UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001 Commission File No.
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 or organization) (State or other jurisdiction of incorporation 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:
12 3/4% Senior Subordinated Notes due 2009
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
- ------------------------------------------------------------------------------------------
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
Unaudited
December 31, March 31,
2000 2001
------------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,968 $ 2,941
Accounts receivable, net 42,930 40,849
Inventories, net 14,605 13,993
Prepaid expenses 3,454 6,269
Other current assets 17,409 16,330
-------- --------
Total current assets 81,366 80,382
Property and equipment, net 8,105 7,694
Purchased software, net 4,709 4,244
Goodwill, net 229,498 227,142
Deferred financing costs, net 6,693 6,406
Identified intangible assets, net 174,068 162,971
Other assets 25 375
-------- --------
Total Assets $504,464 $489,214
======== ========
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable $ 19,767 $ 15,545
Accrued payroll, commissions and benefits 8,495 8,585
Current portion of deferred revenue 36,455 32,218
Other accrued liabilities 39,991 40,837
Current portion of long-term debt 4,488 4,875
-------- --------
Total current liabilities 109,196 102,060
Deferred revenue, net of current portion 1,868 2,038
Due to related party 2,946 2,946
Long-term debt 269,469 280,138
-------- --------
Total liabilities 383,479 387,182
15% Series B preferred stock subject to redemption,
Including accrued dividends and accretion of warrant value 77,796 81,344
-------- --------
Warrants on preferred stock 11,751 11,751
-------- --------
Common stock subject to redemption 1,190 1,190
-------- --------
Stockholders equity:
Common stock, ($.01 par value, 20,000,000 shares authorized;
6,851,821 shares outstanding) 69 69
Additional paid-in capital 126,063 126,063
Accumulated deficit (95,893) (118,394)
Accumulated comprehensive loss 9 9
-------- --------
Total stockholders equity 30,248 7,747
-------- --------
Total liabilities and stockholders equity $504,464 $489,214
======== ========
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets.
2
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31
Unaudited
(dollars in thousands)
2000 2001
-------- --------
Sales, net $ 50,234 $ 49,491
Cost of goods sold 16,952 14,219
-------- --------
Gross profit 33,282 35,272
Costs and expenses:
Sales and marketing 11,829 12,734
Research and development 2,044 1,290
Distribution, circulation and fulfillment 3,172 3,359
Editorial 2,487 2,892
General and administrative 7,292 7,232
Depreciation 634 782
-------- --------
27,458 28,289
Income before amortization of goodwill and intangible
assets, interest expense, income taxes and other, net 5,824 6,983
Amortization of goodwill and intangible assets 8,655 16,853
Loss from operations (2,831) (9,870)
Interest expense, including amortization
of deferred financing costs (8,399) (8,645)
Other, net 56 (204)
-------- --------
Loss before income tax provision (11,174) (18,719)
Income tax provision 450 234
-------- --------
Net loss $(11,624) $(18,953)
======== ========
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
3
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31
Unaudited
(dollars in thousands)
2000 2001
-------- --------
Cash flows from operating activities:
Net loss $(11,624) $(18,953)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation and amortization 9,291 17,636
Interest Expense-Accretion of Discounts and Stock 72 81
Amortization of deferred financing fees 173 287
Changes in assets and liabilities-
Decrease in accounts receivable 5,258 2,081
Decrease in inventories 1,175 612
Increase in prepaid expenses and other current assets (558) (1,738)
Increase in goodwill and other intangibles (2,320) (2,934)
Decrease in accounts payable (9,052) (4,222)
Decrease in current and noncurrent deferred revenue (5,141) (4,067)
(Increase) decrease in noncurrent assets 17 (350)
Increase in current and noncurrent accrued liabilities 812 935
-------- --------
Net cash used in operating activities (11,897) (10,631)
-------- --------
Cash flows from investing activities:
Capital expenditures (424) (371)
-------- --------
Net cash used in investing activities (424) (371)
-------- --------
Cash flows from financing activities:
Net proceeds from revolving line of credit 2,000 12,000
Retirement of senior bank debt (638) (1,025)
-------- --------
Net cash provided by financing activities 1,362 10,975
-------- --------
Decrease in cash and cash equivalents (10,959) (27)
Cash and cash equivalents, beginning of period 15,520 2,968
-------- --------
Cash and cash equivalents, end of period $ 4,561 $ 2,941
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,719 $ 3,937
======== ========
Cash paid during the period for income taxes $ 450 $ 234
======== ========
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
4
WRC MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS ORGANIZATION
The accompanying condensed consolidated financial statements include
the accounts of WRC Media, Inc. ("WRC") and its subsidiaries- Weekly Reader
Corporation, and CompassLearning, Inc. The term "Company" refers to WRC and its
subsidiaries.
