the warrant, Holdings contributed the proceeds
received to the Company.
The authorized redeemable preferred stock and common stock of the Company
consists of 20,000 shares of $.01 par value Class A Preferred Stock and
120,565,000 shares of $.001 par value Class A Common Stock. At December 31, 1997
and 1998, 1,000 shares of the Class A Common Stock were issued and outstanding.
All outstanding shares of Class A Common Stock are held by SSC. At December 31,
1997 and 1998, all 20,000 shares of the Class A Preferred Stock were issued and
outstanding. Holders of Class A Common stock are entitled to one vote per share.
Holders of Class A Preferred Stock have no voting rights. In the event of a
liquidation of the Company, holders of Class A Preferred Stock are entitled to a
preferential distribution of $1,000 per shares plus accrued and unpaid
dividends. Distribution amounts in excess of the Class A and Class B preferred
stock distribution preference are to be distributed ratably to all of the
Class A common stockholders. The Company, at its option, may redeem all the
shares of Class A Preferred Stock at a redemption price of $1,000 per share plus
any accrued and unpaid dividends. Holders of Class A Preferred Stock are
entitled to annual dividends of $100 per share. As of December 31, 1997 and 1998
accrued and unpaid dividends on the Class A Preferred Stock was $2,000 and
$4,000, respectively.
Included in the paid-in capital of the Company is $40,000 in debt payable by
SSC to the Company's former parent, as part of the purchase consideration. Such
debt is not payable by the Company, guaranteed by the Company, nor subject to
repayment from the proceeds of any future equity transactions of the Company.
17. UNALLOCATED PURCHASE CONSIDERATION
In conjunction with the acquisition of the Company by Holdings on June 29,
1995, warrants and an exchangeable note issued to the Company's former parent
allowed the former parent to acquire up to a 30.7% interest in Holdings.
Accordingly, 69.3% of the purchase consideration was allocated to the assets
acquired and liabilities assumed at their respective fair values, with the
remainder allocated at CompassLearning's book value as of the date of
acquisition. The application of the purchase method
F-52
COMPASSLEARNING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
17. UNALLOCATED PURCHASE CONSIDERATION (CONTINUED)
resulted in an allocation of the excess purchase consideration over historical
carryover basis of CompassLearning ("unallocated purchase consideration") of
approximately $17,981.
18. EMPLOYEE BENEFIT PLANS
STOCK APPRECIATION RIGHTS PLAN
In February 1999, the Board of Directors adopted the 1998 Stock Appreciation
Rights Plan (the "Plan"). Stock Appreciation Rights ("SAR(s)") in the aggregate
of 1,500,000 were created and approximately 1,000,000 SARs, at a base value, as
determined by the Board of Directors, of $4.00, were initially granted to select
employees in 1999. These SARs shall vest according to the following schedule:
50% on the second anniversary of October 1, 1998 and an additional 25% shall
vest on each of the third and fourth anniversaries of October 1, 1998. The SAR
represents the right to receive additional compensation equal to the redemption
price of the SAR based on an enterprise value determined at the sole discretion
of the Board of Directors. SARs shall be redeemed out of available funds upon
certain liquidity events, as defined, or at the discretion of the Board of
Directors.
Additionally, in connection with signing the Stock Appreciation Rights
Agreement, employees waive and surrender any rights and interest in options
previously granted to them under the JLC Learning Holdings Stock Option Plan.
401(K) RETIREMENT PLAN (401(K) PLAN)
The Company has a retirement savings plan covering substantially all
eligible employees. The 401(k) Plan provides for a 33% matching contribution by
the Company, limited to eligible contributions by employees. The Company's
matching contribution to the 401(k) Plan for the years ended December 31, 1996,
1997 and 1998 were $350, $442 and $360, respectively.
19. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information:
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
Cash paid during the year for interest...................... $4,686 $2,208 $1,561
Cash paid during the year for income taxes.................. 127 -- --
Non-cash investing and financing activity:
Note payable issued for equity securities (see Note 14)... -- -- 2,251
Equity Securities exchanged for Prepaid Royalty (see Note
12)..................................................... -- -- 2,285
Holdings purchased certain assets of Ideal for a total
purchase price of $5,500. In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired......................... $5,746 -- --
Less cash paid for Ideal.............................. (4,100) -- --
------
Liabilities assumed................................. $1,646
======
F-53
COMPASSLEARNING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
20. RESTRUCTURING
During July 1998 the Company recorded a restructuring charge of $3,012
related to the adoption by the Company of a formal action plan for restructuring
its operations. This restructuring was adopted in an effort to establish a more
competitive cost structure in response to current sales levels.
In connection with the plan in 1998 the Company paid employee severance and
benefit costs of approximately $1,400 when it decreased its workforce by
approximately 90 employees.
As of December 31, 1998, the remaining accrual associated with this
restructuring was approximately $1,400. This accrual consists of estimated
future severance and related obligations of $600; estimated future rent
obligations associated with excess lease space of $600; and an accrual for other
related costs of $200.
21. LIQUIDITY
For the years ended December 31, 1996, 1997 and 1998, the Company reported a
$22,279, $56,204 and $7,773 net loss, respectively. In addition, the Company is
in violation of certain financial covenants in connection with its Senior
Subordinated Debt, and has failed to make quarterly interest payments due on
December 31, 1997 and for each of the four quarters in 1998 on this debt.
Accordingly, the entire amount outstanding under the Senior Subordinated Debt
has been classified as a current liability. In order to address liquidity needs,
the Company has retained outside consultants to render advice regarding various
alternatives available to the Company. These efforts have resulted in the
Company restructuring its operations in July 1998 (see Note 20) and entering
into a definitive agreement to be acquired which will include the retirement of
all of the Company's outstanding debt (see Note 22). In consideration of these
events, management believes that forecasted cash flows from operations and
available credit will be sufficient to sustain the Company's operations for the
next twelve months.
22. SUBSEQUENT EVENT
On July 14, 1999, the Shareholders of the Company and Ripplewood Holdings
L.L.C. ("Ripplewood") entered into a Stock Purchase Agreement, under which
Ripplewood acquired all the issued and outstanding capital stock of the Company.
Under the terms of the agreement, the Company repaid all outstanding debt,
including interest accrued through that date.
Given the fact that all amounts owed under the Company's senior subordinated
debt have been repaid, thereby eliminating the contingencies related to the
Company's violation of certain covenants with respect to these obligations (see
Note 9), management of the Company believes that expected cash flows from
operations and its available line of credit will be sufficient to sustain
operations for the next twelve months.
In May 1999 the Company reached a settlement reducing their guaranteed
minimum royalty commitment by approximately $320 (see Note 12).
In May 1999 the Company entered into an agreement to establish an additional
$1.5 million of available credit on the Company's revolving credit agreement
(see Note 8). The additional available credit is not subject to borrowing base
calculations and when used bears a monthly fee of 1.5% times the average daily
balance for the month, or $3 thousand if greater. The additional available
credit is set to expire on July 15, 1999.
F-54
COMPASSLEARNING, INC.
CONDENSED BALANCE SHEETS
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS:
Current Assets:
Account receivable, net................................... $ 21,727 $ 21,087
Inventories, net.......................................... 656 1,011
Prepaid expenses.......................................... 1,498 2,743
Investment in marketable securities....................... 39 314
-------- --------
Total current assets.................................. 23,920 25,155
Other Assets:
Software development costs, net........................... 1,858 2,690
Intangible assets, net.................................... 837 959
Deferred financing fees, net.............................. 668 859
Fixed Assets, net......................................... 1,566 2,090
-------- --------
Total assets.......................................... $ 28,849 $ 31,753
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current Liabilities:
Accounts payable.......................................... $ 2,688 $ 2,678
Due to related parties.................................... 1,142 955
Accrued salaries and related items........................ 4,712 5,942
Other accrued liabilities................................. 9,450 9,587
-------- --------
Current Liabilities....................................... 17,992 19,162
Deferred revenue............................................ 16,004 20,936
Term note payable to bank................................... 7,500 --
Senior subordinated notes................................... 17,000 17,000
-------- --------
Total current liabilities............................. 58,496 57,098
Deferred Revenue, net of current portion.................... 1,379 1,723
Due to Related Parties, net of current portion.............. 150 650
Note Payable to Related Party............................... 2,358 2,251
Revolving Line of Credit.................................... 7,643 2,238
Other Long-Term Liabilities................................. 293 818
Term note payable to Bank................................... -- 7,500
-------- --------
Total liabilities..................................... 70,319 72,278
-------- --------
Commitments and Contingencies
Mandatorily Redeemable Class B Preferred Stock.............. 11,769 11,230
-------- --------
Stockholders' Deficit:
Redeemable Class A Preferred Stock........................ -- --
Class A Common Stock...................................... -- --
Additional paid-in capital................................ 75,803 75,803
Accumulated deficit....................................... (111,100) (109,891)
Unallocated purchase consideration........................ (17,981) (17,981)
Cumulative other comprehensive income..................... 39 314
-------- --------
Total stockholders' deficit........................... (53,239) (51,755)
-------- --------
Total liabilities & stockholders' deficit............. $ 28,849 $ 31,753
======== ========
The accompanying notes are an integral part of these condensed balance sheets.
F-55
COMPASSLEARNING, INC.
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Net Revenue:
Software license...................................... $10,667 $12,828 $15,678 $16,995
Service............................................... 7,608 9,403 14,941 17,964
Hardware.............................................. 538 538 1,776 1,834
------- ------- ------- -------
18,813 22,769 32,395 36,793
------- ------- ------- -------
Cost of Products Sold:
Software license...................................... 1,452 1,909 2,653 3,198
Service............................................... 4,492 5,163 8,774 10,880
Hardware.............................................. 374 627 1,245 1,750
------- ------- ------- -------
6,318 7,699 12,672 15,828
------- ------- ------- -------
Gross profit...................................... 12,495 15,070 19,723 20,965
------- ------- ------- -------
Selling and Administrative Expenses:
Sales and marketing................................... 5,752 7,107 10,688 14,120
Research and development.............................. 1,882 2,087 3,601 4,378
General and administrative............................ 1,794 2,534 3,726 4,741
Amortization of intangible assets..................... 61 61 122 122
------- ------- ------- -------
9,489 11,789 18,137 23,361
------- ------- ------- -------
Income (Loss) From Operations........................... 3,026 3,281 1,586 (2,396)
Interest Expense........................................ (1,382) (1,036) (2,661) (1,879)
Other Income............................................ 1 -- 405 --
------- ------- ------- -------
Income (Loss) Before Income Taxes....................... 1,675 2,245 (670) (4,275)
Income Tax Expense...................................... -- -- -- --
------- ------- ------- -------
Net Income (Loss)....................................... 1,675 2,245 (670) (4,275)
Other Comprehensive Income (Loss), net of income tax:
Unrealized holding gains arising during the period.... -- -- 121 --
Less: reclassification adjustment for gains included
in net loss......................................... -- -- (396) --
------- ------- ------- -------
Comprehensive Income (Loss)............................. $ 1,675 $ 2,245 $ (945) $(4,275)
======= ======= ======= =======
The accompanying notes are an integral part of these condensed financial
statements.
