UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2000 Commission File No. 333-9619
WRC MEDIA INC. WEEKLY READER CORPORATION
(Exact name of Registrant as specified in its charter) (Exact name of Registrant as specified in its charter)
DELAWARE DELAWARE
(State or other jurisdiction of incorporation (State or other jurisdiction of incorporation
or organization) or organization)
2731 2721
(Primary Standard Industrial Classification Number) (Primary Standard Industrial Classification Number)
13-4066536 13-3603780
(I.R.S. Employer Identification Number) (I.R.S. Employer Identification Number)
COMPASSLEARNING, INC.
(Exact name of Registrant as specified in its charter)
2731
DELAWARE
(State or other jurisdiction of incorporation or
organization)
7372
(Primary Standard Industrial Classification Number)
13-4066535
(I.R.S. Employer Identification Number)
WRC MEDIA INC. WEEKLY READER CORPORATION
512 7th AVENUE, 23RD FLOOR 512 7th AVENUE, 23RD FLOOR
NEW YORK, NY 10018 NEW YORK, NY 10018
(212) 768-1150 (212) 768-1150
COMPASSLEARNING, INC.
512 7th AVENUE, 23RD FLOOR
NEW YORK, NY 10018
(212) 768-1150
(Address, including zip code, and telephone number, including area code, of each
Registrant's principal executive offices)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
None
- ------------------------------------------------------------------------------------------------------------
TITLE OF CLASS | NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------------------------------------------------------------------------------------------------
12 3/4% Senior Subordinated Notes due 2009 | OVER-THE-COUNTER MARKET
- ------------------------------------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No_
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. 'ch'
EXPLANATORY STATEMENT
WRC Media Inc., Weekly Reader Corp. ("Weekly Reader") and CompassLearning Inc.
hereby amend Part II, Item 8 - Financial Statements and Supplementary Data of
their Form 10-K for the fiscal year ended December 31, 2000, as filed with the
Securities and Exchange Commission on March 30, 2001, to insert the following
line item in the WEEKLY READER AND SUBSIDIARIES' CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' DEFICIT FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2000,
Balance, December 31, 1998: "Preferred stock dividends.........(1,406)".
PART II
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements and
Financial Statement Schedule
WRC MEDIA INC. AND SUBSIDIARIES (CO-ISSUER OF SENIOR
SUBORDINATED NOTES):
Report of Independent Public Accountants--Arthur Andersen
LLP
Consolidated Balance Sheets as of December 31, 1999 and 2000
Consolidated Statements of Operations for the period from
May 14, 1999 (inception) to December 31, 1999 and for the Year
Ended December 31, 2000
Consolidated Statements of Stockholders' Equity from
May 14, 1999 (inception) to December 31, 1999 and for the Year
Ended December 31, 2000
Consolidated Statements of Cash Flows for the period from
May 14, 1999 (inception) through December 31, 1999 and for
the Year Ended December 31, 2000
Notes to Consolidated Financial Statements
WEEKLY READER CORPORATION AND SUBSIDIARIES (CO-ISSUER OF
SENIOR SUBORDINATED NOTES):
Report of Independent Public Accountants--Arthur Andersen
LLP
Report of Independent Auditors--Deloitte & Touche LLP
Consolidated Balance Sheets as of December 31, 1999 and
2000
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1999 and 2000
Consolidated Statements of Stockholders' Deficit for the
Years Ended December 31, 1998, 1999 and 2000
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1999 and 2000
Notes to Consolidated Financial Statements
COMPASSLEARNING, INC. (CO-ISSUER OF SENIOR SUBORDINATED NOTES):
Report of Independent Public Accountants--Arthur Andersen
LLP
Report of Independent Accountants--PricewaterhouseCoopers
LLP
Balance Sheets as of December 31, 1999 and 2000
Statements of Operations and Comprehensive Loss for the
Year Ended December 31, 1998, for the period from
January 1, 1999 to July 13, 1999, for the period from
July 14, 1999 to December 31, 1999 and for the Year Ended
December 31, 2000
Statements of Stockholders' Deficit for the Year Ended
December 31, 1998 for the period from January 1, 1999
to July 13, 1999, for the period from May 12, 1999 to
December 31, 1999 and for the Year Ended December 31, 2000
Statements of Cash Flows for the Year Ended December 31, 1998,
for the period from January 1, 1999 to July 13, 1999, for the
period from July 14, 1999 to December 31, 1999 and for the Year
Ended December 31, 2000
Notes to Financial Statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of WRC Media Inc.:
We have audited the accompanying consolidated balance sheets of WRC Media Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1999 and 2000, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the period from May 14, 1999 (inception) through December 31, 1999 and
for the year ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes 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 WRC Media Inc. and subsidiaries
as of December 31, 1999 and 2000, and the results of their operations and their
cash flows for the period from May 14, 1999 through December 31, 1999 and for
the year ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 23, 2001
WRC MEDIA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 2000
(dollars in thousands, except share data)
ASSETS
CURRENT ASSETS: 1999 2000
-------- --------
Cash and cash equivalents $ 15,521 $ 2,968
Accounts receivable, net (Note 3) 47,394 42,930
Inventories, net (Notes 2 and 4) 14,682 14,605
Prepaid expenses 2,961 3,454
Other current assets (Note 18) 20,258 17,409
-------- --------
Total current assets 100,816 81,366
PROPERTY AND EQUIPMENT, net (Notes 2 and 7) 7,898 8,105
PURCHASED SOFTWARE, net (Note 5) 6,566 4,709
GOODWILL, net (Notes 1 and 2) 295,384 229,498
IDENTIFIED INTANGIBLE ASSETS, net (Note 6) 153,676 174,068
DEFERRED FINANCING COSTS, net (Note 2) 7,843 6,693
OTHER ASSETS 46 25
-------- --------
Total assets $572,229 $504,464
======== ========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
WRC MEDIA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 2000
(dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES: 1999 2000
--------- ---------
Accounts payable $ 21,999 $ 19,767
Accrued payroll, commissions and benefits 10,917 8,495
Current portion of deferred revenue (Note 2) 35,961 36,455
Other accrued liabilities (Note 8) 38,990 39,991
Current portion of long-term debt (Note 9) 2,939 4,488
--------- ---------
Total current liabilities 110,806 109,196
DEFERRED REVENUE, net of current portion (Note 2) 1,780 1,868
DUE TO RELATED PARTY 2,946 2,946
LONG-TERM DEBT (Note 9) 273,617 269,469
OTHER LONG-TERM LIABILITIES 14 --
--------- ---------
Total liabilities 389,163 383,479
--------- ---------
15% SERIES B PREFERRED STOCK SUBJECT TO REDEMPTION, including
accrued dividends (Note 10) (Liquidation preference of $75,000
plus accrued dividends)
64,767 77,796
--------- ---------
WARRANTS ON PREFERRED STOCK 11,751 11,751
--------- ---------
COMMON STOCK SUBJECT TO REDEMPTION (Note 11) 1,265 1,190
--------- ---------
STOCKHOLDERS' EQUITY (Note 14):
Common stock, ($.01 par value, 20,000,000 shares authorized; 6,855,853 69 69
and 6,851,821 outstanding in 1999 and 2000, respectively)
Additional paid-in capital 126,063 126,063
Accumulated comprehensive income -- 9
Accumulated deficit (20,849) (95,893)
--------- ---------
Total stockholders' equity 105,283 30,248
--------- ---------
Total liabilities and stockholders' equity $ 572,229 $ 504,464
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
WRC MEDIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM MAY 14, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999 AND FOR
THE YEAR ENDED DECEMBER 31, 2000
(dollars in thousands)
1999 2000
--------- ---------
REVENUES, net $ 50,570 $ 218,847
COST OF GOODS SOLD 16,102 68,512
--------- ---------
Gross profit 34,468 150,335
--------- ---------
OPERATING COSTS AND EXPENSES:
Sales and marketing 14,030 49,148
Research and development 3,861 4,949
Distribution, circulation and fulfillment 1,959 13,019
Editorial 1,374 10,519
General and administrative 5,571 25,233
Write-off of in-process research and development costs (Note 13) 9,000 --
Depreciation and amortization 6,243 73,798
--------- ---------
Total operating costs and expenses 42,038 176,666
--------- ---------
Loss from operations (7,570) (26,331)
INTEREST EXPENSE, INCLUDING AMORTIZATION OF (8,457) (35,315)
DEFERRED FINANCING COSTS
OTHER, net 32 266
--------- ---------
Loss before income tax provision and extraordinary item (15,995) (61,380)
INCOME TAX PROVISION -- 635
--------- ---------
Loss before extraordinary item (15,995) (62,015)
EXTRAORDINARY ITEM - WRITE-OFF OF DEFERRED FINANCING COSTS (3,336) --
--------- ---------
Net loss $ (19,331) $ (62,015)
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
WRC MEDIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FROM MAY 14, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999 AND FOR THE YEAR ENDED
DECEMBER 31, 2000
(in thousands)
Common Stock Additional
------------------- Paid-in Accumulated Comprehensive
Shares Value Capital Deficit Income
-------- -------- -------- ----------- -------------
Balance at May 14, 1999- -- $ -- $ -- $ -- $ --
Issuance of common stock, net 6,649 67 122,354 -- --
Value of stock issued in connection
with senior notes 207 2 3,709 -- --
Net loss -- -- -- (19,331) --
Preferred stock dividends -- -- -- (1,406) --
Accretion of preferred stock warrants -- -- -- (112) --
-------- -------- -------- -------- --------
Balance at December 31, 1999- 6,856 69 126,063 (20,849) --
Acquisition of common stock
subject to redemption (4) -- -- -- --
Net loss -- -- -- (62,015)
Preferred stock dividends -- -- -- (12,122) --
Accretion of preferred stock -- -- -- (908) --
Unrealized gain on investments -- -- -- -- 9
-------- -------- -------- -------- --------
Balance at December 31, 2000- 6,852 $ 69 $126,063 $(95,893) $ 9
======== ======== ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
WRC MEDIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM MAY 14, 1999
(INCEPTION) THROUGH DECEMBER 31, 1999 AND FOR THE YEAR ENDED DECEMBER 31, 2000
(dollars in thousands)
1999 2000
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $ (19,331) $ (62,015)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 9,067 75,966
Write-off of in-process research and development costs 9,000 --
Extraordinary item 3,336 --
Gain on disposition of marketable securities -- (16)
Amortization of debt discount -- 339
Amortization of deferred financing fees 555 1,150
Changes in assets and liabilities-
Decrease in accounts receivable 9,354 4,464
Decrease in inventories 34 77
(Increase) decrease in prepaid expenses and other current assets (882) 2,377
Increase in goodwill and other intangibles (864) (25,578)
Increase (decrease) in accounts payable 3,345 (2,232)
Increase in due to related party 2,161 --
Increase (decrease) in current and noncurrent deferred revenue (5,189) 582
Decrease in non-current assets (46) (230)
Increase (decrease) in current and noncurrent accrued liabilities 4,964 (1,435)
--------- ---------
Net cash provided by (used in) operating activities 15,504 (6,551)
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of business, net of cash acquired (466,919) --
Capital expenditures (700) (3,005)
Proceeds from disposition of securities -- 16
--------- ---------
Net cash used in investing activities (467,619) (2,989)
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net proceeds from long-term debt 303,894 --
Repayments of long-term debt (27,338) (2,938)
Increase in deferred financing fees (11,317) --
Proceeds from sale of preferred stock 75,000 --
Proceeds from issuance of common stock 123,686 --
Purchase of common stock subject to redemption -- (75)
Proceeds from issuance of warrants 3,711 --
--------- ---------
Net cash provided by (used in) financing activities 467,636 (3,013)
--------- ---------
Increase (decrease) in cash and cash equivalents 15,521 (12,553)
CASH AND CASH EQUIVALENTS, beginning of period -- 15,521
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 15,521 $ 2,968
========= =========
1999 2000
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 4,220 $ 33,417
========= =========
Cash paid during the year for income taxes $ -- $ 635
========= =========
Preferred stock dividends accrued $ 1,406 $ 12,122
========= =========
Accretion of preferred stock $ 112 $ 908
========= =========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
WRC MEDIA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS ORGANIZATION
The accompanying consolidated financial statements include the accounts of WRC
Media Inc. (WRC) and its subsidiaries - Weekly Reader Corporation ("Weekly
Reader"), and CompassLearning, Inc ("Compass"). WRC was incorporated on May 14,
1999. The term "Company" refers to WRC and its subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
Business
The Company is in the business of developing, publishing and marketing print and
electronic supplemental education materials. Certain of the Company's products
have been sold in the education marketplace for as long as 70 years. The
Company's customers are primarily concentrated within the United States.
Acquisitions
On July 14, 1999, WRC acquired Compass in a business combination accounted for
as a purchase.
The total cost of the acquisition of Compass was $61,935 (including $2,687 of
acquisition costs) and was allocated to the assets acquired and liabilities
assumed based on their estimated fair values as follows-
Net liabilities assumed $ (6,290)
Purchased software 7,430
In-process research and development 9,000
Other intangible assets 24,700
Goodwill 27,095
--------
$ 61,935
========
On November 17, 1999, WRC completed the recapitalization and purchase of Weekly
Reader and its subsidiaries. As a result of these transactions, WRC owns 94.9%
and PRIMEDIA Inc. ("PRIMEDIA") owns 5.1% of the common stock of Weekly Reader.