WRC was incorporated on May 14, 1999. On July 14, 1999, WRC acquired
CompassLearning in a business combination accounted for as a purchase.
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. owns 5.1% of the common stock of the Weekly Reader
Corporation.
The separate financial statements of the Subsidiary Guarantors have not
been included because (i) the Subsidiary Guarantors constitute all of WRC
Media's direct and indirect subsidiaries, (ii) the Subsidiary Guarantors have
fully and unconditionally guaranteed the Company's obligations on a joint and
several basis; (iii) WRC Media has no operations and its ability to service its
debt is dependent on the operations of its subsidiaries.
All significant intercompany balances and transactions have been
eliminated in the accompanying condensed consolidated financial statements.
The accompanying condensed consolidated financial statements have been
prepared without audit. In the opinion of management, all adjustments,
consisting of only normal recurring adjustments necessary to present fairly the
financial position, the results of operations and cash flows for the periods
presented, have been made.
The accompanying condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Accordingly, certain information and note disclosures
normally included in financial statements prepared in conformity with generally
accepted accounting principles have been condensed or omitted.
These condensed consolidated financial statements should be read in
conjunction with WRC Media, Inc. and Subsidiaries annual financial statements
and related notes for the year ended December 31, 2000. The operating results
for the three-month periods ended March 31, 2000 and 2001 are not necessarily
indicative of the results that may be expected for a full year.
5
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
Unaudited
December 31, March 31,
2000 2001
--------------------- ---------------------
ASSETS
Current Assets:
Cash $ 2,914 $ 2,570
Accounts receivable, net 26,758 26,065
Inventories, net 14,124 13,259
Due from related party, net 4,632 8,616
Prepaid expenses 3,219 5,635
Other current assets 17,409 16,330
-------------- --------------
Total current assets 69,056 72,475
Property and equipment, net 5,729 5,534
Other intangible assets, net 41,282 42,179
Excess of purchase price over net assets acquired, net 104,881 104,156
Other non-current assets 25 375
-------------- --------------
Total Assets $ 220,973 $ 224,719
============== ==============
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable $ 17,382 $ 13,293
Deferred revenue 20,119 17,643
Accrued expenses and other 29,592 27,250
Current portion of long-term debt 4,488 4,875
-------------- --------------
Total current liabilities 71,581 63,061
Long-term debt 269,469 280,138
Commitments and contingencies
Redeemable preferred stock, plus accrued dividends 88,528 91,848
Stockholders deficit:
Common stock, ($.01 par value, 20,000,000 shares authorized;
2,830,000 shares issued) 28 28
Class A non-voting common stock ($.01 par value,
1,000,000 shares authorized, no shares issued or outstanding) - -
Class B non-voting common stock ($.01 par value,
1,000,000 shares authorized, no shares issued or outstanding) - -
Additional paid-in capital 9,133 9,133
Due from parent (69,374) (64,362)
Accumulated deficit (148,392) (155,127)
-------------- --------------
Total stockholders deficit (208,605) (210,328)
-------------- --------------
Total liabilities and stockholders deficit $ 220,973 $ 224,719
============== ==============
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets.