F-56
COMPASSLEARNING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE
30,
-----------------------
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
Cash Flows From Operating Activities:
Net loss.................................................. $ (670) $(4,275)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization............................. 1615 1985
Gain on disposition of marketable securities.............. (396) --
Provision for doubtful accounts receivable................ 225 135
Amortization of deferred financing fees................... 191 --
Change in assets and liabilities:
Increase in accounts receivable......................... (865) (806)
Decrease in Inventories, net............................ 356 651
(Increase) decrease in prepaid expenses................. 1,244 (1,698)
Increase in accounts payable............................ 10 857
Decrease in due to related parties...................... (206) (500)
Increase (decrease) in accrued salaries and related
items................................................. (1,230) 544
Decrease in deferred revenue............................ (5,276) (4,541)
Net increase (decrease) in other accrued liabilities and
other long-term liabilities........................... (662) 516
------- -------
Net cash used in operating activities............... (5,664) (7,132)
------- -------
Cash Flows From Investing Activities:
Capital expenditures...................................... (137) (239)
Proceeds from disposition of marketable securities........ 396 --
------- -------
Net cash provided by or (used) in by investing
activities........................................ 259 (239)
------- -------
Cash Flows From Financing Activities:
Increase in due to former parent.......................... -- 28
Increase in notes payable................................. -- 9,643
Increase (decrease) in revolving line of credit, net...... 5,405 (2,092)
Payment of financing fees................................. -- (1,068)
------- -------
Net cash provided by financing activities........... 5,405 6,511
------- -------
Change in Cash.............................................. -- (860)
Cash, beginning of period................................... -- 860
------- -------
Cash, end of period......................................... $ -- $ --
======= =======
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest.................. $ 1,040 $ 680
======= =======
The accompanying notes are an integral part of these condensed financial
statements.
F-57
COMPASSLEARNING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1. BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. The
statements presented do not include all information and footnotes required to be
in conformity with generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Results of operations in interim periods are not necessarily
indicative of results for a full year. These condensed financial statements and
notes thereto should be read in conjunction with the CompassLearning, Inc.'s
("CompassLearning" or the "Company," formerly known as Jostens Learning
Corporation or JLC Learning Corporation) financial statements and notes thereto
for the year ended December 31, 1998. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions. Such estimates and assumptions affect the
reported amounts of assets and liabilities as well as disclosure of contingent
assets and liabilities at the date of the accompanying condensed financial
statements, and the reported amounts of the revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company adopted Statements of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," for the year ended December 31, 1998.
SFAS No. 130 requires the Company to measure and disclose all elements of
comprehensive income that result from recognized transactions and other events
in the financial statements. Accordingly, the Company has reported unrealized
gains on marketable securities as a separate component of stockholders' deficit.
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," on January 1, 1998. In management's opinion, the
Company does not have any reportable segments as defined by SFAS 131.
NOTE 3. REVOLVING CREDIT AGREEMENT
In May 1999, the Company amended its revolving credit agreement (the
"Agreement"), which includes a revolving line of credit with a maximum loan
availability of $20,000, including up to $2,000 of letters of credit. This
amendment permitted the Company, under the line of credit, to receive additional
advances up to $1,500 for the period from May 1, 1999 to July 15, 1999. These
advances bear interest at rates similar to those existing under the line of
credit, but are not subject to the borrowing base calculations, as defined.
NOTE 4. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a party to litigation arising in the normal course of business.
Management regularly analyzes current information and, if necessary, provides
accruals for probable liabilities on the eventual
F-58
COMPASSLEARNING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
disposition of these matters. Management believes that the effect on its results
of operations and financial position, if any, for the disposition of these
matters, will not be material.
ROYALTY AGREEMENTS
The Company had a minimum guaranteed royalty commitment under a software license
agreement of approximately $1,275. In May 1999, the Company reached a settlement
reducing their minimum guaranteed royalty commitment by approximately $320, in
exchange for the Company releasing certain limited exclusivity rights.
NOTE 5. SUBSEQUENT EVENT
On July 14, 1999, Ripplewood Partners, L.P., EAC I, a Delaware corporation,
purchased all the outstanding common stock and preferred stock of the Company.
Concurrent with the closing, the Company's existing revolving line of credit,
term note payable to bank, senior subordinated notes, and note payable to
related party were refinanced with a revolving credit facility of $16,000, a
term loan facility of $3,000 and senior subordinated notes of $19,000
(collectively; the "Existing CompassLearning Indebtedness"), all with new
lenders. Portions of the Existing CompassLearning Indebtedness begin to mature
in July 2000. The Existing CompassLearning Indebtedness was refinanced on
November 17, 1999.
F-59
COMPASSLEARNING, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 1998
----------------------
(DOLLARS IN THOUSANDS)
ASSETS:
CURRENT ASSETS:
Cash...................................................... $ 1,012
Account receivable, net................................... 24,601
Inventories, net.......................................... 866
Prepaid expenses.......................................... 2,885
Investment in marketable securities....................... --
--------
Total current assets.................................... 29,364
OTHER ASSETS:
Software development costs, net........................... 3,371
Intangible assets, net.................................... 1,021
Deferred financing fees, net.............................. 954
FIXED ASSETS, net........................................... 2,171
--------
Total assets............................................ $ 36,881
========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current Liabilities:
Accounts payable.......................................... $ 3,697
Due to related parties.................................... 570
Accrued salaries and related items........................ 6,263
Other accrued liabilities................................. 10,494
--------
21,024
Deferred revenue............................................ 22,179
Term note payable to bank................................... 7,500
Senior subordinated notes................................... 17,000
--------
Total current liabilities............................... 67,703
Deferred Revenue, net of current portion.................... 1,879
Due to Related Parties, net of current portion.............. 750
Note Payable to Related Party............................... 2,197
Revolving Line of Credit.................................... 4,865
Other Long-term Liabilities................................. 898
--------
Total liabilities....................................... 78,292
========
Commitments and Contingencies
Mandatorily Redeemable Class B Preferred Stock.............. 10,961
--------
Stockholders' Deficit:
Class A Common Stock........................................
Additional paid-in capital.................................. 75,803
Accumulated deficit......................................... (110,194)
Unallocated purchase consideration.......................... (17,981)
--------
Total stockholders' deficit............................. (52,372)
--------
Total liabilities & stockholders' deficit............... $ 36,881
========
F-60
COMPASSLEARNING, INC.
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------
(DOLLARS IN THOUSANDS)
Net Revenue
Software license.......................................... $ 6,101 $23,096
Service................................................... 7,772 25,737
Hardware.................................................. 1,393 3,227
------- -------
15,266 52,060
------- -------
Cost of Products Sold
Software license.......................................... 893 4,091
Service................................................... 4,145 15,024
Hardware.................................................. 914 2,664
------- -------
5,952 21,779
------- -------
Gross profit............................................ 9,314 30,281
------- -------
Selling and Administrative Expenses
Sales and marketing....................................... 5,357 19,477
Research and development.................................. 2,015 6,393
General and administrative................................ 1,651 6,392
Restructuring............................................. 3,012 3,012
Amortization of intangible assets......................... 61 184
------- -------
12,096 35,458
------- -------
Income (Loss) From Operations............................... (2,782) (5,177)
Interest Expense............................................ (1,313) (3,193)
Other Income................................................ 24 24
------- -------
Income (Loss) Before Income Taxes........................... (4,071) (8,346)
------- -------
Income Tax Expense.......................................... -- --
------- -------
Net Income (Loss)........................................... (4,071) (8,346)
======= =======
Other Comprehensive Income (Loss), net of income tax
Unrealized holding gains arising during the period........ -- --
Less: reclassification adjustment for gains included in
net loss................................................ -- --
Comprehensive Income (Loss)............................... $(4,071) $(8,346)
======= =======
F-61
COMPASSLEARNING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
Cash Flows from Operating Activities:
Net loss.................................................... $(8,346)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization............................... 2,922
Gain on disposition of marketable securities................ --
Provision for doubtful accounts receivable.................. 195
Amortization of deferred financing fees and debt discount... 191
Change in assets and liabilities:
Increase in accounts receivable........................... 4,644
Decrease in inventories, net.............................. 184
(Increase) decrease in prepaid expenses................... (1,646)
Increase in accounts payable.............................. 880
Decrease in due to related parties........................ 1,735
Increase (decrease) in accrued salaries and related
items................................................... 875
Decrease in deferred revenue.............................. (5,463)
Net increase (decrease) in other accrued liabilities and
other long-term liabilities............................. 1,518
-------
Net cash used in operating activities................... (2,311)
-------
Cash Flows From Investing Activities:
Capital expenditures...................................... (257)
Software development costs, net........................... --
-------
Net cash provided (used) by investing activities........ (257)
-------
Cash Flows From Financing Activities:
Increase in due to former parent.......................... --
Increase in notes payable................................. 7,500
(Decrease) in revolving line of credit, net............... (3,635)
(Increase) in financing fees.............................. (1,145)
-------
Net cash provided by financing activities............... 2,720
-------
CHANGE IN CASH
Cash, beginning of period................................... 152
Cash, end of period......................................... 860
-------
$ 1,012
=======
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest.................. $ 1,040
=======
F-62
COMPASSLEARNING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1. BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. The
statements presented do not include all information and footnotes required to be
in conformity with generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Results of operations in interim periods are not necessarily
indicative of results for a full year. These condensed financial statements and
notes thereto should be read in conjunction with the CompassLearning, Inc.'s
("CompassLearning" or the "Company," formerly known as Jostens Learning
Corporation or JLC Learning Corporation) financial statements and notes thereto
for the year ended December 31, 1998. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions. Such estimates and assumptions affect the
reported amounts of assets and liabilities as well as disclosure of contingent
assets and liabilities at the date of the accompanying condensed financial
statements, and the reported amounts of the revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company adopted Statements of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," for the year ended December 31, 1998.
SFAS No. 130 requires the Company to measure and disclose all elements of
comprehensive income that result from recognized transactions and other events
in the financial statements. Accordingly, the Company has reported unrealized
gains on marketable securities as a separate component of stockholders' deficit.
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," on January 1, 1998. In management's opinion, the
Company does not have any reportable segments as defined by SFAS 131.
NOTE 3. REVOLVING CREDIT AGREEMENT
In May 1999, the Company amended its revolving credit agreement (the
"Agreement"), which includes a revolving line of credit with a maximum loan
availability of $20,000, including up to $2,000 of letters of credit. This
amendment permitted the Company, under the line of credit, to receive additional
advances up to $1,500 for the period from May 1, 1999 to July 15, 1999. These
advances bear interest at rates similar to those existing under the line of
credit, but are not subject to the borrowing base calculations, as defined.
NOTE 4. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a party to litigation arising in the normal course of business.
Management regularly analyzes current information and, if necessary, provides
accruals for probable liabilities on the eventual disposition of these matters.
Management believes that the effect on its results of operations and financial
position, if any, for the disposition of these matters, will not be material.
F-63
COMPASSLEARNING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
ROYALTY AGREEMENTS
The Company had a minimum guaranteed royalty commitment under a software license
agreement of approximately $1,275. In May 1999, the Company reached a settlement
reducing their minimum guaranteed royalty commitment by approximately $320, in
exchange for the Company releasing certain limited exclusivity rights.