The recapitalization and purchase of Weekly Reader consisted of the following:
o The issuance of $152,000 in aggregate principal amount of 12 3/4%
Senior Subordinated Notes due 2009 by WRC, Weekly Reader and
Compass.
o WRC loaned Weekly Reader $112,363 of the principal amount of the 12
3/4% Senior Subordinated Notes.
o The completion of the senior bank credit facility by WRC, Weekly
Reader and Compass as borrowers, comprising of a $30,000 revolving
credit facility, a $31,000 term A loan and a $100,000 term B loan.
o The issuance of $75,000 of 15% Series B Preferred Stock by WRC and
the related issuance of Weekly Reader Preferred Stock to WRC, with
substantially identical terms to the WRC preferred stock.
o The purchase by Weekly Reader of 71.7% of its common stock
outstanding from PRIMEDIA for $287,363.
WRC MEDIA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
o The purchase by WRC for $107,638 of the remaining 23.2% of Weekly
Reader's common stock outstanding.
The acquisition of 94.9% of the stock of Weekly Reader by WRC Media has been
reflected as a business combination accounted for as a purchase. The total cost
of the acquisition, including transaction costs aggregated $429,201. An
allocation of the purchase cost has been allocated to major categories of assets
and liabilities acquired based on estimated fair market value as follows-
Net assets acquired (including acquired goodwill) $142,786
Identified intangibles 240,019
Goodwill 46,396
--------
$429,201
========
During 2000, the allocation of the purchase price was finalized. The most
significant adjustment to the preliminary allocation was the valuation of the
non-compete agreement with PRIMEDIA. The net effect of the allocation was the
reclass of approximately $76,000 related to the non-compete agreement from
goodwill.
Unaudited proforma information, assuming that the acquisition of Compass and the
recapitalization and acquisition of Weekly Reader had occurred on January 1,
1999, is as follows:
Year Ended
December 31, 1999
-----------------
Revenues $ 217,982
Gross profit 148,844
Loss from operations (24,331)
Loss before extraordinary item (58,606)
Net loss (61,942)
The unaudited pro forma information is presented for informational purposes only
and does not purport to present what the results of operations would have been
had the acquisition of Compass and the acquisition and recapitalization of
Weekly Reader, in fact, occurred on January 1, 1999 or to project the results of
operations for any future period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
WRC MEDIA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
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 allowance for excess or obsolete
inventory as necessary.
Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by the
Company using available market information and valuation methodologies.
Considerable judgment is required in estimating fair values. Accordingly, the
estimates may not be indicative of the amounts the Company could realize in a
current market exchange. The carrying values of cash, accounts receivable, and
accounts payable approximate fair value based on the short-term nature of these
financial instruments.
The carrying values of the Company's Senior Bank Credit Facilities are assumed
to approximate the market value due to the variable interest rates on these
instruments. The estimated fair values of other financial instruments as of
December 31, 2000 are as follows:
Carrying Amount Fair Value
--------------- ----------
12 3/4 % Senior Subordinated Notes $146,194 $121,600
There is no market value information available for the preferred stock and a
reasonable estimate could not be made without incurring excessive costs.
Securities
The Company classifies its securities as available for sale. Accordingly, the
securities are reflected 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
R&D costs are charged to expense when incurred. 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 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.
WRC MEDIA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
Goodwill
Goodwill represents the excess of the purchase price of companies acquired over
the fair value of their net assets at the acquisition date. Goodwill associated
with the acquisition of Compass is being amortized on a straight-line basis over
7 years while goodwill associated with the acquisition of Weekly Reader is being
amortized on a straight-line basis over 40 years. Goodwill amortization charged
to operations from the period from May 14, 1999 (inception) through December 31,
1999 was $2,271 and for the year ended December 31, 2000 was $9,728.
Deferred Financing Fees
Deferred financing fees are related to direct costs paid by the Company in
connection with their financing agreements. These costs are deferred and are
being amortized on a straight-line basis over the term of the related debt.
Amortization expense charged to operations for the period from November 17, 1999
(the date of the financing) through December 31, 1999 was $138 and for the year
ended December 31, 2000 was $1,150.
Property and Equipment
Property and equipment 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
In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, long-lived assets and
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. The Company does not believe that any
events or circumstances have occurred in 2000 which would indicate an impairment
loss.
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.
The Company recognizes software-based product 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 significant
post-delivery obligations exist, revenues are deferred until no significant
obligations remain. 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.
WRC MEDIA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
For contracts with multiple obligations (e.g., deliverable and undeliverable
products, maintenance and other postcontract support), 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.
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.
Expense Recognition and Direct-Response Advertising Costs
Marketing, selling, distribution, editorial, and other general and
administrative expenses are generally expensed as incurred. 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. Capitalized editorial costs are recorded as prepublication costs. As of
December 31, 1999 and 2000, other intangible assets on the accompanying balance
sheets, include prepublication costs, net of amortization, of $5,337 and $9,366.
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 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 ten 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. Direct-response
advertising costs, net of accumulated amortization of approximately $2,700 and
$2,887 at December 31, 1999 and 2000, respectively, are included in other
intangible assets on the accompanying consolidated balance sheets.
Recent Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." In June 2000,
the Financial Accounting Standards Board Issued SFAS No. 138, which amended SFAS
No. 133. These statements establish accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or a liability measured at its fair value. The statements require that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on the
hedged item in the income statement and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. The Company is required to adopt these standards in the first
quarter of 2001. Based on Management's current understanding of the statements,
adoption is not expected to have a material impact on the Company's financial
statements.
WRC MEDIA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB
101 addresses various topics in revenue recognition including the recognition of
revenue for contracts involving multiple deliverables. The adoption of SAB 101,
which the Company adopted during 2000, did not have a material impact on the
Company's financial statements.
Concentration of Credit Risk
The Company's customers include schools and other institutions. Accounts
receivable are generally unsecured and a provision for estimated doubtful
accounts is provided. There are no concentrations of business transacted with a
particular customer or supplier, nor concentrations of revenue from a particular
service or geographic area.
Segment Reporting
The Company has determined that it has one reportable segment in accordance with
SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information," which is educational publishing.
Reclassifications
Certain reclassifications have been made to the prior years consolidated
financial statements to conform them to the current year presentation.
3. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1999 and 2000, are as follows:
1999 2000
------- -------
Accounts receivable-gross $53,274 $47,387
Less-
Allowance for doubtful accounts 2,306 1,794
Allowance for returns and rebates 3,574 2,663
------- -------
$47,394 $42,930
======= =======
4. INVENTORIES
Inventories at December 31, 1999 and 2000, are as follows:
1999 2000
------- -------
Finished goods $16,293 $16,173
Raw materials 1,183 1,471
Less - allowance for obsolescence 2,794 3,039
------- -------
$14,682 $14,605
======= =======
WRC MEDIA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
5. PURCHASED SOFTWARE
Purchased software at December 31, 1999 and 2000, consists of the following:
1999 2000
------ ------
Purchased software $7,430 $7,430
Less - accumulated amortization 864 2,721
------ ------
$6,566 $4,709
====== ======
Amortization of purchased software and capitalized software development costs
are included in cost of products sold.
6. IDENTIFIED INTANGIBLE ASSETS
Identified intangible assets consist of identified intangible assets resulting
from the acquisitions described in Note 1. As of December 31, 1999 and 2000,
identified intangible assets consisted of the following:
-----------------------------------------------------------------------
December 31, 1999 December 31, 2000
-----------------------------------------------------------------------
Amount Life Amount Life
-----------------------------------------------------------------------
Customer lists $ 62,911 7-9 Years $ 62,911 7-9 Years
Trademarks 49,991 1 1/2 to 40 Years 49,991 1 1/2 to 40 Years
Copyrights 14,633 8 Years 14,633 8 Years
Product titles 13,475 7 Years 13,475 7 Years
Pre-publication costs 5,952 5 Years 11,786 5 Years
Tradename 3,520 4 Years 3,520 4 Years
Workforce in place 2,980 3 Years 2,980 3 Years
Direct response advertising 3,877 1 Year 7,426 1 Year
Non-compete agreements (See Note 1) 1,107 2 Years 77,550 2 Years
Databases 560 4-10 Years 560 4-10 Years
Other 61 174
---------- ----------
Total 159,067 245,006
Less - accumulated amortization (5,391) (70,938)
---------- ----------
Total $153,676 $ 174,068
========== ==========
WRC MEDIA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
7. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 2000, are as follows:
-----------------------------------------------------------------
December 31, 1999 December 31, 2000
-----------------------------------------------------------------
Amount Life Amount Life
-----------------------------------------------------------------
Land and buildings $ 707 $ 707
Machinery, equipment and
computer equipment 4,840 3-10 Years 6,567 3-10 Years
Leasehold improvements 833 3 Years 1,223 3 Years
Furniture and fixtures 690 3-10 Years 1,418 3-10 Years
Internal use software 1,368 5 Years 1,471 5 Years
------- -------
Total 8,438 11,386
Less - accumulated depreciation
and amortization (540) (3,281)
------- -------
Property and equipment, net $ 7,898 $ 8,105
====== =======
8. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 1999 and 2000, are as follows:
1999 2000
------- -------
Rabbi Trust (Note 18) $18,220 $16,757
Royalties 1,973 1,284
Accrued acquisition costs 6,243 11,510
Accrued interest payable 3,682 4,421
Pension liability (Note 16) 1,635 1,978
Taxes payable, other than income 547 513
Other 6,690 3,528
------- -------
$38,990 $39,991
======= =======
9. LONG-TERM DEBT
In connection with the recapitalization and purchase of Weekly Reader during
November 1999, the Company, Weekly Reader and Compass entered into the Senior
Subordinated Note and Senior Bank Credit Facility.
WRC MEDIA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
At December 31, long-term debt consists of the following:
As of December 31, 1999 As of December 31, 2000
- ------------------------------------------------------------------------------------------------------------------------
Debt Face Unamortized Principal Book Face Unamortized Principal Book
Instrument Value Discount Payments Value Value Discount Payments Value
- ------------------------------------------------------------------------------------------------------------------------
Senior Bank-
Term A (b) $ 31,000 $ -- $ 387 $ 30,613 $ 30,613 $ -- $ 1,938 $ 28,675
Senior Bank-
Term B (b) 100,000 -- 250 99,750 99,750 -- 1,000 98,750
Revolving
Credit (b) -- -- -- -- -- -- -- --
Senior
Subordinated
Notes (a) 152,000 5,807 -- 146,193 152,000 5,468 -- 146,532
------------------------------------------------------------------------------------------------------
Total debt 283,000 5,807 637 276,556 282,363 5,468 2,938 273,957
Less - current
portion (2,939) -- -- (2,939) 4,488 -- -- 4,488
------------------------------------------------------------------------------------------------------
Long-term
debt $ 280,061 $ 5,807 $ 637 $ 273,617 $ 277,875 $ 5,468 $ 2,938 $ 269,469
========= ========= ========= ========= ========= ========= ========= =========
(a) In connection with the recapitalization of the Company in 1999, the
Company, Weekly Reader and Compass were all co-issuers of 152,000 units
consisting of $152,000 in aggregate principal amount of 12 3/4% Senior
Subordinated Notes (the Notes) due 2009 and 205,656 shares of common
stock. Interest on the Notes is payable semi-annually, on May 15 and
November 15. For the year ending December 31, 2000, $19,380 of interest
was paid on the Notes.
Based upon an independent valuation, $148,289 was allocated to the value
of the Notes while $3,711 was the value ascribed to the common stock. The
Notes were issued net of a $2,096 discount, which is being accreted to
maturity using the effective interest method.
Prior to November 15, 2002, the Company may redeem up to 35% of the Notes
with net cash proceeds of certain sales of equity securities at a price of
112.75% of the principal amount, plus accrued and unpaid interest.
On or after November 15, 2004, the Company may redeem the Notes at a
redemption price of 106.375% of the principal amount, plus accrued
interest thereon decreasing annually to 100% in 2007 and thereafter.
The Notes are unconditionally guaranteed by the subsidiaries of the
Company.
(b) The Senior Bank Credit Facilities are comprised of the $30,000 revolving
credit facility maturing in 2005, the $31,000 term loan A facility
maturing in 2005 and the $100,000 term loan B facility maturing in 2006.
During 2000, the Company applied for and received an annually renewable
stand-by letter of credit in the amount of $2,000 in connection with a
real estate lease entered into by the Company. While this letter of credit
is in effect, the Company's available borrowing under the revolving credit
facility is reduced by $2,000. As of December 31, 2000 there had been no
drawings against this letter of credit. As of December 31, 2000, the
revolving credit facility balance was $0. The term loan A facility and the
term loan B facility amortize in quarterly installments.
WRC MEDIA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
Loans under the senior bank credit facilities bear interest at a rate per annum
equal to the following:
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). As of December 31, 2000,
term loan A loans outstanding had interest rates that ranged from
9.89% to 10.05%.
2. For the term loan B facility, the LIBO rate plus 4.00% or the
alternate base rate plus 3.00%. As of December 31, 2000, term loan B
loans outstanding had interest rates that ranged from 10.64% to
10.76%.
In addition to paying interest on outstanding loans under the Senior Bank
Credit Facilities, the Company is required to pay a commitment fee to the
lenders associated with the revolving credit facility in respect to the
unused commitments thereunder at a rate of 0.5% per annum (subject to
performance-based step downs).
The Senior Bank Credit Facilities are subject to mandatory prepayment with:
o the proceeds of the incurrence of certain indebtedness
o the proceeds of certain asset sales or other dispositions
o the proceeds of issuances of certain equity offerings
o annually beginning in 2000, 50% of the Company's excess cash flow
(as defined in the credit agreement) from the prior year.
No events occurred during 2000 to cause mandatory prepayments to be required.
The borrowing agreements provides for certain restrictions, including
restrictions on asset sales, dividend payments, additional indebtedness payments
for restricted investments. In addition, the borrowing agreements provide for
the maintenance of certain financial covenants, including a limit on the
consolidated leverage ratio and maintenance of a minimum fixed charged coverage
ratio.