6
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31
Unaudited
(dollars in thousands)
2000 2001
---------- ----------
Sales, net $ 35,707 $ 35,582
Cost of goods sold 9,705 9,058
---------- ----------
Gross profit 26,002 26,524
Costs and expenses:
Marketing and selling 5,918 6,796
Distribution, circulation and fulfillment 3,172 3,359
Editorial 2,487 2,892
General and administrative 5,248 5,277
Depreciation 474 491
---------- ----------
17,299 18,815
Income before amortization of goodwill and intangible assets,
interest expense, income taxes and other, net 8,703 7,709
Amortization of goodwill and intangible assets 3,239 2,764
Income from operations 5,464 4,945
Other income (expense):
Interest expense (8,228) (8,361)
Other, net 45 34
---------- ----------
Loss before income tax provision (2,719) (3,382)
Income tax provision 450 33
---------- ----------
Net loss $ (3,169) $ (3,415)
========== ==========
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
7
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31
Unaudited
(dollars in thousands)
2000 2001
--------- ---------
Cash flows from operating activities:
Net loss $(3,169) $(3,415)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 3,714 3,255
Interest Expense-Accretion of Discounts and Stock 72 81
Changes in operating assets and liabilities:
(Increase) decrease in-
Accounts receivable 638 693
Inventories 1,167 865
Prepaid expenses and other assets (2,520) (4,621)
Increase (decrease) in-
Accounts payable (8,191) (4,089)
Deferred revenue (1,345) (2,476)
Accrued expenses and other liabilities (1,960) (2,343)
--------- ---------
Net cash used in operating activities (11,594) (12,050)
--------- ---------
Cash flows from investing activities:
Capital expenditures (111) (296)
--------- ---------
Net cash used in investing activities (111) (296)
--------- ---------
Cash flows from financing activities:
Net proceeds from revolving line of credit 2,000 12,000
Retirement of senior bank debt (638) (1,025)
(Increase) decrease in due from parent, net 4,841 5,012
(Increase) decrease in due from related party (5,211) (3,984)
--------- ---------
Net cash provided by financing activities 992 12,003
--------- ---------
Decrease in cash and cash equivalents (10,713) (343)
Cash, beginning of period 14,143 2,914
--------- ---------
Cash, end of period $ 3,430 $ 2,571
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,719 $ 3,937
========= =========
Cash paid during the period for income taxes $ 450 $ 234
========= =========
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
8
WEEKLY READER CORPORATION ND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS ORGANIZATION
Weekly Reader Corporation ("WRC" or the "Company"), PRIMEDIA Reference,
Inc. ("PRI") and American Guidance Services, Inc. ("American Guidance") were
wholly-owned subsidiaries of PRIMEDIA Inc. ("PRIMEDIA"). On August 13, 1999,
PRIMEDIA entered into a Redemption, Stock Purchase and Recapitalization
Agreement (as amended as of October 6, 1999, the "Recapitalization Agreement")
with WRC Media Inc., formerly EAC II Inc. ("WRC Media"). The terms of the
Recapitalization Agreement required that all of the outstanding capital stock of
PRI and American Guidance be contributed to WRC prior to WRC Media's purchase of
majority interest in WRC for a purchase price of $395,000. The presentation of
these financial statements reflects the capital contribution made by PRIMEDIA to
WRC of all the PRI and American Guidance shares at their historical carrying
values. In addition, on October 5, 1999, the authorized capital of WRC was
amended to consist of 20,000,000 shares of common stock, par value $.01/share,
and WRC declared a 10,000-for-one stock split effective on October 5, 1999. On
November 17, 1999 WRC Media completed its recapitalization of WRC. The
consolidated financial statements include the accounts of WRC and its
subsidiary, Lifetime Learning System, Inc. ("Lifetime Learning"), PRI and its
subsidiaries, Funk & Wagnalls Yearbook Corporation and Gareth Stevens, Inc.