NOTE 5. SUBSEQUENT EVENT
On July 14, 1999, Ripplewood Partners, L.P., EAC I, a Delaware corporation,
purchased all the outstanding common stock and preferred stock of the Company.
Concurrent with the closing, the Company's existing revolving line of credit,
term note payable to bank, senior subordinated notes, and note payable to
related party were replaced with a revolving credit facility of $16,000, a term
loan facility of $3,000 and senior subordinated notes of $19,000 (collectively;
the "Existing CompassLearning Indebtedness"), all with new lenders. Portions of
the Existing CompassLearning Indebtedness begin to mature in July 2000. On
November 17, 1999, approximately $25,499 the entire existing CompassLearning
Indebtedness, was refinanced.
F-64
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To WRC Media Inc. and
Ripplewood Holding, L.L.C.:
We have audited the accompanying balance sheet of WRC MEDIA INC. (formerly EAC
II, INC.) and subsidiary (a Delaware corporation) (the "Company") as of
September 30, 1999, and the related statements of operations and comprehensive
loss, and cash flows for the period from July 14, 1999 (commencement of
operations) to September 30, 1999, and the related statement of stockholders'
equity for the period from May 14, 1999 (inception) to September 30, 1999, and
the accompanying statements of operations and comprehensive loss, stockholders'
deficit and cash flows of the Company's predecessor, CompassLearning, Inc., for
the period from January 1, 1999 to July 13, 1999. These financial statements are
the responsibility of the Companies' management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of
September 30, 1999, and the results of the Company's and its predecessor's
operations and cash flows for the periods from July 14, 1999 to September 30,
1999 and from January 1, 1999 to July 13, 1999, respectively, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
November 17, 1999
F-65
WRC MEDIA INC. AND SUBSIDIARY
BALANCE SHEET
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS)
ASSETS
Current Assets:
Cash...................................................... $ 258
Accounts Receivable, Net of Allowance for Doubtful
Accounts of $768........................................ 19,004
Inventories, net.......................................... 624
Prepaid Expenses.......................................... 1,595
Investment in Marketable Securities....................... 23
--------
Total Current Assets.................................... 21,504
Other Assets:
Purchased Software, Net............................. 7,063
Other Acquired Intangible Assets, Net............... 46,383
Deferred Financing Fees, Net........................ 1,937
Fixed Assets, net........................................... 1,601
--------
$ 78,488
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 2,203
Accrued salaries and related Items........................ 6,983
Other accrued liabilities................................. 5,977
Current portion of deferred revenue....................... 16,018
--------
Total current liabilities............................... 31,181
Deferred Revenue, Net of Current Portion.................... 941
Revolving Line of Credit.................................... 5,000
Term Note Payable to Bank................................... 3,000
Senior Subordinated Notes, Net.............................. 17,499
Other Long-Term Liabilities................................. 319
--------
Total Liabilities....................................... 57,940
--------
Commitments and Contingencies
Stockholders' Equity:
Class A Common Stock, $0.01 Par Value; 3,000,000 Shares
Authorized, 1,434,900 Shares Issued and Outstanding....... 14
Additional Paid-in Capital.................................. 30,844
Accumulated Deficit......................................... (10,296)
Cumulative Other Comprehensive Loss......................... (14)
--------
Total Stockholders' Equity.............................. 20,548
--------
$ 78,488
========
The accompanying notes are an integral part of this balance sheet.
F-66
WRC MEDIA INC. AND SUBSIDIARY WITH PREDECESSOR
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(DOLLARS IN THOUSANDS)
COMPANY
PREDECESSOR JULY 14,
JANUARY 1, 1999 TO
1999 TO SEPTEMBER
JULY 13, 30,
1999 1999
------- --------
Net Revenue:
Software license.......................................... $16,231 $ 7,821
Service................................................... 16,123 6,291
Hardware.................................................. 1,669 735
------- --------
34,023 14,847
------- --------
Cost of Products Sold:
Software license.......................................... 2,783 1,379
Service................................................... 9,295 3,607
Hardware.................................................. 1,296 343
------- --------
13,374 5,329
------- --------
Gross profit............................................ 20,649 9,518
------- --------
Selling and Administrative Expenses:
Sales and marketing....................................... 11,038 4,971
Research and development.................................. 3,831 1,824
Write-off of purchased in-process research and
development............................................. -- 9,000
General and administrative................................ 3,978 1,382
Amortization of intangible assets......................... 131 1,739
------- --------
18,978 18,916
------- --------
Income (Loss) From Operations............................... 1,671 (9,398)
Interest Expense............................................ (2,854) (914)
Other Income, Net........................................... 405 16
------- --------
Loss Before Income Taxes.................................... (778) (10,296)
Income Tax Expense.......................................... -- --
------- --------
Net Loss.................................................... (778) (10,296)
Other Comprehensive Loss, Net of Income Tax:
Unrealized Holding Gain (Loss) Arising During The
period.................................................. 119 (14)
Less: reclassification adjustment for gains included in
net loss................................................ (396) --
Comprehensive Loss.......................................... $(1,055) $(10,310)
======= ========
The accompanying notes are an integral part of these financial statements.
F-67
WRC MEDIA INC. AND SUBSIDIARY WITH PREDECESSOR
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM JANUARY 1, 1999 TO JULY 13, 1999
(DOLLARS IN THOUSANDS)
MANDATORILY
REDEEMABLE REDEEMABLE
CLASS B CLASS A CLASS A
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ------------------- ------------------- PAID-IN ACCUMULATED
PREDECESSOR SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
- ----------- -------- -------- -------- -------- -------- -------- ---------- ------------
BALANCE, December 31, 1998......... 10,000 $11,230 20,000 $ -- 1,000 $ -- $75,803 $(109,894)
Accrued dividends on mandatorily
redeemable preferred stock..... -- 500 -- -- -- -- -- (500)
Accretion of stock issuance costs
and related discount........... -- 39 -- -- -- -- -- (39)
Comprehensive loss............... -- -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- -- (778)
------ ------- ------ ------- ----- ------- ------- ---------
BALANCE, July 13, 1999............. 10,000 $11,769 20,000 $ -- 1,000 $ -- $75,803 $(111,211)
====== ======= ====== ======= ===== ======= ======= =========
CUMULATIVE
UNALLOCATED OTHER
PURCHASE COMPREHENSIVE
PREDECESSOR CONSIDERATION INCOME TOTAL
- ----------- ------------- -------------- --------
BALANCE, December 31, 1998......... $(17,981) $ 314 $(40,528)
Accrued dividends on mandatorily
redeemable preferred stock..... -- -- --
Accretion of stock issuance costs
and related discount........... -- -- --
Comprehensive loss............... -- (277) (277)
Net loss......................... -- -- (778)
-------- ----- --------
BALANCE, July 13, 1999............. $(17,981) $ 37 $(41,583)
======== ===== ========
FOR THE PERIOD FROM MAY 14, 1999 (INCEPTION) TO SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS)
CLASS A
COMMON STOCK ADDITIONAL CUMULATIVE OTHER TOTAL
-------------------- PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS
COMPANY SHARES AMOUNT CAPITAL DEFICIT LOSS EQUITY
- ------- --------- -------- ---------- ------------ ---------------- ------------
BALANCE, May 14, 1999 (inception)............ -- $-- $ -- $ -- $ -- $ --
Issuance of Class A Common Stock........... 1,434,900 14 28,684 -- -- 28,698
Issuance of warrants....................... -- -- 2,160 -- -- 2,160
Comprehensive loss......................... -- -- -- -- (14) (14)
Net loss................................... -- -- -- (10,296) (10,296)
--------- --- ------- -------- ---- --------
BALANCE, September 30, 1999.................. 1,434,900 $14 $30,844 $(10,296) $(14) $ 20,548
========= === ======= ======== ==== ========
The accompanying notes are an integral part of these financial statements
F-68
WRC MEDIA INC. AND SUBSIDIARY WITH PREDECESSOR
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
COMPANY
PREDECESSOR JULY 14, 1999 TO
JANUARY 1, 1999 SEPTEMBER 30,
TO JULY, 13, 1999 1999
----------------- ----------------
Cash Flows From Operating Activities:
Net loss.................................................. $ (778) $(10,296)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities--
Depreciation and amortization........................... 1,713 2,216
Write off of purchased in-process research and
development........................................... -- 9,000
Gain on disposition of marketable securities............ (396) --
Provision for doubtful accounts receivable.............. 225 (20)
Amortization of deferred financing fees and debt
discount.............................................. 204 185
Changes in assets and liabilities, net of effect of
business acquired:
Decrease in accounts receivable....................... 966 170
Decrease in inventories, net.......................... 269 118
Decrease (increase) in prepaid expenses............... 1,107 (271)
(Decrease) increase in accounts payable............... (554) 79
Decrease in accrued salaries and related items........ (144) (848)
(Decrease) increase in deferred revenue............... (6,267) 909
Net (decrease) increase in other accrued liabilities
and other long-term liabilities..................... (908) 221
------ --------
Net cash provided by (used in) operating activities... (4,563) 1,463
------ --------
Cash Flows From Investing Activities:
Purchase of acquired business............................. -- (55,493)
Capital expenditures...................................... (142) (167)
Proceeds from disposition of marketable securities........ 396 --
Investment in tradename................................... -- (375)
------ --------
Net cash provided by (used in) investing activities... 254 (56,035)
------ --------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock.................... -- 28,698
Increase in revolving line of credit, net................. 4,904 5,000
Proceeds from increase in senior subordinated notes....... -- 19,000
Proceeds from term loan................................... -- 3,000
Payment of financing fees................................. -- (1,463)
------ --------
Net cash provided by financing activities............. 4,904 54,235
------ --------
Change in Cash.............................................. 595 (337)
Cash, beginning of period................................... -- 595
------ --------
Cash, end of period......................................... $ 595 $ 258
====== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest.................. $ 925 $ 101
====== ========
The accompanying notes are an integral part of these financial statements.
F-69
WRC MEDIA INC. AND SUBSIDIARY WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1. NATURE OF BUSINESS
The accompanying consolidated financial statements include the accounts of WRC
Media Inc. (formerly EAC II INC.), and its wholly owned subsidiary, (the
"Company"), CompassLearning, Inc. ("CompassLearning") (formerly EAC I, INC.,
Jostens Learning Corporation or JLC Learning Corporation), a provider of
technology-based educational programs to school districts for kindergarten
through twelfth grade.
CompassLearning operates in the education software industry and management
believes it has maintained a leadership position among a multitude of providers.
CompassLearning's products and services include fully integrated software
systems, standalone CD ROM delivery, and a full service offering, including
installation, teacher training, onsite and remote diagnostics and maintenance.
CompassLearning focuses its market efforts in the United States and several U.S.
territories, and is exploring opportunities in international markets.
CompassLearning's selling and distribution efforts include a direct sales force,
telemarketing and catalog sales.