Maturities of long-term debt are as follows:
2001 $ 4,488
2002 6,037
2003 7,588
2004 8,362
2005 25,750
Thereafter 227,200
---------
Total $279,425
========
WRC MEDIA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
10. PREFERRED STOCK
The Company has authorized the issuance of up to 20,000,000 shares of preferred
stock in one or more series as designed by the board of directors. In connection
with the recapitalization described in Note 1, the Company issued 3,000,000
shares of 15% Series B Preferred Stock, due in 2011 with a liquidation
preference of $25.00 per share. The Preferred Stock shall accrue dividends at a
rate of 15% per annum, subject to adjustment under certain conditions.
In connection with the issuance of the Series B Preferred Stock described above,
the Company issued to the senior preferred stockholders, Preferred Stock
Warrants, which entitle the senior preferred stockholders to acquire 422,784
shares of Weekly Reader voting common stock and 1,495 shares of Compass common
stock. These warrants entitle the holders to acquire 13% of voting common stock
of Weekly Reader and Compass at an exercise price of $0.01 per share. Based upon
an independent valuation, the Company allocated the $75,000 proceeds from the
issuance of the preferred stock as follows:
15% Series B Preferred Stock $63,249
Weekly Reader Warrants 9,133
Compass Warrants 2,618
-------
$75,000
=======
The present value of the preferred stock is being accreted to maturity using the
effective interest method. Accretion expense for the period from November 17,
1999 through December 31, 1999 amounted to $112 and for the year ended December
31, 2000 was $908.
Prior to December 31, 2004, or such earlier dividend date as the Company may
elect, the Company will pay dividends in-kind. After December 31, 2004,
dividends will be paid in cash. During the period from November 17 through
December 31, 1999, accrued preferred stock dividends amounted to $1,406 and for
the year ended December 31, 2000, amounted to $12,122, and are payable in
additional shares of preferred stock. The Company may redeem the preferred
stock, including unpaid dividends, prior to November 17, 2002, or after November
17, 2004, subject to certain conditions.
11. COMMON STOCK SUBJECT TO REDEMPTION
In connection with the recapitalization of Weekly Reader in 1999 and merger with
the Company, the Company sold 68,008 shares of common stock to certain
executives at a price of $18.60 per share. During the year ended December 31,
2000, 9,408 of such shares were repurchased from two former executives for $175,
and 5,376 shares were sold to a newly hired executive for $100. Under certain
conditions, the shareholders can require the Company to repurchase the shares.
WRC MEDIA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
12. INCOME TAXES
For the period ended December 31, 2000, the Company had net operating loss
carryforwards of approximately $97,500. No tax benefit has been reflected in the
accompanying financial statements as the utilization of the operating loss
carryforwards is not considered more likely than not. Accordingly, this amount
has been fully offset by a valuation allowance. To the extent that the Company
generates book taxable income in future years, the income tax provision will
reflect the realization of such benefits.
The reconciliation of the federal statutory rate with the effective income tax
rate reflected in the financial statements is as follows:
1999 2000
----- ------
Federal income tax benefit at statutory rate 35.0% 35.0%
State income tax (net of federal benefit) (1.0) 2.4
Write-off of in process R&D (16.3) --
Goodwill amortization (5.5) (25.9)
Other (0.7) (0.4)
Valuation allowance (11.5) (11.14)
===== ======
--% --%
===== ======
Deferred tax assets and liabilities are comprised of the following at December
31, 1999 and 2000:
1999 2000
-------- --------
Goodwill amortization $ 303 $ --
Deferred financing fees 263 --
Other 1,163 --
Gross deferred tax liabilities 1,729 --
-------- --------
Net operating loss carryforward 3,784 36,476
Depreciation and amortization 234 26,545
Accrued liabilities 473 241
Other 70 3,182
-------- --------
Gross deferred tax assets 4,561 66,444
-------- --------
Net deferred tax assets 2,832 66,444
Valuation allowance (2,832) (66,444)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
WRC MEDIA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
13. IN-PROCESS RESEARCH AND DEVELOPMENT
During the period from July 14, 1999, through December 31, 1999, the Company
charged to operations $9,000 related to the write-off of purchased in-process
research and development (R&D) costs acquired in connection with the acquisition
of Compass (Note 1).
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 in-process research and development as a result of Compass
acquisition was predicated on a determination that the developmental projects at
the time of the acquisition were not technologically feasible and had no
alternative use. This conclusion was attributable to the fact that Compass 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.
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 on 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 net cash flows from the
projects and discounting the net cash flow to their present values. 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):
o 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, technique or bringing about a significant improvement to an
existing product or process.
o 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.
WRC MEDIA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
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 project, expected
income generating ability and associated risks.
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.
14. STOCKHOLDERS' EQUITY
Stock Options
During 1999, the Company granted options to purchase 301,724 at $18.60 per
share. The options vest as follows: 33%, in 1999, 33% in 2000 and 34% in 2001.
No options were exercised in 1999.
In 2000, the Company adopted the WRC Media Inc. and Subsidiaries Year 2000 Stock
Option Plan (the "Plan"). The purpose of the Plan is to encourage and enable the
officers, employees, directors, consultants and other key persons of WRC Media
Inc., and its Parents, Subsidiaries and Affiliates, upon whose judgment,
initiative and efforts the Company largely depends for the successful conduct of
its business to acquire a proprietary interest in the Company. The Plan shall be
administered by the Board of Directors ("Board"), or by a committee or
committees of the Board, comprised of not less than two Directors.
The exercise price per share for the Stock covered by a Stock Option shall be
determined by the Board at the time of grant but shall not be less than 100% of
the Fair Market Value on the date of grant in the case of Incentive Stock
Options. "Fair Market Value" of the Stock on any given date means the fair
market value of the Stock determined in good faith by the Board. During 2000,
the Company granted options to purchase 307,523 options at $18.60 per share. The
options vest evenly over four years from the date of grant.
The Company accounts for options issued to employees under the provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation". As permitted by the
statement, the Company has chosen to continue to account for stock based
compensation using the intrinsic value method. Accordingly, no compensation
expense has been recognized for its stock-based compensation plan. Had the fair
value method of accounting been applied to the Company's stock plan, which
requires recognition of compensation cost using a pricing model, the net loss
would have increased by $60 and $388, respectively for the period from May 14,
1999, (inception) to December 31, 1999, and the year ended December 31, 2000.
The fair 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: risk-free interest rate of 5.7% and 6.1% for 1999 and 2000;
expected dividend yield of zero percent for 1999 and 2000; and expected term of
5 years and 4 years with no expected volatility for 1999 and 2000, respectively.
WRC MEDIA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
A summary of the option plan is as follows:
Year Ended Year Ended
December 31, 1999 December 31, 2000
------------------------ --------------------------
Weighted Average Weighted Average
Employee Stock Options Shares Exercise Price Shares Exercise Price
- ---------------------- -------- ---------------- -------- ----------------
Outstanding, beginning of year -- -- 301,724 $ 18.60
Granted 301,724 $ 18.60 307,523 18.60
Forfeited -- -- (7,123) 18.60
--------- --------
Outstanding, end of year 301,724 $ 18.60 602,124 18.60
========= ========
Options exercisable at year end 99,598 298,778
========= ========
Weighted-average fair value of options
granted during the period $ 18.60 $ 18.60
========= ========
The following table summarizes information about employee stock options
outstanding at December 31, 2000:
Options Outstanding Options Exercisable
--------------------------------------------------------- ----------------------------------
Range of Weighted Average Number
Exercise Number Outstanding at Remaining Exercisable at
Prices December 31, 2000 Contractual Life Exercise Price December 31, 2000 Exercise Price
- --------------- --------------------- ---------------- -------------- ----------------- --------------
$ 18.60 602,124 2.5 years $ 18.60 298,778 $ 18.60
=============== ===================== ================ ============== ================= ==============
15. RELATED PARTY TRANSACTIONS
Management Agreements
In connection with the acquisition of Weekly Reader and Compass, the Company
entered into management agreements with a significant shareholder. The
significant provisions of these management agreements are as follows-
Since the date of the acquisition of Compass, the shareholder has been providing
to Compass management consulting and financial advisory services, and Compass
has been paying to the shareholder an annual management fee of $150,000, payable
quarterly, and has reimbursed the shareholder for reasonable out-of-pocket costs
and expenses incurred in connection with the performance of its services. On
November 17, 1999, Compass and the shareholder amended the terms of Compass
management agreement with the shareholder, which relieved Compass of its
obligation to pay management fees to the shareholder.
WRC MEDIA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
In accordance with Weekly Reader's management agreement, the shareholder
provides to Weekly Reader management consulting and financial advisory services.
As a result of Weekly Reader's management agreement and the amendment of
CompassLearning's management agreement, Compass and Weekly Reader will reimburse
the shareholder for 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 the shareholder annual aggregate
management fees for services to both Compass and Weekly Reader totaling
$950,000, payable quarterly.
16. RETIREMENT PLANS
Substantially all of the Company's employees are eligible to participate in a
defined contribution plan of the Company as of January 1, 2000. In 1998 and 1999
all of Weekly Reader's employees were eligible to participate in a PRIMEDIA
defined contribution plan. On January 1, 2000, all active employees of the
Company enrolled in PRIMEDIA's defined contribution plan were eligible to be
transferred to the Company's plan. The expense recognized by the Company for the
Company's plan was $753 for the year ended December 31, 2000.
A subsidiary of Weekly Reader sponsors a defined benefit pension plan (the
"American Guidance Plan") for the benefit of its employees. 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.
The following tables set forth the American Guidance Plan's funded status as of
December 31, 2000, and the amounts recognized in the Company's consolidated
statements of operations and accumulated deficit from the acquisition date
through December 31, 2000:
1999 2000
-------- --------
Change in benefit obligation-
Projected benefit obligation at acquisition date $ 8,455 $ 8,567
Service cost 85 544
Interest cost 76 671
Actuarial loss (17) 872
Benefits paid (32) (384)
-------- --------
Projected benefit obligation at December 31, 2000 $ 8,567 $ 10,270
======== ========
Change in plan assets-
Fair value of plan assets at acquisition date $ 8,521 $ 8,585
Actual return on plan assets 96 (80)
Employer contribution -- 97
Benefits paid (32) (384)
-------- --------
Fair value of plan assets at December 31, 2000 $ 8,585 $ 8,218
======== ========
WRC MEDIA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
1999 2000
------- -------
Funded status $ 19 $(2,052)
Unrecognized actuarial loss (1,654) 126
------- -------
Accrued pension cost $ 1,635 $(1,926)
======= =======
Components of net periodic pension expense
Service cost $ 85 $ 544
Interest cost 76 671
Expected return on plan assets (85) (763)
Amortization of unrecognized net(gain)/loss -- (64)
------- -------
Net periodic pension expense $ 76 $ 388
======= =======
Weighted-average assumptions as of December 31, 2000
Discount rate 8.0% 7.5%
Expected return on plan assets 9.0% 9.0%
Rate of compensation increase 4.5% 4.5%
17. 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
December 31,
------------
2001 $ 6,941
2002 6,581
2003 5,653
2004 5,152
2005 4,898
Thereafter 20,686
--------
Total minimum lease payments 49,911
Total minimum noncancelable sublease rentals (391)
--------
$ 49,520
========
Rent expense, net of sublease rentals, for all operating leases was
approximately $4,341 for the year ended December 31, 2000.
WRC MEDIA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
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.
18. RABBI TRUST
In 1998, as part of its acquisition of American Guidance, a subsidiary of Weekly
Reader, approximately $19,600 of the American Guidance purchase price was paid
through contributions to several Rabbi Trusts to settle American Guidance's
obligations due to employees under American Guidance's predecessor company stock
option, employee stock ownership and deferred compensation plans. Payments to
the beneficiaries of the Rabbi Trusts are taxable upon distribution from the
Rabbi Trusts with Weekly Reader receiving a corresponding deduction for income
tax purposes. The assets of the Rabbi Trusts predominantly consist of marketable
mutual fund investments that are subject to claims of general creditors of
Weekly Reader in the event of bankruptcy. Accordingly, the assets of the Rabbi
Trusts and a related liability are presented in other current assets and accrued
expenses and other current liabilities, respectively on the consolidated balance
sheets. The balance of the asset and liability as of December 31, 1999 and 2000
was approximately $18,220 and $16,757, respectively. The marketable securities
in the Rabbi Trusts have been classified as trading securities and investment
income of $ 1,875 and $24 has been offset with the related compensation expense
for the same amount on the accompanying consolidated statements of operations
for the years ended December 31, 1999 and 2000, respectively. Marketable
securities in the Rabbi Trust have been recorded at fair value, based on quoted
market prices, on the accompanying consolidated balance sheets.
19. QUARTERLY DATA (Unaudited)
Three Months Ended(Unaudited)
---------------------------------------------------------
March 31 June 30 September 30 December 31 Year
---------- ---------- ---------- ---------- ----------
2000
Revenues $ 50,234 $ 50,397 $ 56,921 $ 61,295 $ 218,847
Gross profit $ 32,800 $ 34,371 $ 39,451 $ 43,713 $ 150,335
Operating costs and expenses $ 35,628 $ 44,552 $ 52,211 $ 44,275 $ 176,666
Income / (loss) from operations $ (2,828) $ (10,181) $ (12,760) $ (562) $ (26,331)
Net Income / (loss) $ (11,621) $ (19,275) $ (21,246) $ (9,873) $ (62,015)
1999
Revenues $ -- $ -- $ 14,847 $ 35,723 $ 50,570
Gross profit $ -- $ -- $ 9,518 $ 24,950 $ 34,468
Operating costs and expenses $ -- $ -- $ 18,916 $ 23,122 $ 42,038
Income / (loss) from operations $ -- $ -- $ (9,398) $ 1,828 $ (7,570)
Net Income / (loss) $ -- $ -- $ (10,296) $ (9,035) $ (19,331)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Weekly Reader Corporation:
We have audited the accompanying consolidated balance sheets of Weekly Reader
Corporation and subsidiaries ("the Company"), a 94.9% owned subsidiary of WRC
Media Inc., as of December 31, 1999 and 2000 and the related consolidated
statements of operations, shareholders' deficit, and cash flows for the years
then ended. 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 auditing standards generally accepted
in the United States. 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.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of the Company at December 31,
1999 and 2000, and the results of their operations and their cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 23, 2001
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Weekly Reader Corporation
New York, New York
We have audited the accompanying consolidated statements of operations,
stockholders' deficit and cash flows of Weekly Reader Corporation and
subsidiaries ("Weekly Reader") for the year 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the 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
audit provides a reasonable basis for our opinion.