("Gareth Stevens"), and American Guidance and its subsidiary, AGS International
Sales, Inc. (collectively referred to as "Weekly Reader"). As a result of the
recapitalization, WRC owns 94.9% and PRIMEDIA 5.1% of the common stock of Weekly
Reader. On November 17, 1999 PRI legally changed its name to World Almanac
Education Group ("WAE").
All significant intercompany balances and transactions have been
eliminated in the accompanying condensed consolidated financial statements.
The accompanying condensed consolidated financial statements have been
prepared without audit. In the opinion of management, all adjustments,
consisting of only normal recurring adjustments necessary to present fairly the
financial position, the results of operations and cash flows for the periods
presented, have been made.
The accompanying condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Accordingly, certain information and note disclosures
normally included in financial statements prepared in conformity with generally
accepted accounting principles have been condensed or omitted.
These condensed consolidated financial statements should be read in
conjunction with Weekly Reader Corporation and Subsidiaries annual financial
statements and related notes for the year ended December 31, 2000. The operating
results for the three-month periods ended March 31, 2000 and 2001 are not
necessarily indicative of the results that may be expected for a full year.
9
COMPASSLEARNING, INC.
CONDENSED BALANCE SHEETS
(dollars in thousands)
Unaudited
December 31, March 31,
2000 2001
------------ ---------
ASSETS
Current Assets:
Cash $ 54 $ 371
Accounts receivable, net 15,410 14,022
Inventories, net 481 734
Prepaid expenses 233 634
--------- ---------
Total current assets 16,178 15,761
Purchased software, net 4,709 4,244
Other acquired intangible assets, net 18,147 17,028
Excess of purchase price over net assets acquired, net 21,424 20,457
Fixed assets, net 2,376 2,160
--------- ---------
Total Assets $ 62,834 $ 59,650
========= =========
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable $ 2,385 $ 2,252
Due to related party 4,630 8,616
Accrued expenses 6,942 6,474
Current portion of deferred revenue 16,336 14,575
Current portion of long-term debt 4,488 4,875
--------- ---------
Total current liabilities 34,781 36,792
Deferred revenue, net of current portion 1,868 2,038
Long-term debt 269,469 280,138
Due to related party 2,160 2,160
--------- ---------
Total liabilities 308,278 321,128
Stockholders deficit:
Preferred stock, ($.01 par value, 10,000,000
shares authorized, no shares issued
and outstanding) - -
Class A common stock, ($.01 par value,
20,000 shares authorized,
10,000 shares issued and outstanding) - -
Additional paid-in capital 31,316 31,316
Accumulated deficit (59,240) (70,918)
Due from parent (217,520) (221,876)
--------- ---------
Total stockholders deficit (245,444) (261,478)
--------- ---------
Total liabilities and stockholders deficit $ 62,834 $ 59,650
========= =========
The accompanying notes to condensed financial statements
are an integral part of these condensed balance sheets.
10
COMPASSLEARNING, INC.
CONDENSED STATEMENTS OF OPERATIONS
For the three months ended March 31
Unaudited
(dollars in thousands)
2000 2001
-------- --------
Sales, net $ 14,527 $ 13,909
Cost of goods sold 7,247 5,161
-------- --------
Gross profit 7,280 8,748
Costs and expenses:
Sales and marketing 5,911 5,938
Research and development 2,044 1,290
General and administrative 2,044 1,955
Depreciation 160 291
-------- --------
10,159 9,474
Loss before amortization of goodwill and intangible assets,
interest expense, income taxes and other, net (2,879) (726)
Amortization of goodwill and intangible assets 2,603 2,550
Loss from operations (5,482) (3,276)
Other income (expense):
Interest expense (8,226) (8,358)
Other, net 11 -
-------- --------
Loss before income tax provision (13,697) (11,634)
Income tax provision - 44
-------- --------
Net Loss $(13,697) $(11,678)
======== ========
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
11
COMPASSLEARNING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the three months ended March 31
Unaudited
(dollars in thousands)
2000 2001
-------- --------
Cash flows from operating activities:
Net loss $(13,697) $(11,678)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 2,764 2,842
Interest Expense-Accretion of Discounts and Stock 72 81
Changes in assets and liabilities:
Decrease in accounts receivable 4,620 1,388
(Increase) decrease in inventories 8 (253)
(Increase) decrease in prepaid expenses 59 (401)