The Company's Predecessor (the "Predecessor") was acquired by the Company on
July 14, 1999 (the "Purchase Date"). The Company's consolidated statement of
operations and comprehensive loss and cash flows for the period from July 14,
1999 to September 30, 1999 include the operations of the Predecessor since the
Purchase Date. The SEC staff deems an acquired business to be a predecessor when
the registrant is in substantially the same business of the entity acquired and
the registrant's own operations prior to the acquisition appear insignificant
relative to the business acquired. A predecessor must present audited financial
statements for the interim period between the predecessor's most recent year-end
and the date of the acquisition by the registrant. Accordingly, the accompanying
financial statements for the period from January 1, 1999 to July 13, 1999 of the
Predecessor, and for the period from July 14, 1999 to September 30, 1999 of the
Company are presented. The purchase method of accounting was used to record
assets acquired and liabilities assumed by the Company. Such accounting
generally results in increased amortization and depreciation reported in future
periods. Accordingly, the accompanying financial statements of the Predecessor
and the Company are not comparable in all material respects since those
financial statements report financial position, results of operations, and cash
flows of two separate entities.
FORMATION OF THE COMPANY
The Company and its subsidiary, EAC I, INC., were incorporated on May 14 1999
and May 12, 1999, respectively, for the purpose of acquiring the Predecessor.
The acquisition was consummated by EAC I, INC. merging with the Predecessor,
with EAC I, INC. being the surviving entity. EAC I, INC. then changed its name
to CompassLearning.
ACQUISITION OF THE PREDECESSOR
On July 14, 1999, the Company purchased all the outstanding common stock and
preferred stock of the Predecessor for approximately $55,200. The purchase price
and acquisition costs were funded by approximately $28,700 in equity
contributions, and a senior credit facility and senior subordinated notes of
approximately $29,537. There was approximately $350 in cash after the
acquisition. Concurrent with the closing, the Predecessor's existing line of
credit, term note payable to the bank, senior subordinated notes and notes
payable to related parties were refinanced (see Note 8).
F-70
WRC MEDIA INC. AND SUBSIDIARY WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1. NATURE OF BUSINESS (CONTINUED)
The acquisition of the Predecessor was accounted for using the purchase method
of accounting. The total cost of the acquisition of $57,887 (including $2,687 of
acquisition costs) was allocated, on a preliminary basis which is subject to
adjustment, to assets and liabilities based on an independent valuation of their
estimated fair values as of the Purchase Date as follows:
Net liabilities assumed..................................... $(6,290)
Purchased software.......................................... 7,430
In-process research and development......................... 9,000
Other intangible assets..................................... 24,700
Goodwill.................................................... 23,047
-------
$57,887
=======
Included in net liabilities assumed are obligations related to bonuses payable
as a result of the acquisition and Stock Appreciation Rights ("SARs") (see
Note 12).
During the period from July 14, 1999 to September 30, 1999, the Company
recognized a $9,000 charge related to the write-off of purchased in-process
research and development ("R&D") costs acquired in connection with the
acquisition described above.
The nature of the efforts required to develop the acquired in-process
technologies into commercially viable products principally relate to the
completion of all planning, designing, coding, and testing activities that are
necessary to establish that the products can be produced to meet their design
requirements, including functions, features and technical and economic
performance requirements.
The valuation of the acquired in-process research and development was predicated
on the determination that the developmental projects at the time of the
acquisition were not technologically feasible and had no alternative future use.
This conclusion was attributable to the fact that the Company had not completed
a working model that had been tested and proven to work at performance levels
which were expected to be commercially viable and that the technologies of the
projects have no alternative use other than as a software application. The value
is attributable solely to the development efforts completed as of the
acquisition date.
As of the acquisition date, the Predecessor's significant ongoing R&D projects
included the development of:
- Curriculum: Next-generation reading system (5-8)
- Assessment: Web-based JCAT platform
- Management: Compass 4.x and Compass 5.0 (next-generation)
The Company allocated values to the in-process R&D based on an assessment by an
independent valuation expert of the R&D projects. The value assigned to these
assets was limited to significant research projects for which technological
feasibility had not been established, including development, engineering and
testing activities associated with the introduction of the Predecessor's
next-generation Internet-based technologies and products.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting
F-71
WRC MEDIA INC. AND SUBSIDIARY WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1. NATURE OF BUSINESS (CONTINUED)
net cash flows from the projects, and discounting the net cash flows to their
present value. The present value calculations were then adjusted to reflect the
estimated percent complete of each project, a procedure designed to reflect the
value creation efforts of the target companies prior to the close of the
acquisition.
The developmental projects were evaluated in the context of Statement of
Financial Accounting Standards ("SFAS") No. 2, ACCOUNTING FOR RESEARCH AND
DEVELOPMENT COSTS, including its related interpretation, and SFAS No. 86,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD LEASED, OR OTHERWISE
MARKETED,. In-process R&D involves products which fall under the following
definitions of R&D (as defined in SFAS No. 2):
- Research is defined as the planned search or critical investigation aimed
at discovery of new knowledge with the hope that such knowledge will be
useful in developing a new product, service, process, or technique, or in
bringing about a significant improvement to an existing product or
process.
- Development is defined as the translation of research findings or other
knowledge into a plan or design for a new product or process or for a
significant improvement to an existing product or process whether intended
for sale or use. It includes the conceptual formulation, design, and
testing of product alternatives, construction of prototypes, and operation
of pilot plants.
Activities specifically excluded from R&D include engineering follow-through in
an early phase of commercial production; routine, ongoing efforts to refine or
enhance an existing product; and the adaptation of existing capabilities to a
particular customer's needs.
In order to calculate the value of the in-process R&D, the income approach was
employed. Each of the significant ongoing R&D projects was identified and valued
through interviews and analysis of product development data provided by
management concerning project descriptions, their respective stage of
development, the time and resources needed to complete the projects, expected
income generating ability, and associated risks. Of the $9,000 in-process R&D
write-off, $220, $80 and $8,700 was allocated to the management, assessment, and
curriculum described above.
The resulting cash flows were discounted to their present value by applying
appropriate discount rates considering each asset's relative risk. The discount
rate selected for the in-process technologies was 20%. In the selection of the
appropriate discount rate, consideration was given to the weighted average cost
of capital. The discount rate utilized for the in-process technologies was
higher than the Company's overall rates of return due to the risk of realizing
cash flows from products that had yet to reach technological feasibility. The
returns on all the acquired assets were established and weighted to ensure the
rates were reasonable in the context of the overall required return.
Accordingly, the assets, including in-process R&D, and liabilities, are recorded
based on their fair values at the date of acquisition and the results of
operations for the acquisition has been included in the financial statements for
the periods subsequent to acquisition. The Company allocated the fair values of
the net assets acquired between acquired in-process R&D, developed technology
and goodwill.
F-72
WRC MEDIA INC. AND SUBSIDIARY WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1. NATURE OF BUSINESS (CONTINUED)
UNAUDITED PROFORMA INFORMATION
The following unaudited proforma information includes the combined results of
operations of the Company and its Predecessor for the period from January 1,
1999 to September 30, 1999 and gives effect to the acquisition of the
Predecessor as if it had been consummated on January 1, 1999.
Net revenue................................................. $48,870
Loss from operations........................................ (2,594)
Net loss.................................................... (2,087)
The unaudited pro forma information excludes the effect of the approximate
$9,000 charge related to the write off of purchased in-process research and
development and has been adjusted for interest expense, depreciation and
amortization expense resulting from the acquisition. The unaudited pro forma
information is provided for illustrative purposes only and is not necessarily
indicative of the combined results of operations that would have been achieved
had the acquisition occurred on the date indicated, nor does it purport to
project the results of operations of the Company for the year or for any future
period.
ACQUISITION OF THE SUPPLEMENTAL EDUCATIONAL GROUP OF PRIMEDIA INC.
On November 17, 1999, the Company completed the Recapitalization of
PRIMEDIA Inc. ("PRIMEDIA") Supplemental Education Group, consisting of the
businesses of Weekly Reader, American Guidance and World Almanac and their
respective subsidiaries (collectively known as "Weekly Reader"), and certain
other related transactions (the "Recapitalization"). Upon consummation of this
transaction, the Company acquired 94.9% of Weekly Reader's outstanding common
stock with PRIMEDIA retaining the remaining 5.1%. As a result of the retained
ownership of Weekly Reader's original shareholders, push-down accounting to
Weekly Reader was not required. Therefore, approximately $246,299 of goodwill
has been recorded and will remain on the books of the Company related to the
Recapitalization. Weekly Reader will expense approximately $900 in
November 1999 related to expenses for the Recapitalization. The Company, Weekly
Reader, American Guidance and World Almanac will have no outstanding
indebtedness, other than the indebtedness described below.
To finance the Recapitalization and repayment of the Company's existing
indebtedness:
(1) The Company issued 152,000 units consisting of a 12.75% senior
subordinated notes and 205,656 shares of the Company's common stock for
proceeds of $152,000;
(2) Certain Company subsidiaries entered into new senior secured bank credit
facilities, providing for credit facilities of up to $161,000. These
consisted of two term loans which totaled $131,000 and a revolving credit
facility of $30,000. The revolving credit facility was not used at the
closing of the Recapitalization;
(3) The Company issued to a merchant bank and certain of its affiliates,
$75,000 of senior accreting preferred stock which included warrants to
acquire 13.0% of the common stock of Weekly Reader and 13.0% of the
common stock of CompassLearning; and
(4) The Company will issue $95,000 in common stock in exchange for the cash
equity contribution of certain existing stockholders or their designees.
F-73
WRC MEDIA INC. AND SUBSIDIARY WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1. NATURE OF BUSINESS (CONTINUED)
The lenders who provided the Senior Credit Facility and Senior Subordinated
Notes of the Company (see Note 8) exercised their warrants and the common stock
received was contributed to a partnership of an existing stockholder for certain
membership interests in that partnership.
In connection with the Recapitalization described above, the Company will incur
an extraordinary charge, net of income taxes, related to the extinguishment of
the Senior Credit Facility and the Senior Subordinated Notes of approximately
$3,326.
In connection with the Recapitalization described above, the Company authorized
CompassLearning to enter into a new management agreement (see Note 11) with
Ripplewood Holdings, L.L.C. ("Ripplewood"). This new agreement begins on
January 1, 2001, and provides for payments to Ripplewood of $150 per year.
Additionally, the Company authorized Weekly Reader to enter into a management
agreement with Ripplewood that provides for payments to Ripplewood of $800 per
year. In return for these payments, CompassLearning and Weekly Reader will
receive management consulting and financial advisory services.
In connection with the Recapitalization described above, the Company entered
into several new employment agreements with its executives. These agreements
included provisions that required the executives to purchase shares from the
Company, authorized the issuance of stock options, some that are fixed and
others that are performance-based, and provided certain executives the right to
put their shares back to the Company under certain circumstances.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on the
first-in, first-out ("FIFO") basis. The Company periodically evaluates the
realizability of inventories and adjusts its reserve as necessary.
INVESTMENT IN MARKETABLE SECURITIES
The Company classifies its investment in marketable securities as available for
sale. Accordingly, the investment is recorded at fair value with unrealized
gains or losses, net of the related tax effect, excluded from income and
reported as other comprehensive income (loss).