As further described in Notes 1 and 15, 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 results of operations and cash flows of Weekly Reader for
the year ended December 31, 1998 in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
New York, New York
August 30, 1999
(November 17, 1999 as to Note 1)
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
December 31,
----------------------
ASSETS 1999 2000
--------- ---------
Current assets:
Cash $ 14,143 $ 2,914
Accounts receivable, net 27,440 26,758
Inventories, net 13,952 14,124
Due from related party 500 4,632
Prepaid expenses 1,642 3,219
Other current assets 20,234 17,409
--------- ---------
Total current assets 77,911 69,056
PROPERTY AND EQUIPMENT, net 6,245 5,729
OTHER INTANGIBLE ASSETS, net 44,338 41,282
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED, net 107,801 104,881
OTHER NON-CURRENT ASSETS 46 25
--------- ---------
$ 236,341 $ 220,973
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 19,491 $ 17,382
Deferred revenues 18,989 20,119
Accrued expenses and other 36,274 29,592
Current portion of long-term debt 2,939 4,488
--------- ---------
Total current liabilities 77,693 71,581
--------- ---------
LONG-TERM DEBT 273,617 269,469
--------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK, PLUS ACCRUED DIVIDENDS
(Liquidation preference of $75,000 plus accrued dividends) 76,406 88,528
--------- ---------
SHAREHOLDERS' (DEFICIT):
Common stock ($.01 par value, 20,000,000 shares
authorized; 2,800,000 issued and outstanding as of
December 31, 1999 and 2000) 28 28
Additional paid-in capital 9,133 9,133
Due from parent (68,684) (69,374)
Accumulated deficit (131,852) (148,392)
--------- ---------
Total shareholders' deficit (191,375) (208,605)
--------- ---------
$ 236,341 $ 220,973
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
Year Ended December 31,
-----------------------------------
1998 1999 2000
--------- --------- ---------
SALES, net $ 118,236 $ 148,287 $ 154,819
COST OF GOODS SOLD 30,646 40,211 41,326
--------- --------- ---------
Gross profit 87,590 108,076 113,493
--------- --------- ---------
OPERATING COSTS AND EXPENSES:
Marketing and selling 17,636 24,316 27,060
Distribution, circulation and fulfillment 10,881 13,172 13,019
Editorial 10,596 10,046 10,519
General and administrative 15,281 15,947 15,392
Corporate and group overhead 5,577 6,211 3,284
Depreciation and amortization 12,212 15,345 13,983
--------- --------- ---------
Total operating costs and expenses 72,183 85,037 83,257
Operating income 15,407 23,039 30,236
OTHER INCOME (EXPENSE):
Intercompany interest expense (9,232) (10,133) --
Interest expense -- (4,504) (34,293)
Amortization of deferred financing costs (184) (184) --
Other, net (184) (570) 231
--------- --------- ---------
Income before income tax provision 5,807 7,648 (3,826)
INCOME TAX PROVISION 3,942 4,459 592
--------- --------- ---------
Net income (loss) $ 1,865 $ 3,189 $ (4,418)
========= ========= =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2000
(in thousands)
Common Stock Additional Due
---------------------- Paid-in Investment by From Accumulated
Shares Value Capital PRIMEDIA, Inc. Parent Deficit
------ ------- ----------- -------------- -------- -------------
Balance, December 31, 1997 10,000 $ 100 $ -- $ 91,397 $ -- $(18,426)
Push-down accounting relating
to acquisitions -- -- -- 107,411 -- --
Transfers from PRIMEDIA and
subsidiaries, net -- -- -- (14,955) -- --
Net loss -- -- -- -- -- 1,865
------ ------- ----------- -------------- -------- --------------
Balance, December 31, 1998 10,000 100 -- 183,853 -- (16,561)
Net income -- -- -- -- -- 3,189
Recapitalization (7,200) (72) 9,133 -- -- (117,074)
Preferred stock dividends -- -- -- -- -- (1,406)
Transfer from WRC Media, net -- -- -- -- (68,684) --
Transfers from PRIMEDIA and
subsidiaries, net -- -- -- (183,853) -- --
------ ------- ----------- -------------- -------- --------------
Balance, December 31, 1999 2,800 28 9,133 -- (68,684) (131,852)
Net loss -- -- -- (4,418)
Preferred stock dividends -- -- -- (12,122)
Change in due from parent -- -- -- -- (690) --
------ ------- ----------- -------------- -------- --------------
Balance, December 31, 2000 2,800 $ 28 $ 9,133 $ -- $(69,374) $(148,392)
====== ======= =========== ============== ======== ==============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Year Ended December 31,
-----------------------------------
1998 1999 2000
--------- --------- ---------
OPERATING ACTIVITIES:
Net (loss) income $ 1,865 $ 3,189 $ (4,418)
Adjustments to reconcile net (loss) income to net cash provided by operating
activities-
Depreciation and amortization 12,212 15,345 13,983
Amortization of deferred financing costs 184 184 --
Amortization of debt discount -- -- 338
Intercompany interest expense 9,232 2,779 --
Corporate and group overhead 5,577 -- --
Deferred income taxes 3,142 2,608 --
Other, net (4) -- 11
Changes in operating assets and liabilities-
(Increase) decrease in-
Accounts receivable (2,578) (2,507) 682
Inventories (1,211) (311) (172)
Prepaid expenses and other assets 1,710 (255) 1,019
Increase (decrease) in-
Accounts payable 3,976 3,164 (2,109)
Deferred revenues 1,746 (2,281) 1,130
Accrued expenses and other liabilities (3,662) 4,654 (6,682)
--------- --------- ---------
Net cash provided by operating activities 32,189 26,569 3,782
--------- --------- ---------
INVESTING ACTIVITIES:
Payments for businesses acquired (105,584) (667) --
Additions to property, equipment and other, net (4,299) (5,870) (7,251)
--------- --------- ---------
Net cash used in investing activities (109,883) (6,537) (7,251)
--------- --------- ---------
FINANCING ACTIVITIES:
Intercompany, net 79,224 (72,043) --
Proceeds from term loans -- 131,000 --
Proceeds from issuance of senior subordinated notes -- 146,193 --
Proceeds from issuance of preferred stock -- 75,000 --
Increase in due from parent -- -- (690)
Increase in due from related party -- -- (4,132)
Recapitalization -- (287,363) --
Repayments of debt -- (638) (2,938)
--------- --------- ---------
Net cash provided by (used in) financing activities 79,224 (7,851) (7,760)
--------- --------- ---------
Increase (decrease) in cash 1,530 12,181 (11,229)
CASH, beginning of period 432 1,962 14,143
--------- --------- ---------
CASH, end of period $ 1,962 $ 14,143 $ 2,914
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 211 $ 10,399 $ 33,417
========= ========= =========
Cash paid during the period for income taxes $ -- $ -- $ 592
========= ========= =========
Preferred stock dividends accrued $ 0 $ 1,406 $ 12,122
========= ========= =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Weekly Reader Corporation ("the Company") is a 94.9% owned subsidiary of WRC
Media, Inc. ("the Parent"). On November 17, 1999, the Parent completed its
recapitalization of the Company. The consolidated financial statements include
the accounts of the Company and its subsidiaries, Lifetime Learning ("Lifetime
Learning"), PRIMEDIA Reference, Inc. ("PRI") and its subsidiaries, Funk &
Wagnalls Yearbook Corporation and Gareth Stevens, Inc.("Gareth Stevens"), and
American Guidance Service Inc. ("American Guidance") and its subsidiary, AGS
International Sales, Inc. As a result of the recapitalization, the Parent owns
94.9% and PRIMEDIA ("PRIMEDIA") owns 5.1% of the common stock of the Company. On
November 17, 1999, PRIMEDIA Reference, Inc. legally changed its name to World
Almanac Education Group ("WAE"). Before November 17, 1999, the Company, WAE and
American Guidance were wholly-owned subsidiaries of 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 the Parent. The terms of the Recapitalization Agreement required that all
of the outstanding capital stock of WAE and American Guidance be contributed to
the Company prior to the Parent's purchase of a majority interest in the Company
for a purchase price of $395,000. The presentation of these financial statements
reflects the capital contribution made by PRIMEDIA to the Company of all the WAE
and American Guidance shares at their historical carrying values. In addition,
on October 5, 1999, the authorized capital of the Company was amended to consist
of 20,000,000 shares of common stock, par value $.01/share, and the Company
declared a 10,000-for-one stock split effective on October 5, 1999. This
amendment was retroactively reflected on the accompanying financial statements.
In connection with the Recapitalization, the Parent issued 3,000,000 shares of
15% Series B Preferred Stock, due 2011 with a liquidation preference of $25.00
per share, with preferred stock warrants, which entitled the preferred
shareholders to acquire 422,874 shares of the Company's voting common stock. The
assets and liabilities of the Company have not been revalued as a result of the
Recapitalization.
Weekly Reader Corporation is a publisher of classroom periodicals and skills
books serving the Pre-Kindergarten through twelfth grade ("Pre K-12") market.
The Company's subsidiary, Lifetime Learning , creates and distributes sponsored
instructional materials primarily for use in the Pre K-12 market. WAE 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 the Company's sales are in
the United States.
All material intercompany accounts and transactions have been eliminated in
consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use Of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
However, actual results may differ from these estimates.
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands
Recent Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." In June 2000,
the Financial Accounting Standards Board Issued SFAS No. 138, which amended SFAS
No. 133. These Statements establish accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or a liability measured at its fair value. The Statements require that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on the
hedged item in the income statement and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. The Company is required to adopt these standards in the first
quarter of 2001. Based on Management's current understanding of the Statements,
adoption is not expected to have a material impact on the Company's financial
statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB
101 addresses various topics in revenue recognition including the recognition of
revenue for contracts involving multiple deliverables. The adoption of SAB 101,
which the Company adopted during 2000, did not have a material impact on the
Company's 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 are 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.
Internal Use Software
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
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 and $123 for the years ended
December 31, 1998 and 1999, respectively.
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands
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 (See Note
3).
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
periodically 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 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. 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. Capitalized editorial costs are recorded as prepublication costs. As of
December 31, 1999 and 2000, other intangible assets on the accompanying balance
sheets, include prepublication costs, net of amortization, of $5,337 and $9,366.
Amortization of prepublication costs, which is included in depreciation and
amortization on the accompanying consolidated statements of operations was $12,
$1,017 and $1,805 for the years ended December 31, 1998, 1999 and 2000,
respectively.
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands
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 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 ten 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 consolidated statements of operations. Direct response
advertising costs of approximately $2,700 and $2,887 at December 31, 1999 and
2000, respectively, are included in other intangible assets on the accompanying
consolidated balance sheets, and are net of accumulated amortization of
approximately $9,400 and $4,549 at December 31, 1999 and 2000, respectively.
Marketing and selling expenses, includes amortization of direct response
advertising of approximately $6,400, $5,900 and $7,955 in 1998, 1999 and 2000,
respectively.
Concentration of Credit Risk
The Company's customers include schools and other institutions. Accounts
receivable are generally unsecured and a provision for estimated doubtful
accounts is provided. There are no concentrations of business transacted with a
particular customer or supplier, nor concentrations of revenue from a particular
service or geographic area.
Income Taxes
The Company's subsidiaries file their Federal income taxes as members of the
Parent'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 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.
Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by the
Company using available market information and valuation methodologies.
Considerable judgment is required in estimating fair values. Accordingly, the
estimates may not be indicative of the amounts the Company could realize in a
current market exchange. The carrying values of cash, accounts receivable, and
accounts payable approximate fair value based on the short-term nature of these
financial instruments.
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands
The carrying values of the Company's Senior Bank Credit Facilities are assumed
to approximate the market value due to the variable interest rates on these
instruments. The estimated fair values of other financial instruments as of
December 31, 2000 are as follows:
Carrying Amount Fair Value
--------------- ----------
12 3/4% Senior Subordinated Notes $ 146,194 $121,600
There is no market value information available for the preferred stock and a
reasonable estimate could not be made without incurring excessive costs.
Segment Reporting
The Company has determined that it has one reportable segment in accordance with
SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information" which is educational publishing.
Reclassifications
Certain reclassifications have been made to the prior years consolidated
financial statements to conform them to the current year presentation.
3. ACQUISITIONS
The Company acquired American Guidance in 1998. This acquisition was financed
through borrowings from PRIMEDIA, the former parent of the Company. The cash
payment for this acquisition on an aggregate basis was $105,584 (net of
liabilities assumed of approximately $34,700). The excess purchase price over
net assets acquired was approximately $73,400.
Approximately $19,600 of the American Guidance purchase price was paid through
contributions to several Rabbi Trusts to settle American Guidance's obligations
due to employees under American Guidance's predecessor company stock option,
employee stock ownership and deferred compensation plans. Payments to the
beneficiaries of the Rabbi Trusts are taxable upon distribution from the Rabbi
Trusts with Weekly Reader receiving a corresponding deduction for income tax
purposes. The assets of the Rabbi Trusts predominantly consist of marketable
mutual fund investments that are subject to claims of general creditors of
Weekly Reader in the event of bankruptcy. Accordingly, the assets of the Rabbi
Trusts and a related liability are presented in other current assets and accrued
expenses and other current liabilities, respectively on the consolidated balance
sheets. The balance of the asset and liability as of December 31, 1999 and 2000
was approximately $18,220 and $16,757, respectively. The marketable securities
in the Rabbi Trusts have been classified as trading securities and investment
income of $1,875 and $24 has been offset with the related compensation expense
for the same amount on the accompanying consolidated statement of operations for
the years ended December 31, 1999 and 2000, respectively. Marketable securities
in the Rabbi Trust have been recorded at fair value, based on quoted market
prices, on the accompanying consolidated balance sheets.
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands
The following unaudited pro forma information presents the results of operations
of the Company for the year ended December 31, 1998, as if the acquisition of
American Guidance had taken place on January 1, 1998:
1998
--------
Sales, net $137,820
========
Operating income $ 14,334
========
Net income $ 664
========
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable consist of the following-
December 31,
-------------------
1999 2000
------- -------
Accounts receivable $32,807 $30,982
Less-
Allowance for doubtful accounts 1,793 1,561
Allowance for returns and rebates 3,574 2,663
------- -------
$27,440 $26,758
======= =======
5. INVENTORIES, NET
Inventories consist of the following-
December 31,
--------------------
1999 2000
------- -------
Finished goods $15,720 $15,762
Raw materials 1,026 1,401
Less- allowance for obsolescence 2,794 3,039
------- -------
$13,952 $14,124
======= =======
6. OTHER CURRENT ASSETS
Other current assets consist of the following-
December 31,
-----------------------
1999 2000
------- -------
Rabbi Trust (Note 3) $18,200 $16,757
Other 2,034 652
------- -------
$20,234 $17,409
======= =======
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands
7. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following-
Range of December 31,
Lives -----------------
(Years) 1999 2000
------- ------- -------
Machinery, equipment and other 3-10 $ 7,841 $ 8,602
Furniture and fixtures 5-10 2,214 2,617
Leasehold improvements 5-10 1,306 1,505
Buildings and improvements 32 730 730
------- -------
12,091 13,454
Less- accumulated depreciation and amortization 5,846 7,725
------- -------
$ 6,245 $ 5,729
======= =======
Depreciation and amortization of property and equipment was $1,258, $1,750 and
$1,927 for the years ended December 31, 1998, 1999 and 2000, respectively.
8. 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) 1999 2000
-------- -------- --------
Customer and subscriber lists 3-14 $ 59,821 $ 36,118
Non-compete agreements 3-6 25,100 17,944
Product titles 7 22,400 22,400
Trademarks 40 18,363 18,363
Copyrights 9 11,100 11,100
Databases 10 5,812 5,812
Trademark license agreements 40 3,000 3,000
Other, including deferred direct advertising and
pre-publication costs 0-10 8,918 19,636
-------- --------
154,514 134,373
Less- accumulated amortization 110,176 93,091
-------- --------
$ 44,338 $ 41,282
======== ========
In 2000, certain subscriber lists, non-compete agreements and deferred direct
advertising, in the amount of $23,703, $7,000 and $11,195, respectively, were
fully amortized and retired.
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands
The excess of purchase price over the fair market value of the net assets
acquired is net of accumulated amortization of $27,731 and $30,649 at December
31, 1999 and 2000, respectively. Amortization of other intangible assets and
excess of purchase price over net assets acquired was $10,942, $10,369 and
$7,337 for the years ended December 31, 1998, 1999 and 2000, respectively.
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
December 31,
-------------------
1999 2000
------- -------
Rabbi Trust (see Note 3) $18,220 $16,757
Payroll and related employee benefits 4,222 4,780
Acquisition costs 3,579 1,866
Pension liability (see Note 12) 1,635 1,978
Royalties 1,092 1,144
Accrued interest 1,259 1,891
Other 6,267 1,176
------- -------
$36,274 $29,592
======= =======
10. INCOME TAXES
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 for income tax purposes, and (b) operating loss
carryforwards. The tax effects of significant items comprising the Company's net
deferred income tax accounts include accelerated depreciation and amortization
for certain assets offset by allowances for uncollectable accounts receivable
and sales returns.
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 of the Company at the Recapitalization, except those
relating to American Guidance and Gareth Stevens, remained with PRIMEDIA as a
result of a certain tax elections relating to the recapitalization.
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands
The provision for Federal and state income taxes consists of the following:
1998 1999 2000
------ ------ ------
Current - Federal $ 800 $1,851 $ --
Deferred-
State and local 246 900 592
Federal 2,896 1,708 --
------ ------ ------
3,142 2,608 592
------ ------ ------
Income tax provision $3,942 $4,459 $ 592
====== ====== ======
The Company's provision for income taxes differs from the amount computed by
applying the statutory U.S. Federal income tax rate to income before income tax
provision as follows:
1998 1999 2000
------- ------- -------
Provision for taxes at the statutory rate $ 2,032 $ 2,236 $(1,339)
State income taxes, net of Federal tax benefit 160 315 592
Non-deductible goodwill amortization 555 800 3,013
Non-deductible interest 0 0 2,268
Change in valuation allowance 1,205 868 (3,913)
Other (10) 240 (29)
------- ------- -------
Total $ 3,942 $ 4,459 $ 592
======= ======= =======
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
deferred tax assets are as follows:
Deferred income tax assets
December 31, 2000
--------------------------------
Federal State Total
-------- -------- --------
Difference between book and tax basis of intangible
assets $ 11,816 $ 855 $ 12,671
Difference between book and tax basis of accrued
expenses and other 2,672 193 2,865
Difference between book and tax depreciation 661 49 710
Net operating losses 2,050 148 2,198
-------- -------- --------
17,199 1,245 18,444
Less: Valuation allowances (17,199) (1,245) (18,444)
-------- -------- --------
Net $ 0 $ 0 $ 0
======== ======== ========
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands
As of December 31, 2000, the Company had net operating loss carryforwards of
approximately $5,900. These carryforwards begin expiring in 2013. These losses
are subject to various limitations, and no tax benefit has been reflected in the
accompanying financial statements to give effect to the utilization of these
operating loss carryforwards or the Company's other deferred tax assets as
realization is not considered more likely than not.
11. LONG-TERM DEBT
In connection with the recapitalization and merger of the Company during
November, 1999, the Parent, the Company and CompassLearning, a wholly owned
subsidiary of the Parent, entered into the senior subordinated note and senior
bank credit facility. Since each Company is jointly and severally liable for the
borrowing, they are considered to be obligated. Accordingly, the debt and
related interest expense is reflected in the financial statements of each
entity. For the Company, a corresponding entry in the financial statements has
been recorded as Due from Parent.
At December 31, long-term debt consisted of the following:
As of December 31, 1999
- -------------------------------------------------------------------------------------------
Face Unamortized Principal Book
Debt Instrument Value Discount Payments Value
- -------------------------------------------------------------------------------------------
Senior Bank-Term A (b) $ 31,000 $ -- $ 387 $ 30,613
Senior Bank-Term B (b) 100,000 -- 250 99,750
Revolving Credit (b) -- -- -- --
Senior Subordinated Notes (a) 152,000 5,807 -- 146,193
--------------------------------------------------------
Total debt $ 283,000 $ 5,807 $ 637 $ 276,556
Less: Current Portion (2,939) -- -- (2,939)
--------------------------------------------------------
Long term debt $ 280,061 $ 5,807 $ 637 $ 273,617
========================================================
- -------------------------------------------------------------------------------------------
As of December 31, 2000
- -------------------------------------------------------------------------------------------
Face Unamortized Principal Book
Debt Instrument Value Discount Payments Value
- -------------------------------------------------------------------------------------------
Senior Bank-Term A (b) $ 30,613 $ -- $ 1,938 $ 28,675
Senior Bank-Term B (b) 99,750 -- 1,000 98,750
Revolving Credit (b) -- -- -- --
Senior Subordinated Notes (a) 152,000 5,468 -- 146,532
--------------------------------------------------------
Total debt $ 282,363 $ 5,468 $ 2,938 $ 273,957
Less: Current Portion (4,488) -- -- (4,488)
--------------------------------------------------------
Long term debt $ 277,875 $ 5,468 $ 2,938 $ 269,469
========================================================
- -------------------------------------------------------------------------------------------
(a) In connection with the recapitalization of the Company in 1999, the
Company, CompassLearning Inc. and the parent were all co-issuers of
152,000 units consisting of $152,000 in aggregate principal amount of 12
3/4% Senior Subordinated Notes (the Notes) due 2009 and 205,656 shares of
common stock. Interest on the Notes is payable semi-annually, on May 15
and November 15. For the year ending December 31, 2000, $19,380 of
interest was paid on the Notes.
Based upon an independent valuation, $148,289 was allocated to the value
of the Notes while $3,711 was the value ascribed to the common stock. The
Notes were issued net of a $2,096 discount, which is being accreted to
maturity using the effective interest method.
Prior to November 15, 2002, the Company may redeem up to 35% of the Notes
with net cash proceeds of certain sales of equity securities at a price of
112.75% of the principal amount, plus accrued and unpaid interest.
On or after November 15, 2004, the Company may redeem the Notes at a
redemption price of 106.375% of the principal amount, plus accrued
interest thereon decreasing annually to 100% in 2007 and thereafter.
The Notes are unconditionally guaranteed by the subsidiaries of the
Company.
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands
(b) The senior bank credit facilities are comprised of the $30,000 revolving
credit facility maturing in 2005, the $31,000 term loan A facility
maturing in 2005 and the $100,000 term loan B facility maturing in 2006.
During 2000, the Company applied for and received an annually renewable
stand-by letter of credit in the amount of $2,000 in connection with a
real estate lease entered into by the Parent. While this letter of credit
is in effect, the Company's available borrowing under the revolving credit
facility is reduced by $2,000. As of December 31, 2000 there had been no
drawings against this letter of credit. As of December 31, 2000, the
revolving credit facility balance was $0. The term loan A facility and the
term loan B facility amortize in quarterly installments.
Loans under the senior bank credit facilities bare 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).
As of December 31, 2000, Term loan A loans outstanding had interest
rates that ranged from 9.89% to 10.05%.
2. For the term loan B facility, the LIBO rate plus 4.00% or the
alternate base rate plus 3.00%.
As of December 31, 2000, Term loan B loans outstanding had interest
rates that ranged from 10.64% to 10.76%.
In addition to paying interest on outstanding loans under the senior
bank credit facilities, the Company is required to pay a commitment
fee to the lenders associated with 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 bank credit facilities are subject to mandatory
prepayment with:
o the proceeds of the incurrence of certain indebtedness
o the proceeds of certain asset sales or other dispositions
o the proceeds of issuances of certain equity offerings
o annually beginning in 2000, 50% of the Company's excess cash
flow (as defined in the credit agreement) from the prior year.
The borrowing agreements provides for certain restrictions, including
restrictions on asset sales, dividend payments, additional indebtedness payments
for restricted investments. In addition, the borrowing agreements provide for
the maintenance of certain financial covenants, including a limit on the
consolidated leverage ratios and maintenance of minimum fixed charged coverage
ratios.
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands
Maturities of long-term debt are as follows-
2001 $ 4,488
2002 - 6,037
2003 - 7,588
2004 - 8,362
2005 - 25,750
Thereafter - 227,200
----------
Total $ 279,425
==========
12. STOCKHOLDERS' EQUITY
Preferred Stock
The Company has authorized 20,000,000 shares of preferred stock in series and to
designate accordingly the dividend, voting, conversion, redemption and
liquidations rights for each series. In connection with the Recapitalization
described in Note 1, The Company issued to its parent 3,000,000 shares of 15%
Preferred Stock is due in 2011. The Preferred stock has an aggregate liquidation
preference of $25.00 per share. The Parent, holds all of the 3,000,000 shares of
preferred stock outstanding and is entitled to receive dividends at 15% per
annum, subject to adjustment under certain conditions. During the years ended
December 31, 1999 and 2000, accrued preferred stock dividends amounted to $1,406
and $12,122, respectively, and are payable in additional shares of preferred
stock. The Company may redeem the preferred stock, including unpaid dividends,
prior to November 17, 2002 or after November 17, 2004, subject to certain
conditions.
13. RETIREMENT PLANS
Substantially all of the Company's employees are eligible to participate in a
defined contribution plan of the Parent as of January 1, 2000. In 1999 all of
the Company's employees were eligible to participate in PRIMEDIA defined
contribution plan. On January 1, 2000, all employees enrolled in PRIMEDIA's
defined contribution plan were transferred to the Parents plan. The expense
recognized by the Company for the plans was $425 in 1998, $444 in 1999 and $753
in 2000.
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.
The following tables set forth the American Guidance Plan's funded status as of
December 31, 2000 and the amounts recognized in the Company 's statement of
consolidated operations and accumulated deficit from the acquisition date
through December 31, 2000:
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands
1999 2000
-------- --------
Change in benefit obligation-
Projected benefit obligation $ 8,455 $ 8,567
Service cost 85 544
Interest cost 76 671
Actuarial loss (17) 872
Benefits paid (32) (384)
-------- --------
Projected benefit obligation $ 8,567 $ 10,270
======== ========
Change in plan assets-
Fair value of plan assets $ 8,521 $ 8,585
Actual return on plan assets 96 (80)
Employer Contribution -- 97
Benefits paid (32) (384)
-------- --------
Fair value of plan assets at December 31, 2000 $ 8,585 $ 8,218
======== ========
Funded status $ 19 $ (2,052)
Unrecognized actuarial loss (1,654) 126
-------- --------
Accrued pension cost $ 1,635 $ (1,926)
======== ========
Components of net periodic pension expense-
Service cost $ 85 $ 544
Interest cost 76 671
Expected return on plan assets (85) (763)
Amortization of Unrecognized Net(Gain)/Loss -- (64)
-------- --------
Net periodic pension expense $ 76 $ 388
======== ========
Weighted-average assumptions as of December 31, 2000
Discount rate 8.0% 7.5%
Expected return on plan assets 9.0% 9.0%
Rate of compensation increase 4.5% 4.5%
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands
14. COMMITMENTS AND CONTINGENCIES
Commitments
The Company has operating leases for office, warehouse space and equipment that
include original or remaining non-cancelable minimum rental contracts as
follows:
Years Ending December 31,
-------------------------
2001 $ 2,213
2002 1,910
2003 1,828
2004 1,849
2005 1,508
Thereafter 2,780
---------
Total minimum lease payments $ 12,088
=========
Total rent expense under operating leases was $1,836, $1,934 and $2,383 for the
years ended December 31, 1998, 1999 and 2000, respectively.