SOFTWARE DEVELOPMENT COSTS
In accordance with SFAS No. 86, the Company capitalizes software development
costs by project commencing when technological feasibility is established and
concluding when the product is ready for commercial release. Additionally, the
Company capitalizes acquired technologies that meet the provisions of SFAS
No. 86. The establishment of technological feasibility and the ongoing
assessment of
F-74
WRC MEDIA INC. AND SUBSIDIARY WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the recoverability of these costs require considerable judgment by management
with respect to certain external factors, including, but not limited to,
anticipated future gross product revenues, estimated economic product lives and
changes in software and hardware technology. Software development costs are
amortized on a straight-line basis over four years or the expected life of the
product, whichever is less. The Company periodically evaluates the net
realizable value of capitalized software development costs based on factors such
as budgeted sales, product development cycles and management's market emphasis.
R&D costs are charged to expense when incurred.
INTANGIBLE ASSETS
Intangible assets include goodwill, tradenames, trademark, customer lists and
workforce in place. Goodwill represents the excess of the purchase price over
the fair value of assets acquired as a result of the acquisition of the
Predecessor by the Company on July 14, 1999.
DEFERRED FINANCING FEES
Deferred financing fees are direct costs paid by the Company in connection with
their revolving credit agreement (see Note 8). These costs are being amortized
over the term of the related debt. Amortization for the period from January 1,
1999 to July 13, 1999 was approximately $204 and for the period from July 14,
1999 to September 30, 1999, was approximately $143. Accumulated amortization as
of September 30, 1999 was $143.
FIXED ASSETS
Fixed assets are recorded at cost and depreciated over the estimated useful
lives of the related assets. Depreciation is provided principally on the
straight-line method for financial reporting purposes and on accelerated methods
for income tax purposes. Leasehold improvements are depreciated over the shorter
of their useful life or lease term.
LONG-LIVED ASSETS
The Company periodically evaluates the carrying value of long-lived assets in
accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. Under SFAS No. 121, long-lived
assets and certain identifiable intangible assets, including goodwill, are
reviewed for impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be fully recoverable. An impairment loss is
recognized if the sum of the expected long-term undiscounted cash flows is less
than the carrying amount of the long-lived assets being evaluated.
REVENUE RECOGNITION
The Company recognizes revenues in accordance with the provisions of Statement
of Position ("SOP") 97-2, SOFTWARE REVENUE RECOGNITION, as amended by SOP 98-4,
DEFERRAL OF THE EFFECTIVE DATE OF CERTAIN PROVISIONS of SOP 97-2. Under SOP
97-2, the Company recognizes revenue for hardware and software sales upon
shipment of the product, provided collection of the receivable is probable,
payment is due within one year and the fee is fixed or determinable. If an
acceptance period is required, revenues are recognized upon the earlier of
customer acceptance or the expiration of the acceptance period. If
F-75
WRC MEDIA INC. AND SUBSIDIARY WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
significant post-delivery obligations exist or if a product is subject to
customer acceptance, revenues are deferred until no significant obligations
remain or acceptance has occurred. Revenue from service contracts, instruction
and user training is recognized ratably as the services are performed and
post-contract support is recognized ratably over the related contract. Deferred
revenue represents the Company's obligation to perform under signed contracts.
For contracts with multiple obligations (e.g., deliverable and undeliverable
products, maintenance and other services), the Company allocates revenue to each
component of the contract based on vendor specific objective evidence of its
fair value, which is specific to the Company, or for products not being sold
separately, the price established by management. The Company recognizes revenue
allocated to undelivered products when the criteria for product revenue set
forth above are met.
Several of the Company's customers are subject to fiscal funding requirements.
If the funding requirements are subject to governmental approval, the likelihood
of cancellation is assessed. If the likelihood of cancellation is assessed as
remote, revenue is recognized. If the likelihood of cancellation is assessed as
other than remote, revenue is deferred. If the funding requirements are subject
to non-governmental approval, revenue is deferred and recognized in accordance
with the remaining provisions of SOP 97-2.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES, which requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of assets and
liabilities. A valuation allowance is required to offset any net deferred tax
assets if, based upon the available evidence, it is more likely than not that
some or all of the deferred tax asset will not be realized. The Company will
consider the elimination of the valuation allowance when available evidence
indicates the deferred assets will be realized.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense was
approximately $509 for the period from January 1, 1999 to July 13, 1999 and $383
for the period from July 14, 1999 to September 30, 1999.
SEGMENT REPORTING
The Company has determined that it has three reportable segments in accordance
with SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. These three segments are software licenses, service and hardware.
These segments are separately stated in the accompanying statements of
operations and comprehensive loss. The Company does not allocate selling and
administrative expenses to these individual segments and reviews them
individually on a gross margin basis only. The Company does not track individual
balance sheet information for its three reportable segments and, therefore, has
not provided separate balance sheet and cash flow information for each of the
reportable segments.
F-76
WRC MEDIA INC. AND SUBSIDIARY WITH PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3. INVENTORIES
Inventories at September 30, 1999, are as follows:
Materials and supplies...................................... $166
Finished products, net...................................... 458
----
$624
====
NOTE 4. PURCHASED SOFTWARE
Purchased software at September 30, 1999, are as follows:
Purchased software.......................................... $7,430
Less--accumulated amortization.............................. (367)
------
$7,063
======
Amortization of purchased software and capitalized software development costs
are included in cost of products sold and was approximately $887 for the period
from January 1, 1999 to July 13, 1999 and $367 for the period from July 14, 1999
to September 30, 1999. In prior periods, the Predecessor recorded additional
charges to reduce capitalized software costs to their net realizable value.
NOTE 5. OTHER ACQUIRED INTANGIBLE ASSETS
Intangible assets at September 30, 1999, are as follows:
LIFE
----
Tradename....................... 4 years......................... $ 3,520
Customer list................... 7 years......................... 18,200
Workforce in place.............. 3 years......................... 2,980
Trademark....................... 18 months....................... 375
Goodwill........................ 7 years......................... 23,047
-------
48,122
Less--accumulated amortization.................................... (1,739)
-------
$46,383
=======
F-77
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6. FIXED ASSETS
Fixed assets at September 30, 1999, are as follows:
Computer equipment.......................................... $1,429
Leasehold improvements...................................... 98
Other furniture and fixtures................................ 184
------
1,711
Less--accumulated depreciation.............................. (110)
------
$1,601
======
Estimated useful lives for all fixed assets are three years. Depreciation
expense was approximately $695 for the period from January 1, 1999 to July 13,
1999 and $117 for the period from July 14, 1999 to September 30, 1999.
NOTE 7. OTHER ACCRUED LIABILITIES
Other accrued liabilities at September 30, 1999 are as follows:
Customer deposits........................................... $1,017
Royalties................................................... 1,168
Other....................................................... 3,792
------
$5,977
======
NOTE 8. DEBT
SENIOR CREDIT FACILITY
The Company's Senior Credit Facility includes a revolving line of credit (the
"Line of Credit") with a maximum loan availability of $16,000, including up to
$2,000 of letters of credit, and a $3,000 term loan ("Term Loan"). At
September 30, 1999, $5,000 was outstanding on the Line of Credit, with an
additional $7,400 of the $16,000 available due to minimum borrowing base
calculations. There were no letters of credit outstanding under the Line of
Credit, and $3,000 was outstanding on the Term Loan. Advances under the Line of
Credit are limited to 70% of the book value of eligible accounts receivable, as
defined. The Senior Credit Facility is secured by all personal property, assets
and intellectual property of the Company. The Senior Credit Facility requires
the Company to meet certain financial covenants, including a consolidated senior
leverage ratio, consolidated fixed charge ratio, minimum consolidated earnings
before interest, taxes, depreciation and amortization ("EBITDA").
Principal on the Line of Credit is due on July 13, 2002. Principal on the Term
Loan is repayable in 24 equal monthly installments of $125 commencing July 31,
2000. Interest on borrowings under the Senior Credit Facility is computed at the
prime lending rate, as most recently announced by Bank of America, N.A. (8%
effective rate as of September 30, 1999), plus 0% to 0.5%, or Eurodollar Rate,
plus 2.25% to 2.75% depending on the consolidated senior leverage ratio, and is
generally payable quarterly. The Company is subject to a commitment fee computed
at a rate equal to 0.5% of the average daily unutilized commitment under the
Line of Credit.
F-78
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8. DEBT (CONTINUED)
In connection with the issuance of the Senior Credit Facility, the lender
received 30,858 warrants to acquire a specified number of Class A common stock
of the Company. The value ascribed to the warrants of $617 was recorded as
deferred financing fees and is being amortized over three years as additional
interest expense. The warrants expire on July 13, 2009.
SENIOR SUBORDINATED NOTES
The Company has $19,000 in senior subordinated notes ("Notes") outstanding which
bear interest at 13.375%. Principal of $6,333 is due in three annual payments,
commencing on July 13, 2005, and interest is payable quarterly. The Notes are
secured by the same collateral as the Senior Credit Facility. The Notes require
the Company to meet certain financial covenants, including restrictions on new
debt, a minimum interest coverage ratio, and a total consolidated debt to
consolidated EBITDA ratio.
In connection with the issuance of the Notes, the lender received 77,145
warrants to acquire a specified number of Class A common stock of the Company.
The value ascribed to the warrants of $1,543 was recorded as a discount from the
face value of the Notes and is being amortized over the term of the Notes as
additional interest expense. The unamortized discount on the Notes was $1,501 at
September 30, 1999. The warrants expire on July 13, 2009.
NOTE 9. INCOME TAXES
Due to the losses incurred from operations, the Company and its Predecessor have
no provisions for (benefits from) income taxes for the periods from January 1,
1999 to July 13, 1999 and for the period from July 14, 1999 to
September 30,1999.
The Company accounts for income taxes using a balance sheet approach whereby
deferred tax assets and liabilities are determined based on the differences in
financial reporting and income tax basis of assets. The differences are measured
using the income tax rate in effect during the year of measurement.
There was no current or deferred benefit for income taxes for the periods from
January 1, 1999 to July 13, 1999 and for the period from July 14, 1999 to
September 30, 1999. The following table provides a reconciliation between the
amount determined by applying the statutory federal income tax rate to the
pretax loss and benefit for income taxes:
JANUARY 1, 1999 JULY 14, 1999 TO
TO JULY 13, 1999 SEPTEMBER 30, 1999
---------------- ------------------
Benefit at statutory rate................... $ 342 $ 3,604
State income tax, net....................... 49 515
Write off of in-process R&D................. -- (3,600)
Goodwill amortization....................... -- (286)
Other permanent differences................. (50) (25)
Valuation allowance......................... (341) (208)
----- -------
$ -- $ --
===== =======
F-79
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 9. INCOME TAXES (CONTINUED)
The income tax effects of loss carryforwards and temporary differences between
financial and income tax reporting that give rise to the deferred income tax
assets and liabilities are as follows:
SEPTEMBER 30,
1999
-------------
Net operating loss carryforward............................. $6,900
Bad debt expense............................................ 135
Accrued liabilities......................................... 1,658
Other....................................................... 1,460
Deferred tax asset valuation allowance...................... (8,027)
Gross deferred tax liabilities (depreciation and
amortization)............................................. (2,126)
------
Net deferred tax assets..................................... $ --
======
In assessing the realizability of its deferred tax assets, the Company considers
whether it is more likely than not that some or all of such assets will be
realized. As a result of historical operating losses, the Company has fully
reserved its net deferred tax assets as of September 30, 1999.