Contingencies
The Company 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 the Company.
15. RELATED PARTY TRANSACTIONS
Investment by PRIMEDIA
The consolidated financial statements at December 31, 1998 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, interest and allocations of PRIMEDIA's equity.
Outstanding intercompany debt was approximately $167,000 at December 31, 1998.
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 fees are being amortized by the straight-line
method over the terms of the related indebtedness of PRIMEDIA.
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands
The consolidated financial statements also included 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 and
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. These allocations were discontinued subsequent to the
recapitalization of Weekly Reader on November 17, 1999.
Payment of trade payables and other disbursements were processed through the
centralized cash management system operated by PRIMEDIA. All receipts from
customers were collected in Weekly Reader's lock boxes and then transferred to
PRIMEDIA.
The activity in the Investment by PRIMEDIA, net account for the years ended
December 31, 1998 and 1999 is as follows:
1998 1999
--------- ---------
Balance, beginning of year $ 91,397 $ 183,853
Push down accounting relating to acquisitions 107,411 --
Transfers to PRIMEDIA and subsidiaries, net (14,955) (183,853)
--------- ---------
Balance, end of year $ 183,853 $ --
========= =========
PRIMEDIA did not assess interest to the Company 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 exercised during 1998 was 600. The number of stock options
outstanding at December 31, 1998 was 303,100.
On November 17, 1999, as a result of the recapitalization of the Company, the
investment by PRIMEDIA, net account was eliminated.
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands
16. QUARTERLY DATA (Unaudited)
Three Months Ended
------------------------------------------------
March 31 June 30 September 30 December 31 Year
-------- ------- ------------ ----------- --------
2000
Revenues $35,708 $29,269 $43,483 $46,359 $154,819
Gross profit $26,005 $20,906 $31,903 $34,679 $113,493
Operating costs and expenses $20,538 $18,291 $21,435 $22,993 $ 83,257
Income/(loss) from operations $ 5,467 $ 2,615 $10,468 $11,686 $ 30,236
Net Income/(loss) $(3,166) $(6,197) $ 2,248 $ 2,697 $ (4,418)
1999
Revenues $33,099 $28,735 $39,796 $46,657 $148,287
Gross profit $24,812 $21,054 $27,809 $34,401 $108,076
Operating costs and expenses $20,594 $19,673 $20,983 $23,787 $ 85,037
Income/(loss) from operations $ 4,218 $ 1,381 $ 6,826 $10,614 $ 23,039
Net Income/(loss) $ 314 $(2,014) $ 1,065 $ 3,824 $ 3,189
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: Board of Directors of CompassLearning, Inc.
We have audited the accompanying balance sheets of COMPASSLEARNING, INC.
(formerly JLC Learning Corporation and formerly EAC I Inc.) (a Delaware
corporation) (the Company) as of December 31, 1999 and 2000, and the related
statements of operations and comprehensive loss, and cash flows for the periods
from January 1, 1999 to July 13, 1999 for the Predecessor Company, from July 14,
1999 (commencement of operations) to December 31, 1999, and for the year ended
December 31, 2000 for the Company. We have also audited the accompanying
statements of stockholders' deficit for the periods from December 31, 1998 to
July 13, 1999, from May 12, 1999 (inception) to December 31, 1999, and for the
year ended December 31, 2000. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 December 31,
1999 and 2000, and the results of the Company's and its predecessor's operations
and cash flows for the periods from January 1, 1999 to July 13, 1999, from July
14, 1999 to December 31, 1999 and for the year ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Phoenix, Arizona
February 23, 2001
Report of Independent Accountants
To the Board of Directors and Shareholders of CompassLearning, Inc.
In our opinion, the accompanying statements of operations and comprehensive
loss, of stockholders' deficit and of cash flows of CompassLearning, Inc.
(formerly JLC Learning Corporation) for the year ended December 31, 1998 present
fairly, in all material respects, the results of operations and cash flows of
JLC Learning Corporation (prior to being acquired by WRC Media Inc.) (the
"Predecessor Company") for the year ended December 31, 1998, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Predecessor Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, 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
audit provides a reasonable basis for our opinion. We have not audited the
financial statements of the Predecessor Company for any period subsequent to
December 31, 1998.
PricewaterhouseCoopers LLP
Phoenix, Arizona
July 14, 1999
COMPASSLEARNING, INC.
Balance Sheets
December 31, 1999 and 2000
(Dollars in Thousands)
1999 2000
--------- ---------
Assets
Current Assets:
Cash $ 102 $ 54
Accounts receivable, net of allowance for doubtful accounts of
$513 and $233 in 1999 and 2000, respectively 19,954 15,410
Inventories 730 481
Prepaid expenses 1,319 233
Investment in marketable securities 24 --
--------- ---------
Total current assets 22,129 16,178
Other Assets:
Software development costs, net 6,566 4,709
Intangible assets, net 48,156 39,571
Fixed Assets, net 1,653 2,376
--------- ---------
$ 78,504 $ 62,834
========= =========
Liabilities and Stockholders' Deficit
Current Liabilities:
Accounts payable $ 2,508 $ 2,385
Due to related party 500 4,630
Accrued expenses 12,652 6,942
Current portion of deferred revenue 16,971 16,336
Current portion of long-term debt 2,939 4,488
--------- ---------
Total current liabilities 35,570 34,781
Deferred Revenue 1,780 1,868
Long-term Debt 273,617 269,469
Due to Related Party 2,160 2,160
Other Long-Term Liabilities 15 --
--------- ---------
Total liabilities 313,142 308,278
--------- ---------
Commitments and Contingencies
Stockholders' Deficit:
Preferred stock, $0.01 par value; 10,000,000 shares authorized,
no shares issued and outstanding in 1999 and 2000 -- --
Class A Common Stock, $0.01 par value; 20,000 shares authorized,
10,000 shares issued and outstanding in 1999 and 2000
Additional paid-in capital 31,316 31,316
Accumulated deficit (18,708) (59,240)
Due from parent (247,234) (217,520)
Cumulative other comprehensive loss (12) --
--------- ---------
Total stockholders' deficit (234,638) (245,444)
--------- ---------
$ 78,504 $ 62,834
========= =========
The accompanying notes are an integral part of these financial statements.
COMPASSLEARNING, INC.
Statements of Operations and Comprehensive Loss
(Dollars in Thousands)
July 14, 1999
Year Ended January 1, 1999 to Year Ended
December 31, to July 13, December 31, December 31,
1998 1999 1999 2000
------------ --------------- ------------ ------------
Net Revenue:
Software license $ 30,949 $ 16,231 $ 16,521 $ 32,509
Service 33,935 16,123 13,502 25,354
Hardware 4,014 4,786 5,649 6,165
-------- -------- -------- --------
68,898 37,140 35,672 64,028
-------- -------- -------- --------
Cost of Products Sold:
Software license 6,936 2,783 2,937 5,814
Service 19,235 9,295 7,622 15,860
Hardware 3,229 4,413 4,994 5,512
-------- -------- -------- --------
29,400 16,491 15,553 27,186
-------- -------- -------- --------
Gross profit 39,498 20,649 20,119 36,842
-------- -------- -------- --------
Operating Expenses:
Sales and marketing 24,034 11,038 10,444 22,088
Research and development 8,022 3,831 3,861 4,949
Write-off of purchased in-process research and development -- -- 9,000 --
General and administrative 7,705 3,978 2,534 7,357
Amortization of intangible assets 245 131 4,014 8,585
Restructuring 3,012 -- -- --
-------- -------- -------- --------
43,018 18,978 29,853 42,979
-------- -------- -------- --------
Income (Loss) From Operations (3,520) 1,671 (9,734) (6,137)
Interest Expense (4,286) (2,854) (5,654) (34,430)
Other Income, net 33 405 16 35
-------- -------- -------- --------
Loss Before Income Taxes and Extraordinary Item (7,773) (778) (15,372) (40,532)
Income Taxes -- -- -- --
-------- -------- -------- --------
Loss before Extraordinary Item (7,773) (778) (15,372) (40,532)
Extraordinary Loss on Debt Extinguishment, net of income taxes -- -- (3,336) --
-------- -------- -------- --------
Net Loss (7,773) (778) (18,708) (40,532)
Other Comprehensive Loss, net of income tax:
Unrealized holding gain (loss) arising during the period 314 119 (12) --
Less: reclassification adjustment for gains included
in net loss -- (396) -- 12
-------- -------- -------- --------
Comprehensive Loss $ (7,459) $ (1,055) $(18,720) $(40,520)
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
COMPASSLEARNING, INC.
Statements of Stockholders' Deficit
Predecessor
For the Period from December 31, 1997 to July 13, 1999
(Dollars in Thousands)
Mandatorily
Redeemable Class B Redeemable Class A Class A
Preferred Stock Preferred Stock Common Stock Additional
------------------ ------------------ ----------------- Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ------ ------ ------- -------
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)
Other comprehensive income -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- (7,773)
------ --------- ------ --------- ----- --------- --------- ---------
Balance, December 31, 1998 10,000 11,230 20,000 -- 1,000 -- 75,803 (109,891)
Accrued dividends on
mandatorily redeemable
preferred stock -- 500 -- -- -- -- -- (500)
Accretion of stock issuance
costs and related discount -- 39 -- -- -- -- -- (39)
Other comprehensive loss -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- (778)
------ --------- ------ --------- ----- --------- --------- ---------
Balance, July 13, 1999 10,000 $ 11,769 20,000 $ -- 1,000 $ -- $ 75,803 $(111,208)
====== ========= ====== ========= ===== ========= ========= =========
Cumulative
Unallocated Other
Purchase Comprehensive
Consideration Income Total
------------- ------ -----
Balance, December 31, 1997 $ (17,981) $ -- $ (33,066)
Accrued dividends on
mandatorily redeemable
preferred stock -- -- --
Accretion of stock issuance
costs and related discount -- -- --
Other comprehensive income -- 314 314
Net loss -- -- (7,773)
--------- --------- ---------
Balance, December 31, 1998 (17,981) 314 (40,525)
Accrued dividends on
mandatorily redeemable
preferred stock -- -- --
Accretion of stock issuance
costs and related discount -- -- --
Other comprehensive loss -- (277) (277)
Net loss -- -- (778)
--------- --------- ---------
Balance, July 13, 1999 $ (17,981) $ 37 $ (41,580)
========= ========= =========
Company
For the Period from May 12, 1999 (inception) to December 31, 2000
(Dollars in Thousands)
Class A
Common Stock Additional Other Total Total
---------------- Paid-in Accumulated Due from Comprehensive Stockholders'
Shares Amount Capital Deficit Parent Loss Deficit
------ ------- ---------- ----------- --------- ------------- ------------
Balance, May 12, 1999 (inception) -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of Class A Common Stock 10,000 -- 28,698 -- -- -- 28,698
Issuance of warrants -- -- 2,160 -- -- -- 2,160
Transfer of warrants to related party -- -- (2,160) -- -- -- (2,160)
Issuance of parent's long-term debt
and warrants -- -- 2,618 -- (247,234) -- (244,616)
Other comprehensive loss -- -- -- -- -- (12) (12)
Net loss -- -- -- (18,708) -- -- (18,708)
------ ------- --------- --------- --------- -------- ---------
Balance, December 31, 1999 10,000 -- 31,316 (18,708) (247,234) (12) (234,638)
Change in due from parent -- -- -- -- 29,714 -- 29,714
Other comprehensive loss -- -- -- -- -- 12 12
Net loss -- -- -- (40,532) -- -- (40,532)
------ ------- --------- --------- --------- -------- ---------
Balance, December 31, 2000 10,000 $ -- $ 31,316 $ (59,240) $(217,520) $ -- $(245,444)
====== ======= ========= ========= ========= ======== =========
The accompanying notes are an integral part of these financial statements.
COMPASSLEARNING, INC.
Statements of Cash Flows
(Dollars in Thousands)
January 1, 1999
Year Ended to July 13,
December 31, 1998 1999
----------------- ---------------
Cash Flows From Operating Activities:
Net loss $ (7,773) $ (778)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 4,025 1,713
Write-off of purchased in-process research and development -- --
Write-off of debt issuance costs - extraordinary item -- --
(Gain) loss on disposition of marketable securities -- (396)
Amortization of deferred financing fees and debt discount 286 204
Changes in assets and liabilities, net of effect of business acquired:
Decrease (increase) in accounts receivable 8,353 1,191
Decrease in inventories 39 269
Decrease in prepaid expenses 106 1,107
(Decrease) increase in accounts payable (139) (554)
(Decrease) increase in deferred revenue (6,862) (6,267)
(Decrease) increase in accrued expenses and other long-term liabilities 1,710 (1,052)
--------- ---------
Net cash used in operating activities (255) (4,563)
--------- ---------
Cash Flows From Investing Activities:
Purchase of business -- --
Capital expenditures (536) (142)
Proceeds from disposition of marketable securities -- 396
Cash paid for trademark -- --
--------- ---------
Net cash provided by (used in) investing activities (536) 254
--------- ---------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock -- --
Decrease in due to former parent (162) --
Borrowings under revolving line of credit, net 2,238 4,904
Borrowings under senior subordinated notes, net -- --
Borrowings (payments) under senior credit facility, net -- --
Retirement of previous line of credit, net (8,500) --
Borrowings on long-term note payable to bank 7,500 --
Payment of financing fees (1,145) --
(Increase) decrease in due from parent -- --
Increase in due to related party -- --
--------- ---------
Net cash provided by (used in) financing activities (69) 4,904
--------- ---------
Increase (decrease) in cash (860) 595
Cash, beginning of period 860 --
--------- ---------
Cash, end of period $ -- $ 595
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 1,561 $ 925
========= =========
Cash paid during the period for income taxes $ -- $ --
========= =========
Non-cash investing and financing activity:
========= =========
Note payable issued for equity securities $ 2,251 $ --
========= =========
Equity securities exchanged for prepaid royalty $ 2,285 $ --
========= =========
July 14, 1999
to Year Ended
December 31, December 31,
1999 2000
--------------- ------------
Cash Flows From Operating Activities:
Net loss $ (18,708) $ (40,532)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 5,135 11,304
Write-off of purchased in-process research and development 9,000 --
Write-off of debt issuance costs - extraordinary item 3,336 --
(Gain) loss on disposition of marketable securities -- 20
Amortization of deferred financing fees and debt discount 297 340
Changes in assets and liabilities, net of effect of business acquired:
Decrease (increase) in accounts receivable (800) 4,544
Decrease in inventories 13 249
Decrease in prepaid expenses 5 1,086
(Decrease) increase in accounts payable 384 (123)
(Decrease) increase in deferred revenue 2,702 (547)
(Decrease) increase in accrued expenses and other long-term liabilities (7,440) (5,725)
--------- ---------
Net cash used in operating activities (6,076) (29,384)
--------- ---------
Cash Flows From Investing Activities:
Purchase of business (55,493) --
Capital expenditures (374) (1,585)
Proceeds from disposition of marketable securities -- 16
Cash paid for trademark (375) --
--------- ---------
Net cash provided by (used in) investing activities (56,242) (1,569)
--------- ---------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock 28,698 --
Decrease in due to former parent -- --
Borrowings under revolving line of credit, net -- --
Borrowings under senior subordinated notes, net 146,193 --
Borrowings (payments) under senior credit facility, net 130,363 (2,939)
Retirement of previous line of credit, net -- --
Borrowings on long-term note payable to bank -- --
Payment of financing fees (1,473) --
(Increase) decrease in due from parent (244,616) 29,714
Increase in due to related party 2,660 4,130
--------- ---------
Net cash provided by (used in) financing activities 61,825 30,905
--------- ---------
Increase (decrease) in cash (493) (48)
Cash, beginning of period 595 102
--------- ---------
Cash, end of period $ 102 $ 54
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 1,306 $ --
========= =========
Cash paid during the period for income taxes $ -- $ --
========= =========
Non-cash investing and financing activity:
Note payable issued for equity securities $ -- $ --
========= =========
Equity securities exchanged for prepaid royalty $ -- $ --
========= =========
The accompanying notes are an integral part of these financial statements.
COMPASSLEARNING, INC.
Notes to Financial Statements
(Dollars in Thousands, Except Share Amounts)
1. NATURE OF BUSINESS
CompassLearning, Inc. (formerly JLC Learning Corporation, a Delaware
corporation, and formerly EAC I Inc.) (the Company) is a provider of
technology-based educational programs to schools and school districts for
kindergarten through twelfth grade. Prior to July 14, 1999, the Company's
predecessor (the Predecessor) was a wholly-owned subsidiary of Software Systems
Corporation, a wholly-owned subsidiary of JLC Holdings, Inc. (Holdings).
The Company operates in the education software industry. The Company's products
and services include fully integrated software systems, standalone CD ROM
delivery, internet solutions and a full service offering, including
installation, teacher training, onsite and remote diagnostics and maintenance.
The Company focuses its market efforts in the United States and several U.S.
territories, and is exploring opportunities in inter-national markets. The
Company's selling and distribution efforts include a direct sales force,
telemarketing and catalog sales.
JLC Learning Corporation, an Illinois corporation was acquired by WRC Media Inc.
(the Parent) on July 14, 1999 (the Purchase Date). The Company's statements of
operations and comprehensive loss and of cash flows for the period from July 14,
1999 to December 31, 1999 include the operations of the Predecessor since the
Purchase Date. The Securities and Exchange Commission 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 December 31, 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.
On November 17, 1999, the Parent completed a recapitalization (the
Recapitalization) of Primedia Inc.'s Supplemental Education Group, consisting of
the businesses of Weekly Reader, American Guidance and World Almanac. In
connection with the Recapitalization, the Company's existing indebtedness
incurred in connection with the purchase of the Predecessor was extinguished.
Accordingly, the Company has recognized an extraordinary loss on debt
extinguishment of $3,336 in its accompanying statement of operations during the
period July 14, 1999 to December 31, 1999.
As a result of the Recapitalization, the Company became, along with certain
other Parent subsidiaries, a co-issuer of the Parent's 12 3/4% Senior
Subordinated Notes, due 2009 (Notes) and Senior Bank Credit Facilities (see Note
8). The Company relies on the Parent's and its subsidiaries (including the other
co-issuer subsidiaries) ability to fund the debt service. The Company's Parent
has agreed to provide, if and when necessary, the financial support to sustain
the company's operations under the normal course of business through December
31, 2001. However, the inability of the Parent and its subsidiaries (including
the other co-issuer subsidiaries) to meet the debt service requirements would
adversely impact the Company's financial position and results of operations.
COMPASSLEARNING, INC.
Notes to Financial Statements
(Dollars in Thousands, Except Share Amounts)
Formation of the Company
The Company was incorporated on May 12, 1999, for the purpose of acquiring the
Predecessor. The acquisition was consummated by EAC I Inc. (a wholly-owned
subsidiary of the Parent) merging with the Predecessor, with EAC I Inc. being
the surviving entity. EAC I Inc. then changed its name to JLC Learning
Corporation, which subsequently changed its name to CompassLearning, Inc. on
January 20, 2000.
Acquisition of the Predecessor
On July 14, 1999, the Parent 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).
The acquisition of the Predecessor was accounted for using the purchase method
of accounting. The total cost of the acquisition of $61,935 (including $6,735 of
acquisition costs) was allocated 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 acquired intangible assets 24,700
Goodwill 27,095
--------
$ 61,935
========
Included in goodwill above are obligations related to bonuses payable as a
result of the acquisition and Stock Appreciation Rights (SARs) (see Note 12).
Immediately following the acquisition, 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.
COMPASSLEARNING, INC.
Notes to Financial Statements
(Dollars in Thousands, Except Share Amounts)
As of the acquisition date, the Predecessor's significant ongoing R&D projects
included the development of:
o Curriculum: Next-generation reading system (5-8)
o Assessment: Web-based JCAT platform
o 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 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 that fall under the following
definitions of R&D as defined in SFAS No. 2:
o 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.
o 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 write-off of
in-process R&D, $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.
COMPASSLEARNING, INC.
Notes to Financial Statements
(Dollars in Thousands, Except Share Amounts)
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 December 31, 1999, and gives effect to the acquisition of the
Predecessor as if it had been consummated on January 1, 1999 and the completion
of the Recapitalization on November 17, 1999.
Net revenue $ 72,812
Loss from operations (3,176)
Net loss (7,044)
The unaudited pro forma information excludes the effect of the $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 of the Predecessor and the completion of the
Recapitalization. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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. Estimates also affect the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by the
Company using available market information and valuation methodologies.
Considerable judgment is required in estimating fair values. Accordingly, the
estimates may not be indicative of the amounts the Company could realize in a
current market exchange. The carrying amounts of cash, accounts receivable, and
accounts payable approximate fair values. The book value of the senior bank
credit facility approximates fair value due to the variable rate interest
charged on the facility. Fair value of the senior subordinated notes is
estimated at $121,600 as of December 31, 2000.
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.
Investment in Marketable Securities
The Company classifies its investments 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).
COMPASSLEARNING, INC.
Notes to Financial Statements
(Dollars in Thousands, Except Share Amounts)
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
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.
Research and Development costs are charged to expense when incurred.
Intangible Assets
Intangible assets include goodwill and other acquired intangible assets.
Goodwill represents the excess of the purchase price over the fair value of
assets acquired as a result of the acquisition of the Predecessor on July 14,
1999. Intangible assets are being amortized on a straight-line basis over 18
months to seven years.
Deferred Financing Fees
Deferred financing fees are direct costs paid by the Company in connection with
their revolving credit agreement. These costs were being amortized over the term
of the related debt until the debt was extinguished in 1999. Amortization was
approximately $286 for the year ended December 31, 1998, $204 for the period
from January 1, 1999 to July 13, 1999, and $230 for the period from July 14,
1999 to November 17, 1999. On November 17, 1999, the Company wrote-off deferred
financing fees of $3,336 through an extraordinary charge as the Parent
refinanced all the Company's debt.
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.
COMPASSLEARNING, INC.
Notes to Financial Statements
(Dollars in Thousands, Except Share Amounts)
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 98-9,
Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions. 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 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 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 elements (e.g., deliverable and undeliverable
products, maintenance and other post-contract support), the Company allocates
revenue to each undelivered element 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 delivered products on the residual
method 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.
In July 2000, the Emerging Issues Task Force (EITF) reached a consensus on EITF
#99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. As a
result, the Company has reported all revenue involving hardware components on
the gross method for 1999 and 2000. The Company could not restate its 1998
hardware revenue because of a lack of information. In 1999, the Company
converted its financial systems to a new enterprise software-based system, which
did not migrate the necessary hardware revenue information to properly restate
1998. This had no effect on revenue for 1999 and 2000.
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 $705 for the year ended December 31, 1998, $509 for the period
from January 1, 1999 to July 13, 1999, $740 for the period from July 14, 1999 to
December 31, 1999, and $707 for the year ended December 31, 2000.
COMPASSLEARNING, INC.
Notes to Financial Statements
(Dollars in Thousands, Except Share Amounts)
New Accounting Pronouncements
In 1998, the Predecessor adopted SFAS No. 130, "Reporting Comprehensive Income".
SFAS 130 requires that an entity measure and disclose all elements of
comprehensive income that result for 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.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 (as
amended by SFAS No. 138), Accounting for Derivative Instruments and Hedging
Activities, which requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Company did not experience any material impact
resulting from the adoption of SFAS No. 133, as amended.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
which was subsequently updated by SAB 101A. SAB 101 and SAB 101A summarize
certain of the SEC's views in applying accounting principles generally accepted
in the United States to revenue recognition in financial statements. The Company
did not experience any material impact resulting from the adoption of SAB 101.
Reclassification of Certain Amounts
Certain amounts in prior periods presented have been reclassified in the
accompanying financial statements to conform to the 2000 presentation.
3. INVENTORIES
Inventories are as follows:
December 31,
-----------------
1999 2000
---- ----
Materials and supplies $157 $ 70
Finished products 573 411
---- ----
$730 $481
==== ====
4. SOFTWARE DEVELOPMENT COSTS
Software development costs are as follows:
December 31,
---------------------
1999 2000
------- -------
Purchased software $ 7,430 $ 7,430
Less - accumulated amortization (864) (2,721)
------- -------
$ 6,566 $ 4,709
======= =======
Amortization of capitalized software development costs are included in cost of
products sold and was approximately $2,189 for the year ended December 31, 1998,
$887 for the period from January 1, 1999 to July 13, 1999, $864 for the period
from July 14, 1999 to December 31, 1999 and $1,857 for the year ended December
31, 2000.
COMPASSLEARNING, INC.
Notes to Financial Statements
(Dollars in Thousands, Except Share Amounts)
No product currently under development met the technological feasibility
criteria during the years ended December 31, 1999 or 2000. Therefore, no costs
were capitalized in these periods.
5. INTANGIBLE ASSETS
Intangible assets at December 31, 2000 are as follows:
December 31,
-------------------
Life 1999 2000
--------- ------- --------
Tradenames 4 years $ 3,520 $ 3,520
Customer lists 7 years 18,200 18,200
Workforce in place 3 years 2,980 2,980
Trademark 18 months 375 375
Goodwill 7 years 27,095 27,095
------- --------
$52,170 $ 52,170
Less - accumulated amortization (4,014) (12,599)
------- --------
$48,156 $ 39,571
======= ========
Amortization of intangibles was approximately $245 for the year ended December
31, 1998, $131 for the period from January 1, 1999 to July 13, 1999, $4,014 for
the period from July 14, 1999 to December 31, 1999, and $8,585 for the year
ended December 31, 2000.
6. FIXED ASSETS
Fixed assets are comprised of the following:
December 31,
----------------------
Life 1999 2000
------- -------- --------
Computer equipment 3 years $ 1,610 $ 2,679
Leasehold improvements 3 years 102 293
Other furniture and fixtures 3 years 198 523
-------- --------
$ 1,910 $ 3,495
Less - accumulated depreciation (257) (1,119)
-------- --------
$ 1,653 $ 2,376
======== ========
Depreciation expense was approximately $1,591 for the year ended December 31,
1998, $695 for the period from January 1, 1999 to July 13, 1999, and $257 for
the period from July 14, 1999 to December 31, 1999 and $862 for the year ended
December 31, 2000.
COMPASSLEARNING, INC.