As of September 30, 1999, the Company had a net operating loss carryforward
("NOLC") for federal income tax purposes of approximately $80,000. The Company
experienced an ownership change as a result of the acquisition of the
Predecessor on July 14, 1999. As a result of the change, the NOLC existing as of
that change date is subject to an annual limitation of approximately $710. As a
result of the ownership change, the Company projects that approximately all but
$17,250 of the NOLC will expire. The Company has reduced its gross deferred tax
asset related to the NOLC to reflect the exclusion of that portion of the loss
that is expected to expire as a result of the change of ownership limitation.
NOTE 10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has operating leases for equipment, office and warehouse space that
include remaining noncancelable minimum rental commitments as follows:
TWELVE MONTHS ENDING
SEPTEMBER 30,
- ------------------------------------------------------------
2000.................................................. $3,388
2001.................................................. 2,456
2002.................................................. 1,386
2003.................................................. 766
2004.................................................. 140
------
Total minimum lease payments.......................... 8,136
Total minimum noncancelable sublease rentals.......... (361)
------
$7,775
======
F-80
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Of the approximate $7,775 in minimum rental commitments, net of sublease
rentals, approximately $553 has been accrued in the accompanying balance sheet
at September 30, 1999, as they represent excess space liabilities.
Rent expense for all operating leases was approximately $1,482 for the period
from January 1, 1999 to July 13, 1999, and $716 for the period from July 14,
1999 to September 30, 1999, net of sublease rentals of approximately $122 for
the period from January 1, 1999 to July 13, 1999, and $46 for the period from
July 14, 1999 to September 30, 1999.
LITIGATION
The Company is a party to litigation arising in the normal course of business.
Management regularly analyzes current information and, as necessary, provides
accruals for probable liabilities on the eventual disposition of these matters.
Management believes that the effect on its results of operations and financial
position, if any, for the disposition of these matters, will not be material.
ROYALTY AGREEMENT
The Company has a minimum royalty commitment under a software license agreement
with monthly payments due through March 2000. Accordingly, the Company has
accrued approximately $482 associated with this royalty agreement at
September 30, 1999.
NOTE 11. RELATED PARTY TRANSACTIONS
STRATEGIC ALLIANCE AGREEMENT
In anticipation of the acquisition of the Predecessor by the Company, the
Predecessor entered into a strategic alliance agreement ("Agreement") with a
then related party. This related party was a creditor, investor and customer of
the Company. As a result of the acquisition, those relationships were terminated
and the agreement was executed to specify terms for the sale of specific
software product and services to the related party.
The Company granted the related party $11,500 in Purchase Credits ("Credits"),
as defined, to be used over four years toward the purchase of non-specialized
products and services. The Credits may be used for up to 60% of the purchase
price of non-specialized products and services, with the balance paid in cash.
The available balance of the Credits shall be permanently reduced by the use of
the Credits and by a certain amount each year. If the cumulative Credits
utilized do not exceed $2,875, $5,750, and $8,625 as of July 14, 2000, 2001, and
2002, respectively, the total Credits will be reduced by such shortfall each
year. If the Credits are not used by the end of the fourth year, they will be
reduced to zero. The Company will account for the Credits by recording them as
discounts to product sales in the future. Under the Agreement, the related party
is obligated to purchase products and services of at least $2,000 during any
one-year period.
TRADEMARK LICENSE AGREEMENT
The Company entered into a trademark license agreement with the Predecessor's
former parent to permit the Company to use specific trademarks until
December 31, 2000 in return for $375 in cash payments. At September 30, 1999,
$250 is accrued in other accrued liabilities to the Predecessor's
F-81
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 11. RELATED PARTY TRANSACTIONS (CONTINUED)
former parent. The $375 is recorded as an intangible asset and is being
amortized over 18 months (see Note 5).
MANAGEMENT AGREEMENT
In connection with the acquisition of the Predecessor by the Company, the
Company authorized CompassLearning to enter into a management agreement with
Ripplewood. This agreement provides for payments to Ripplewood of $500 per year
in exchange for management consulting and financial advisory services.
NOTE 12. EMPLOYEE BENEFIT PLANS
STOCK APPRECIATION RIGHTS
In February 1999, the Predecessor's Board of Directors adopted the 1998 Stock
Appreciation Rights Plan. SAR's in the aggregate of 1,500,000 were created and
1,013,500 SARs, at a base value of $4.00 per SAR, as determined by the Board of
Directors were granted. As a result of the acquisition of the Predecessor by the
Company, the SARs became 100% vested and are no longer subject to value changes.
The SARs were valued at $5.50 per share at the time of the acquisition. In
connection with the acquisition, approximately $1,520 was ascribed to the value
of the SAR's. Of the $1,520 value ascribed to the SAR's, $1,120 was paid to
employees in November 1999 and $400 is being held in escrow for distribution in
June 2000 in accordance with the terms of the acquisition.
SALE BONUS
In January 1999, the Predecessor entered into agreements to pay a sale bonus to
select members of management. As a result of the acquisition of the Predecessor
by the Company, $913 has been accrued at September 30, 1999, and was paid in
November 1999.
401(K) RETIREMENT PLAN
The Company has a retirement savings plan covering substantially all eligible
employees. This 401(k) Plan provides for a 33% matching contribution by the
Company, limited to eligible contributions by the employees. The Company accrued
$175 and $88 during the period January 1, 1999 to July 13, 1999, and July 14,
1999 to September 30, 1999, respectively, for 1999 contributions to be paid in
2000.
F-82
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS OR IN THE ACCOMPANYING
LETTER OF TRANSMITTAL. YOU MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION OR
REPRESENTATIONS. THIS PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL ARE
AN OFFER TO SELL OR TO BUY ONLY THE SECURITIES OFFERED HEREBY, BUT ONLY UNDER
CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS LAWFUL TO DO SO. THE INFORMATION
CONTAINED IN THIS PROSPECTUS AND IN THE ACCOMPANYING LETTER OF TRANSMITTAL ARE
CURRENT ONLY AS OF THEIR RESPECTIVE DATES.
- --------------------------------------------------------------------------------
[LOGO]
- --------------------------------------------------------------------------------
THROUGH AND INCLUDING , (THE 90TH DAY AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENT OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware provides
that WRC Media Inc., CompassLearning, Inc. and Weekly Reader Corporation have
the power to indemnify any director or officer, or former director or officer,
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation) against the expenses (including attorney's fees), judgments, fines
or amounts paid in settlement actually and reasonably incurred by them in
connection with the defense of any action by reason of being or having been
directors or officers, if such person shall have acted in good faith and in a
manner reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding; PROVIDED
that such person had no reasonable cause to believe his conduct was unlawful,
except that, if such action shall be in the right of the corporation, no such
indemnification shall be provided as to any claim, issue or matter as to which
such person shall have been judged to have been liable to the corporation unless
and to the extent that the Court of Chancery of the State of Delaware, or any
court in such suit or action was brought, shall determine upon application that,
in view of all of the circumstances of the case, such person is fairly and
reasonably entitled to indemnify for such expenses as such court shall deem
proper.
WRC Media Inc., CompassLearning, Inc. and Weekly Reader Corporation's
(collectively the "CORPORATION") bylaws provide that subject to Section 3 of
Article VII of the bylaws, the Corporation shall indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which such person reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that such
person's conduct was unlawful.
Subject to Section 3 of Article VII of the bylaws, the Corporation shall
have the power to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that such person is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Corporation; except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall
II-1
have been adjudged to be liable to the Corporation unless and only to the extent
that the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
Any indemnification under Article VII of the bylaws (unless ordered by a
court) shall be made by the Corporation only as authorized in the specific case
upon a determination that indemnification of the present or former director,
officer, employee or agent is proper in the circumstances because such person
has met the applicable standard of conduct set forth in Section 1 or Section 2
of Article VII of the bylaws, as the case may be. Such determination shall be
made, with respect to a person who is a director or officer at the time of such
determination, (1) by a majority vote of the directors who are not parties to
such action, suit or proceeding, even though less than a quorum, or (2) by a
committee of such directors designated by majority vote of such directors, even
though less than a quorum, or (3) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or
(4) by the stockholders. To the extent, however, that a director, officer,
employee or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding described above, or in
defense of any claim, issue or matter therein, such person shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection therewith, without the necessity of authorization in
the specific case.
For purposes of any determination under Section 3 of Article VII of the
bylaws, a person shall be deemed to have acted in good faith and in a manner
such person reasonably believed to be in or not opposed to the best interests of
the Corporation, or, with respect to any criminal action or proceeding, to have
had no reasonable cause to believe such person's conduct was unlawful, if such
person's action is based on the records or books of account of the Corporation
or another enterprise, or on information supplied to such person by the officers
of the Corporation or another enterprise in the course of their duties, or on
the advice of legal counsel for the Corporation or another enterprise or on
information or records given or reports made to the Corporation or another
enterprise by an independent certified public accountant or by an appraiser or
other expert selected with reasonable care by the Corporation or another
enterprise. The term "another enterprise" as used in Section 4 of Article VII of
the bylaws shall mean any other corporation or any partnership, joint venture,
trust, employee benefit plan or other enterprise of which such person is or was
serving at the request of the Corporation as a director, officer, employee or
agent. The provisions of Section 4 of Article VII of the bylaws shall not be
deemed to be exclusive or to limit in any way the circumstances in which a
person may be deemed to have met the applicable standard of conduct set forth in
Section 1 or 2 of Article VII of the bylaws, as the case may be.
Notwithstanding any contrary determination in the specific case under
Section 3 of Article VII of the bylaws, and notwithstanding the absence of any
determination thereunder, any director, officer, employee or agent may apply to
any court of competent jurisdiction in the State of Delaware for indemnification
to the extent otherwise permissible under Sections 1 and 2 of Article VII of the
bylaws. The basis of such indemnification by a court shall be a determination by
such court that indemnification of the director, officer, employee or agent is
proper in the circumstances because such person has met the applicable standards
of conduct set forth in Sections 1 or 2 of Article VII of the bylaws, as the
case may be. Neither a contrary determination in the specific case under
Section 3 of Article VII of the bylaws nor the absence of any determination
thereunder shall be a defense to such application or create a presumption that
the director, officer, employee or agent seeking indemnification has not met any
applicable standard of conduct. Notice of any application for indemnification
pursuant to Section 5 of the bylaws shall be given to the Corporation promptly
upon the filing of such application. If successful, in whole or in part, the
director, officer, employee or agent seeking indemnification shall also be
entitled to be paid the expense of prosecuting such application.
II-2
Expenses incurred in defending or investigating a threatened or pending
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director, officer, employee or agent to
repay such amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the Corporation as authorized in Article VII of
the bylaws.
The indemnification and advancement of expenses provided by or granted
pursuant to Article VII of the bylaws shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any By-law, agreement, contract, vote of stockholders or
disinterested directors or pursuant to the direction (howsoever embodied) of any
court of competent jurisdiction or otherwise, both as to action in such
director's official capacity and as to action in another capacity while holding
such office, it being the policy of the Corporation that indemnification of the
persons specified in Sections 1 and 2 of Article VII of the bylaws shall be made
to the fullest extent permitted by law. The provisions of Article VII of the
bylaws shall not be deemed to preclude the indemnification of any person who is
not specified in Section 1 or 2 of Article VII of the bylaws but whom the
Corporation has the power or obligation to indemnify under the provisions of the
General Corporation Law of the State of Delaware or otherwise.
The Corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise against any liability asserted against
such person and incurred by such person in any such capacity, or arising out of
such person's status as such, whether or not the Corporation would have the
power or the obligation to indemnify such person against such liability under
the provisions of Article VII of the bylaws.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
1.1 Purchase Agreement dated November 10, 1999 among WRC Media
Inc., Weekly Reader Corporation and CompassLearning, Inc.
2.1 Redemption, Stock Purchase and Recapitalization Agreement
dated August 13, 1999 among WRC Media Inc. and Primedia Inc.
3.1 Articles of Incorporation of WRC Media Inc.
3.2 Bylaws of WRC Media Inc.
3.3 Articles of Incorporation of Weekly Reader Corporation
3.4 Bylaws of Weekly Reader Corporation
3.5 Articles of Incorporation of CompassLearning, Inc.
3.6 Bylaws of CompassLearning, Inc.
3.7 Articles of Incorporation of Lifetime Learning Systems, Inc.
3.8 Bylaws of Lifetime Learning Systems, Inc.
3.9* Articles of Incorporation of American Guidance Service, Inc.
3.10 Bylaws of American Guidance Service, Inc.
3.11 Articles of Incorporation of AGS International Sales, Inc.
II-3
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
3.12 Bylaws of AGS International Sales, Inc.
3.13 Articles of Incorporation of World Almanac Education Group,
Inc.
3.14 Bylaws of World Almanac Education Group, Inc.
3.15 Articles of Incorporation of Funk & Wagnalls Yearbook Corp.
3.16 Bylaws of Funk & Wagnalls Yearbook Corp.
3.17 Articles of Incorporation of Gareth Stevens, Inc.
3.18 Bylaws of Gareth Stevens, Inc.
4.1 Indenture dated November 17, among WRC Media Inc., Weekly
Reader Corporation, CompassLearning, Inc. and Bankers Trust
Company
4.2 Registration Rights Agreement dated November 17, 1999 among
WRC Media Inc., Weekly Reader Corporation, CompassLearning,
Inc., Primedia Reference Inc., Funk & Wagnalls Yearbook
Corp., Lifetime Learning Systems, Inc., Gareth Stevens,
Inc., American Guidance Service, Inc. and AGS International
Sales, Inc.
4.3* Certificate of Designations, Preferences and Rights of 15%
Senior Preferred Stock due 2011 of WRC Media Inc.
4.4 WRC Media Inc. Preferred Stockholders Agreement dated
November 17, 1999 between WRC Media Inc., Weekly Reader
Corporation and CompassLearning, Inc. and the preferred
shareholders listed on the signature pages thereto
4.5 Form of Note
4.6 Certificate of Preferred Stock
5.1* Opinion of Cravath, Swaine & Moore regarding the legality of
the new notes and the new senior preferred stock
10.1 Note Agreement, dated as of July 13, 1999, among
CompassLearning, Inc. (as successor by merger to EAC I
Inc.), The Northwestern Mutual Life Insurance Company and
SGC Partners II L.L.C.
10.2 Stock Purchase Agreement, dated July 13, 1999, among
Software Systems Corp., Sylvan Learning Systems, Inc.,
Pyramid Ventures, Inc., GE Capital Equity Investments, Inc.
and CompassLearning, Inc. (as successor by merger to EAC I
Inc.)
10.3 Credit Agreement dated November 17, 1999 among Weekly Reader
Corporation, CompassLearning, Inc., WRC Media Inc., DLJ
Capital Funding, Inc., Bank of America, N.A. and General
Electric Capital Corporation
10.4 Security and Pledge Agreement dated November 17, 1999 among
Weekly Reader Corporation, CompassLearning, Inc., WRC Media
Inc., Primedia Reference Inc., American Guidance Service
Inc., Lifetime Learning Systems, Inc., AGS International
Sales, Inc., Funk & Wagnalls Yearbook Corp. and Gareth
Stevens, Inc.
10.5 Subsidiary Guaranty dated November 17, 1999 among Primedia
Reference Inc., American Guidance Service Inc., Lifetime
Learning Systems, Inc., AGS International Sales, Inc., Funk
& Wagnalls Yearbook Corp. and Gareth Stevens, Inc.
II-4
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
10.6 Stockholders Agreement dated November 17, 1999 among Weekly
Reader Corporation, CompassLearning, Inc., WRC Media Inc.,
EAC III L.L.C., Donaldson, Lufkin & Jenrette and Banc of
America Securities
10.7 Shareholders Agreement dated as of November 17, 1999 among
WRC Media, Weekly Reader Corporation and PRIMEDIA, Inc.
10.8 Employment Agreement dated as of the 17th day of November,
1999 among WRC Media Inc., EAC III L.L.C., CompassLearning,
Inc. and Martin E. Kenney, Jr.
10.9 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Terry Bromberg
10.10 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Peter Bergen
10.11 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Robert Jackson
10.12 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Kenneth Slivken
10.13 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Sandy Maccarone
10.14 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Thaddeus Kozlowski
10.15 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Eric Ecker
10.16 Employment Agreement dated as of the 17th day of November,
1999 among Weekly Reader Corporation and Lester Rackoff
10.17 Employment Agreement dated as of the 14th day of July, 1999
among CompassLearning, Inc. and Therese K. Crane
10.18 Employment Agreement dated as of the 14th day of July, 1999
among CompassLearning, Inc. and Joyce F. Russell
10.19 Employment Agreement dated as of the 17th day of November,
1999 among American Guidance Service Inc. and Larry
Rutkowski
10.20 Employment Agreement dated as of the 17th day of November,
1999 among American Guidance Service, Inc. and Gerald Adams
10.21 Employment Agreement dated as of the 17th day of November,
1999 among Primedia Reference Inc. and Al De Seta
10.22 Employment Agreement dated as of the 17th day of November,
1999 among Primedia Reference Inc. and Janice P. Bailey
10.23 Employment Agreement dated as of the 14th day of July, 1999
among CompassLearning, Inc. and Nancy Lockwood
10.24 Transitional Services Agreement dated as of November 17,
1999, among Primedia Inc., WRC Media Inc. and Weekly Reader
Corporation
II-5
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
10.25 Shareholder Agreement dated as of the 17th day of November,
1999 among EAC III L.L.C., Therese K. Crane and WRC Media
Inc.
10.26 Shareholder Agreement dated as of the 17th day of November,
1999 among EAC III L.L.C., Peter Bergen, Larry Rutkowski, Al
De Seta, Robert Jackson, Kenneth Slivken and WRC Media Inc.
10.27 Shareholder Agreement dated as of the 17th day of November,
1999 among EAC III L.L.C., Martin Kenney and WRC Media Inc.
10.28 Preferred Stock and Warrants Subscription Agreement dated
November 17 between WRC Media Inc., Weekly Reader
Corporation, CompassLearning, Inc. and the other signatories
thereto
12.1 Statement regarding Computation of Ratios of Earnings to
Fixed Charges
21.1 List of Subsidiaries of the Registrants
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of PricewaterhouseCoopers LLP
23.4 Consent of Cravath, Swaine & Moore (included in its opinion
filed as Exhibit 5.1)
23.5 Consent of Simba Information Inc.
25.1 Statement of Eligibility of Bankers Trust Corporation under
the Trust Indenture Act of 1939, as amended, on Form T-1.
27.1 Financial Data Schedule
99.1 Letter of Transmittal for Tender of 15% Senior Preferred
Stock Due 2011 of WRC Media Inc.
99.2 Letter of Transmittal for Tender of 12 3/4% Senior
Subordinated Notes Due 2009 of WRC Media Inc., Weekly Reader
Corporation, and CompassLearning, Inc.
99.3 Notice of Guaranteed Delivery for Tender of 12 3/4% Senior
Subordinated Notes Due 2009 of WRC Media Inc., Weekly Reader
Corporation, and CompassLearning, Inc.
99.4 Notice of Guaranteed Delivery for Tender of 15% Senior
Preferred Stock Due 2011 of WRC Media Inc.
99.5 Notice of Withdrawal of Tender of 12 3/4% Senior
Subordinated Notes Due 2009 of WRC Media Inc., Weekly Reader
Corporation, and CompassLearning, Inc.
99.6 Notice of Withdrawal of Tender of 15% Senior Preferred Stock
Due 2011 of WRC Media Inc.
99.7 Form of Letter to Securities Dealers, Commercial Banks,
Trust Companies and other Nominees for Tender of all
Outstanding 12 3/4% Senior Subordinated Notes Due 2009 of
WRC Media Inc., Weekly Reader Corporation and
CompassLearning, Inc.
99.8 Form of Letter to Securities Dealers, Commercial Banks,
Trust Companies and other Nominees for Tender of all
Outstanding 15% Senior Preferred Stock Due 2011 of WRC Media
Inc.
99.9 Form of Letter to Clients for 12 3/4% Senior Subordinated
Notes Due 2009 of WRC Media Inc.
99.10 Form of Letter to Clients for 15% Senior Preferred Stock Due
2011 of WRC Media Inc.
99.11 Guidelines for Certification of Taxpayer Identification
Number on Substitute Form 99
* To be filed by amendment.
II-6
ITEM 22. UNDERTAKINGS
Each of the undersigned Registrants hereby undertakes (i) to respond to
requests for information that are incorporated by reference into the Prospectus
pursuant to Item 4, 10(b), 11, or 13 of Form S-4, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This undertaking also includes information
in documents filed subsequent to the effective date of the Registration
Statement through the date of responding to the request.
Each of the undersigned Registrants hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
Each of the undersigned Registrants hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be initial bona fide offering thereof.
Each of the undersigned Registrants hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
undersigned undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
Each of the undersigned Registrants hereby undertakes that every prospectus:
(i) that is filed pursuant to the immediately preceding paragraph or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Securities Act of
1933 and is used in connection with an offering of securities subject to
Rule 415, will be filed as a part of an amendment to the registration statement
and will not be used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-7
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON THIS 3RD DAY OF FEBRUARY, 2000.
WRC MEDIA INC.,
By: /s/ MARTIN E. KENNEY, JR.
-----------------------------------------
Name: Martin E. Kenney, Jr.
Title: CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Charles L. Laurey, his or her true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and all
documents relating hereto, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary or advisable to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THIS 3RD DAY OF FEBRUARY, 2000.
SIGNATURE TITLE
--------- -----
/s/ MARTIN E. KENNEY, JR.
- ------------------------------------------- Chief Executive Officer/Director
Martin E. Kenney, Jr.
/s/ TIMOTHY C. COLLINS
- ------------------------------------------- Director
Timothy C. Collins
/s/ D. RONALD DANIEL
- ------------------------------------------- Director
D. Ronald Daniel
/s/ CHARLES L. LAUREY
- ------------------------------------------- Director/Secretary
Charles L. Laurey
/s/ ROBERT S. LYNCH
- ------------------------------------------- Director/Treasurer
Robert S. Lynch
/s/ JAMES N. LANE
- ------------------------------------------- Director
James N. Lane
/s/ WILLIAM F. DAWSON, JR.
- ------------------------------------------- Director
William F. Dawson, Jr.