Notes to Financial Statements
(Dollars in Thousands, Except Share Amounts)
7. ACCRUED EXPENSES
Accrued expenses are as follows:
December 31,
----------------------
1999 2000
------- -------
Salaries and compensation $ 5,895 $ 3,715
Acquisition-related accruals 2,965 222
Other accrued expenses 3,742 3,005
------- -------
$12,652 $ 6,942
======= =======
8. LONG-TERM DEBT
Long-term debt consisted of the following:
(a) (b)
Senior Credit Facilities Senior
------------------------ Subordinated
Term A Term B Notes Total
------------------------ ------------ ---------
Original Issue, November 17, 1999 $ 31,000 $ 100,000 $ 152,000 $ 283,000
Unamortized Discount -- -- (5,807) (5,807)
1999 Principal Payments (387) (250) -- (637)
--------- --------- --------- ---------
Book Value, December 31, 1999 30,613 99,750 146,193 276,556
2000 Principal Payments (1,939) (1,000) -- (2,939)
Accretion of Discount -- -- 340 340
--------- --------- --------- ---------
Book Value, December 31, 2000 $ 28,674 $ 98,750 $ 146,533 $ 273,957
========= ========= ========= =========
(a) The senior bank credit facilities are comprised of a $30 million revolving
credit facility maturing in 2005, a $31 million term loan A facility
maturing in 2005 and a $100 million term loan B facility maturing in 2006.
During 2000, the Parent applied for and received an annually renewable
standby letter of credit in the amount of $2 million in connection with a
real estate lease. While this letter of credit is in effect, the Parent's
available borrowing under the revolving credit facility is reduced by $2
million. As of December 31, 2000 there had been no drawdowns against the
letter of credit. The term loan A facility and the term loan B facility
are payable in quarterly installments on the last business day of March,
June, September, and December.
Loans under the senior bank credit facilities bear interest as follows:
1. for the revolving credit facility and the term loan A facility, the
LIBOR 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 LIBOR plus 4.00% or the alternate
base rate plus 3.00%.
Term loan A, loans outstanding, as of December 31, 2000, had interest
rates that ranged from 9.89% to 10.05%. Term loan B, loans outstanding, as
of December 31, 2000, had interest rates that ranged from 10.64% to
10.76%.
COMPASSLEARNING, INC.
Notes to Financial Statements
(Dollars in Thousands, Except Share Amounts)
In addition to paying interest on outstanding loans under the senior bank
credit facilities, the Parent is required to pay a commitment fee to the
lender associated with 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). Interest expense incurred during the year
ended December 31, 2000 reduced the contra-equity account, Due from
Parent.
The senior bank credit facilities are subject to mandatory prepayment
with:
o the proceeds of the incidence of certain indebtedness
o the proceeds of certain asset sales or other dispositions
o the proceeds of issuance's of certain equity offerings
o annually beginning in 2000, 50% of the Parent's excess cash flow (as
defined in the credit agreement) from the prior year.
(b) In connection with the Recapitalization, the Parent and the Company issued
152,000 Units consisting of $152,000 in aggregate principal amount of
Notes and 205,656 shares of common stock of the Parent. The Notes bear
interest at 12.75% and pay interest semi-annually in arrears commencing on
May 15, 2000. The Notes are payable in full in 2009. Interest expense
incurred during the year ended December 31, 2000 reduced the contra-equity
account, Due from Parent. The Notes are joint and several obligations of
the Parent and the Company.
Based upon an independent valuation, $148,289 was allocated to the value
of the Notes while $3,711 was the value ascribed to the common stock. The
Notes were issued net of a $2,096 discount, which is being accreted to
maturity using the effective interest method. Accretion for period from
November 17, 1999 through December 31, 1999 was not significant. Accretion
attributable to the stock and the discount for the period January 1, 2000
through December 31, 2000 was $340.
Prior to November 15, 2002, the Parent may repay up to 35% of the Notes
with net cash proceeds of certain sales of equity securities at a price of
112.75% of the principal amount, plus accrued and unpaid interest.
On or after November 15, 2004, the Parent may repay the Notes at a
redemption price of 106.375% of the principal amount, plus accrued
interest thereon decreasing annually to 100% in 2007 and thereafter.
The borrowing agreements provide for certain restrictions, including
restrictions on asset sales, dividend payments, additional indebtedness payments
for restricted investments. In addition, the borrowing agreements provide for
the maintenance of certain financial covenants, including a limit on the
consolidated leverage rates and maintenance of minimum fixed charged coverage
ratios. For the year ended December 31, 2000, the Company was in compliance with
all financial covenants.
Maturities of long-term debt are as follows:
2001 $ 4,488
2002 6,037
2003 7,588
2004 8,361
2005 25,750
Thereafter 227,200
---------
$ 279,424
Less: Discount 5,467
---------
$ 273,957
=========
COMPASSLEARNING, INC.
Notes to Financial Statements
(Dollars in Thousands, Except Share Amounts)
9. INCOME TAXES
Due to the losses incurred from operations, the Predecessor and the Company have
no provision for (benefit from) income taxes for any period presented in the
accompanying financial statements.
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.
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 Year Ended
to July 13, December 31, December 31,
1999 1999 2000
--------------- ---------------- ------------
Benefit at federal statutory rate $ 342 $ 6,548 $ 2,133
State income tax benefit, net 49 935 305
Write-off of in-process R&D - (3,600) -
Goodwill amortization - (710) (1,544)
Other permanent differences (50) (50) (71)
Valuation allowance (341) (3,123) $ (823)
---------- -------- --------
$ - $ - $ -
========== ======== ========
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:
December 31,
------------------------
1999 2000
-------- --------
Net operating loss carryforward $ 9,460 $ 10,190
Depreciation and amortization 7,171 7,939
Bad debt expense 205 93
Accrued liabilities 940 645
Other 500 778
-------- --------
Gross deferred tax assets $ 18,276 $ 19,645
Deferred tax asset valuation allowance (18,276) (19,645)
-------- --------
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 December 31, 1999 and 2000.
COMPASSLEARNING, INC.
Notes to Financial Statements
(Dollars in Thousands, Except Share Amounts)
The Company had a net operating loss carryforward (NOLC) for federal income tax
purposes of approximately $75,650 as of December 31, 2000. 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
$25,475 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.
10. COMMITMENTS AND CONTINGENCIES
Leases
The Company has operating leases for equipment, office and warehouse space that
include original or remaining noncancelable minimum rental commitments as
follows:
Twelve months ending December 31:
2001 $ 3,408
2002 3,344
2003 2,498
2004 1,976
2005 2,040
Thereafter 5,199
---------
Total minimum lease payments 18,465
Total minimum noncancelable sublease rentals (391)
---------
$ 18,074
=========
Rent expense, net of sublease rentals, for all operating leases, was
approximately $3,060 for the year ended December 31, 1998, $1,482 for the period
from January 1, 1999 to July 13, 1999, and $933 for the period from July 14,
1999 to December 31, 1999 and $1,958 for the year ended December 31, 2000.
Litigation
During 1999, the U.S. Department of Labor commenced an investigation into the
issue of whether the Company was properly treating certain employees as exempt
employees under the Fair Labor Standards Act. As a result of the acquisition of
the Predecessor in 1999, the Parent recorded a reserve of approximately $500.
Management believes that this reserve is adequate to cover any potential losses.
In the normal course of business, the Company is a party to various litigation.
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.
COMPASSLEARNING, INC.
Notes to Financial Statements
(Dollars in Thousands, Except Share Amounts)
Warrants
In connection with the Recapitalization, the Parent issued warrants to acquire
13% of the voting common stock of the Company at an exercise price of $0.01 per
share. Based upon an independent valuation, the Parent allocated $2,618 to these
warrants. The warrants are not exercisable after the twelfth anniversary of the
issuance date and contain antidilution provisions.
11. RELATED PARTY TRANSACTIONS
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. The $375 was recorded as an
intangible asset and became fully amortized at December 31, 2000 (see Note 5).
Due from Parent
As a result of the November 17, 1999 Recapitalization, the Company became a
co-issuer on its Parent's long-term debt. Therefore, the long-term debt and
related cost were pushed down to the Company and an offsetting contra-equity
account, Due from Parent, was recorded. Additionally, included in Due from
Parent, are certain operating expenses paid by the Company and subsequently
charged back as these expenses relate to operations of the Parent. $598 and
$7,921 were charged back for 1999 and 2000, respectively.
Due to Related Party
The Predecessor benefited from a management and advisory services agreement
between Holdings and an affiliate of Holding's shareholders. Out-of-pocket
expenses were paid to this affiliate of $25 and $5 during the years ended
December 31, 1998 and 1999, respectively. The Predecessor incurred consulting
expenses of $499 for the year ended December 31, 1998 relating to a consulting
arrangement with an investor. In addition to the consulting arrangement, the
Predecessor entered into a sales and marketing agreement with this investor
whereby the Predecessor would sell product to the investor at a discount.
Approximately $354 and $69 in sales were made to the investor during the years
ended December 31, 1998 and 1999, respectively.
The Company borrowed $500 and $4,350 in 1999 and 2000 respectively from the
Parent's subsidiary, Weekly Reader Corporation. Borrowings for 2000 were offset
by $220 in charges between the Company and subsidiaries of the Parent.
During November 1999, the Company transferred certain warrants valued at $2,160
to EAC III Inc., an investor in the Parent, in connection with the debt
restructuring on November 17, 1999.
COMPASSLEARNING, INC.
Notes to Financial Statements
(Dollars in Thousands, Except Share Amounts)
12. EMPLOYEE BENEFIT PLANS
Stock Appreciation Rights
In February 1999, the Predecessor's Board of Directors adopted the 1998 Stock
Appreciation Rights (SAR) Plan. SARs 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 SARs. Of the $1,520 value ascribed to the SARs, $1,120 was paid to
employees in November 1999 and the balance was paid in July 2000.
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 was paid in November 1999.
401(k) Retirement Plan
The Parent has a retirement savings plan covering substantially all eligible
employees of the Company. This 401(k) Plan provides for a 33% matching
contribution by the Company, limited to eligible contributions by the employees.
The Predecessor accrued $175 and the Company accrued $198 during the period
January 1, 1999 to July 13, 1999, and July 14, 1999 to December 31, 1999,
respectively, for 1999 contributions to be paid in 2000. The Company accrued
$348 as of December 31, 2000 for matching contributions to be paid in 2001.
13. RESTRUCTURING
During July 1998 the Predecessor recorded a restructuring charge of $3,012
related to the adoption by the Predecessor 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 Predecessor paid employee severance and
benefit costs of approximately $1,400 when it decreased its workforce by
approximately 90 employees.
14. QUARTERLY DATA (Unaudited)
Three Months Ended
--------------------------------------------------
March 31 June 30 September 30 December 31 Year
--------- --------- ------------ ----------- ---------
2000
Revenues $ 12,731 $ 19,578 $ 12,908 $ 18,811 $ 64,028
Gross profit $ 6,795 $ 13,465 $ 7,548 $ 9,034 $ 36,842
Operating costs and expenses $ 12,277 $ 12,085 $ 8,140 $ 10,477 $ 42,979
Income/(loss) from operations $ (5,482) $ 1,380 $ (592) $ (1,443) $ (6,137)
Net Income/(loss) $(13,698) $ (7,168) $ (9,413) $(10,253) $(40,532)
1999
Revenues $ 15,353 $ 19,916 $ 18,714 $ 18,829 $ 72,812
Gross profit $ 7,228 $ 12,497 $ 10,442 $ 10,601 $ 40,768
Operating costs and expenses $ 8,669 $ 9,449 $ 19,776 $ 10,937 $ 48,831
Income/(loss) from operations $ (1,441) $ 3,048 $ (9,334) $ (336) $ (8,063)
Net Income/(loss) $ (2,346) $ 1,675 $(13,739) $ (5,076) $(19,486)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: April 5, 2001
WRC MEDIA INC.,
By: /s/ MARTIN E. KENNEY, JR.
-----------------------------
Name: Martin E. Kenney, Jr.
Title: CHIEF EXECUTIVE OFFICER
WEEKLY READER CORPORATION,
By: /s/ PETER E. BERGEN
-----------------------------
Name: Peter E. Bergen
Title: PRESIDENT
COMPASSLEARNING, INC.,
By: /s/ MARTIN E. KENNEY, JR.
-----------------------------
Name: Martin E. Kenney, Jr.
Title: CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS BEEN
SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON THIS 5TH DAY
OF APRIL, 2001.
*
- ------------------------------------
David F. Burgstahler
Director: WRC Media, Weekly Reader and CompassLearning
*
- ------------------------------------
Ralph D. Caulo
Non-Executive Vice-Chairman: WRC Media
SIGNATURES
*
- ------------------------------------
Timothy C. Collins.
Director: WRC Media, Weekly Reader and CompassLearning
*
- ------------------------------------
D. Ronald Daniel.
Non-Executive Chairman: WRC Media, Weekly Reader and CompassLearning
*
- ------------------------------------
Martin E. Kenney, Jr.
Director: WRC Media, Weekly Reader and CompassLearning;
Chief Executive Officer: WRC Media and CompassLearning;
President: CompassLearning; and
Executive Vice President, Weekly Reader
*
- ------------------------------------
James N. Lane
Director: WRC Media, Weekly Reader and CompassLearning
*
- ------------------------------------
Charles L. Laurey
Director: WRC Media, Weekly Reader and CompassLearning; and
Secretary: WRC Media, Weekly Reader and CompassLearning
*
- ------------------------------------
Robert S. Lynch
Director: WRC Media, Weekly Reader and CompassLearning;
Executive Vice President, Chief Operating Officer:
WRC Media and CompassLearning; and
Treasurer: WRC Media, Weekly Reader and CompassLearning
*
- ------------------------------------
Richard Nota
Vice President, Finance: WRC Media
STATEMENT OF DIFFERENCES
------------------------
The checkmark shall be expressed as.................................... 'ch'