/s/ RALPH D. CAULO
- ------------------------------------------- Vice-Chairman
Ralph D. Caulo
S-1
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON THIS 3RD DAY OF FEBRUARY, 2000.
WEEKLY READER CORPORATION,
By: /s/ PETER E. BERGEN
-----------------------------------------
Name: Peter E. Bergen
Title: PRESIDENT
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Charles L. Laurey, his or her true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and all
documents relating hereto, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary or advisable to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THIS 3RD DAY OF FEBRUARY, 2000.
SIGNATURE TITLE
--------- -----
/s/ PETER E. BERGEN
- ------------------------------------------- President/Chief Executive Officer
Peter E. Bergen
/s/ LESTER RACKOFF
- ------------------------------------------- Chief Financial Officer
Lester Rackoff
/s/ D. RONALD DANIEL
- ------------------------------------------- Chairman
D. Ronald Daniel
/s/ TIMOTHY C. COLLINS
- ------------------------------------------- Director
Timothy C. Collins
/s/ CHARLES L. LAUREY
- ------------------------------------------- Director/Secretary
Charles L. Laurey
/s/ ROBERT S. LYNCH
- ------------------------------------------- Director/Treasurer
Robert S. Lynch
/s/ MARTIN E. KENNEY, JR.
- ------------------------------------------- Director/Executive Vice President
Martin E. Kenney, Jr.
/s/ JAMES N. LANE
- ------------------------------------------- Director
James N. Lane
/s/ WILLIAM F. DAWSON, JR.
- ------------------------------------------- Director
William F. Dawson, Jr.
S-2
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON THIS 3RD DAY OF FEBRUARY, 2000.
COMPASSLEARNING, INC.,
By: /s/ DR. THERESE K. CRANE
-----------------------------------------
Name: Dr. Therese K. Crane
Title: PRESIDENT
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Charles L. Laurey, his or her true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and all
documents relating hereto, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary or advisable to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THIS 3RD DAY OF FEBRUARY, 2000.
SIGNATURE TITLE
--------- -----
/s/ DR. THERESE K. CRANE
- ------------------------------------------- President
Dr. Therese K. Crane
/s/ JOYCE F. RUSSELL
- ------------------------------------------- Chief Financial Officer
Joyce F. Russell
/s/ TIMOTHY C. COLLINS
- ------------------------------------------- Director
Timothy C. Collins
/s/ D. RONALD DANIEL
- ------------------------------------------- Director
D. Ronald Daniel
/s/ CHARLES L. LAUREY
- ------------------------------------------- Director/Secretary
Charles L. Laurey
/s/ ROBERT S. LYNCH
- ------------------------------------------- Director/Treasurer
Robert S. Lynch
/s/ MARTIN E. KENNEY, JR.
- ------------------------------------------- Director/Executive Vice President
Martin E. Kenney, Jr.
/s/ JAMES N. LANE
- ------------------------------------------- Director
James N. Lane
/s/ WILLIAM F. DAWSON, JR.
- ------------------------------------------- Director
William F. Dawson, Jr.
S-3
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON THIS 3RD DAY OF FEBRUARY, 2000.
LIFETIME LEARNING SYSTEMS, INC.,
By: /s/ PETER E. BERGEN
-----------------------------------------
Name: Peter E. Bergen
Title: PRESIDENT
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Charles L. Laurey, his or her true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and all
documents relating hereto, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary or advisable to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THIS 3RD DAY OF FEBRUARY, 2000.
SIGNATURE TITLE
--------- -----
/s/ PETER E. BERGEN
- ------------------------------------------- Chief Executive Officer/President
Peter E. Bergen
/s/ LESTER RACKOFF
- ------------------------------------------- Chief Financial Officer
Lester Rackoff
/s/ D. RONALD DANIEL
- ------------------------------------------- Chairman
D. Ronald Daniel
/s/ TIMOTHY C. COLLINS
- ------------------------------------------- Director
Timothy C. Collins
/s/ CHARLES L. LAUREY
- ------------------------------------------- Director/Secretary
Charles L. Laurey
/s/ ROBERT S. LYNCH
- ------------------------------------------- Director/Treasurer
Robert S. Lynch
/s/ MARTIN E. KENNEY, JR.
- ------------------------------------------- Director
Martin E. Kenney, Jr.
/s/ JAMES N. LANE
- ------------------------------------------- Director
James N. Lane
/s/j WILLIAM F. DAWSON, JR.
- ------------------------------------------- Director
William F. Dawson, Jr.
S-4
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON THIS 3RD DAY OF FEBRUARY, 2000.
AMERICAN GUIDANCE SERVICE, INC.,
By: /s/ LARRY RUTKOWSKI
-----------------------------------------
Name: Larry Rutkowski
Title: PRESIDENT
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Charles L. Laurey, his or her true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and all
documents relating hereto, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary or advisable to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THIS 3RD DAY OF FEBRUARY, 2000.
SIGNATURE TITLE
--------- -----
/s/ LARRY RUTKOWSKI
- ------------------------------------------- President/Chief Executive Officer
Larry Rutkowski
/s/ GERALD G. ADAMS
- ------------------------------------------- Chief Financial Officer
Gerald G. Adams
/s/ D. RONALD DANIEL
- ------------------------------------------- Chairman
D. Ronald Daniel
/s/ TIMOTHY C. COLLINS
- ------------------------------------------- Director
Timothy C. Collins
/s/ CHARLES L. LAUREY
- ------------------------------------------- Director/Secretary
Charles L. Laurey
/s/ ROBERT S. LYNCH
- ------------------------------------------- Director/Treasurer
Robert S. Lynch
/s/ MARTIN E. KENNEY, JR.
- ------------------------------------------- Director
Martin E. Kenney, Jr.
/s/ JAMES N. LANE
- ------------------------------------------- Director
James N. Lane
/s/ WILLIAM F. DAWSON, JR.
- ------------------------------------------- Director
William F. Dawson, Jr.
S-5
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON THIS 3(RD) DAY OF FEBRUARY, 2000.
AGS INTERNATIONAL SALES, INC.,
By: /s/ LARRY RUTKOWSKI
-----------------------------------------
Name: Larry Rutkowski
Title: PRESIDENT
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Charles L. Laurey, his or her true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and all
documents relating hereto, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary or advisable to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THIS 3(RD) DAY OF FEBRUARY, 2000.
SIGNATURE TITLE
--------- -----
/s/ LARRY RUTKOWSKI
- ------------------------------------------- President/Chief Executive Officer
Larry Rutkowski
/s/ GERALD G. ADAMS
- ------------------------------------------- Chief Financial Officer
Gerald G. Adams
/s/ D. RONALD DANIEL
- ------------------------------------------- Chairman
D. Ronald Daniel
/s/ TIMOTHY C. COLLINS
- ------------------------------------------- Director
Timothy C. Collins
/s/ CHARLES L. LAUREY
- ------------------------------------------- Director/Secretary
Charles L. Laurey
/s/ ROBERT S. LYNCH
- ------------------------------------------- Director/Treasurer
Robert S. Lynch
/s/ MARTIN E. KENNEY, JR.
- ------------------------------------------- Director
Martin E. Kenney, Jr.
/s/ JAMES N. LANE
- ------------------------------------------- Director
James N. Lane
/s/ WILLIAM F. DAWSON, JR.
- ------------------------------------------- Director
William F. Dawson, Jr.
S-6
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON THIS 3RD DAY OF FEBRUARY, 2000.
WORLD ALMANAC EDUCATION GROUP, INC.,
By: /s/ ALFRED DE SETA
-----------------------------------------
Name: Alfred De Seta
Title: PRESIDENT
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Charles L. Laurey, his or her true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and all
documents relating hereto, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary or advisable to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THIS 3RD DAY OF FEBRUARY, 2000.
SIGNATURE TITLE
--------- -----
/s/ ALFRED DE SETA
- ------------------------------------------- President
Alfred De Seta
/s/ JANICE P. BAILEY
- ------------------------------------------- Chief Financial Officer
Janice P. Bailey
/s/ D. RONALD DANIEL
- ------------------------------------------- Director
D. Ronald Daniel
/s/ TIMOTHY C. COLLINS
- ------------------------------------------- Director
Timothy C. Collins
/s/ CHARLES L. LAUREY
- ------------------------------------------- Director/Secretary
Charles L. Laurey
/s/ ROBERT S. LYNCH
- ------------------------------------------- Director/Treasurer
Robert S. Lynch
/s/ MARTIN E. KENNEY, JR.
- ------------------------------------------- Director
Martin E. Kenney, Jr.
/s/ JAMES N. LANE
- ------------------------------------------- Director
James N. Lane
/s/ WILLIAM F. DAWSON, JR.
- ------------------------------------------- Director
William F. Dawson, Jr.
S-7
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON THIS 3RD DAY OF FEBRUARY, 2000.
FUNK & WAGNALLS YEARBOOK CORP.,
By: /s/ ALFRED DE SETA
-----------------------------------------
Name: Alfred De Seta
Title: PRESIDENT
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Charles L. Laurey, his or her true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and all
documents relating hereto, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary or advisable to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THIS 3RD DAY OF FEBRUARY, 2000.
SIGNATURE TITLE
--------- -----
/s/ ALFRED DE SETA
- ------------------------------------------- President
Alfred De Seta
/s/ JANICE P. BAILEY
- ------------------------------------------- Chief Financial Officer
Janice P. Bailey
/s/ D. RONALD DANIEL
- ------------------------------------------- Chairman
D. Ronald Daniel
/s/ TIMOTHY C. COLLINS
- ------------------------------------------- Director
Timothy C. Collins
/s/ CHARLES L. LAUREY
- ------------------------------------------- Director/Secretary
Charles L. Laurey
/s/ ROBERT S. LYNCH
- ------------------------------------------- Director/Treasurer
Robert S. Lynch
/s/ MARTIN E. KENNEY, JR.
- ------------------------------------------- Director/Executive Vice President
Martin E. Kenney, Jr.
/s/ JAMES N. LANE
- ------------------------------------------- Director
James N. Lane
/s/ WILLIAM F. DAWSON, JR.
- ------------------------------------------- Director
William F. Dawson, Jr.
S-8
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON THIS 3RD DAY OF FEBRUARY, 2000.
GARETH STEVENS, INC.,
By: /s/ ALFRED DE SETA
-----------------------------------------
Name: Alfred De Seta
Title: PRESIDENT
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Charles L. Laurey, his or her true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and all
documents relating hereto, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary or advisable to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THIS 3RD DAY OF FEBRUARY, 2000.
NAME TITLE
---- -----
/s/ ALFRED DE SETA
- ------------------------------------------- President
Alfred De Seta
/s/ JANICE P. BAILEY
- ------------------------------------------- Chief Financial Officer
Janice P. Bailey
/s/ TIMOTHY C. COLLINS
- ------------------------------------------- Director
Timothy C. Collins
/s/ CHARLES L. LAUREY
- ------------------------------------------- Director/Secretary
Charles L. Laurey
/s/ ROBERT S. LYNCH
- ------------------------------------------- Director/Treasurer
Robert S. Lynch
/s/ MARTIN E. KENNEY, JR.
- ------------------------------------------- Director
Martin E. Kenney, Jr.
/s/ JAMES N. LANE
- ------------------------------------------- Director
James N. Lane
S-9