Decrease in accounts payable (855) (133)
Decrease in deferred revenue (3,797) (1,591)
Decrease in accrued expenses and other long-term liabilities (2,075) (468)
-------- --------
Net cash used in operating activities (12,901) (10,213)
-------- --------
Cash flows from investing activities:
Capital expenditures (313) (75)
-------- --------
Net cash used in investing activities (313) (75)
-------- --------
Cash flows from financing activities:
Borrowings under revolving line of credit, net 2,000 12,000
Retirement of senior bank debt (638) (1,025)
Increase in due to related party 5,489 3,986
(Increase) decrease in due from parent, net 7,392 (4,356)
-------- --------
Net cash provided by financing activities 14,243 10,605
-------- --------
Change in Cash 1,029 317
Cash, beginning of period 102 54
-------- --------
Cash, end of period $ 1,131 $ 371
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ - $ -
======== ========
Cash paid during the period for income taxes $ - $ 44
======== ========
The accompanying notes to condensed financial statements
are an integral part of these statements.
12
COMPASSLEARNING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS ORGANIZATION
CompassLearning, Inc. (formerly, JLC Learning Corporation and formerly
EAC I Inc.) (the "Company") is a leading 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
("SSC"), a wholly-owned subsidiary of JLC Learning Holdings, Inc. ("Holdings").
The Predecessor was acquired by WRC Media, Inc. (the "Parent") on July
14, 1999 (the "Purchase Date"). The Securities and Exchange Commission ("SEC")
deems an acquired business to be a predecessor when the acquirer is in
substantially the same business of the entity acquired and the acquirer's own
operations prior to the acquisition appear insignificant relative to the
business acquired. The purchase method of accounting was used to record the
assets acquired and liabilities assumed by the Company. Such accounting
generally results in the acquirer recording the assets purchased and liabilities
assumed at fair value, which results in increased amortization and depreciation
reported in future periods.
The accompanying condensed consolidated financial statements have been
prepared without audit. In the opinion of management, all adjustments,
consisting of only normal recurring adjustments necessary to present fairly the
financial position, the results of operations and cash flows for the periods
presented, have been made.
The accompanying condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the SEC. Accordingly, certain
information and note disclosures normally included in financial statements
prepared in conformity with generally accepted accounting principles have been
condensed or omitted.
These condensed consolidated financial statements should be read in
conjunction with CompassLearning, Inc.'s financial statements and related notes
for the period ended December 31, 2000. The operating results for the
three-month periods ended March 31, 2000 and 2001 are not necessarily indicative
of the results that may be expected for a full year.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding the financial
condition as of March 31, 2001 of WRC Media Inc. ("WRC Media") and its
subsidiaries and their results of operations for the three-month periods ended
March 31, 2000 and 2001. You should read the following discussion in conjunction
with the financial statements of WRC Media, Weekly Reader Corporation ("Weekly
Reader") and CompassLearning, Inc. ("CompassLearning,") attached to this
discussion and analysis. Unless the context otherwise requires, references to
"Weekly Reader" herein are to Weekly Reader and its subsidiaries, including
American Guidance Service, Inc. ("American Guidance") and World Almanac
Education Group, Inc. ("World Almanac"). Unless the context otherwise requires,
the terms "we," "our," and "us" refer to WRC Media and its subsidiaries after
giving effect to the transactions related to the acquisition of CompassLearning
and recapitalization of Weekly Reader effectuated on July 14, 1999 and November
17, 1999, respectively (the "Acquisition and Recapitalization"). This discussion
and analysis contains forward-looking statements. Although we believe that our
plans, intentions and expectations reflected in or suggested by these
forward-looking statements are reasonable, we cannot assure you that these
plans, intentions or expectations will be achieved. These forward-looking
statements are subject to risks, uncertainties and assumptions about us.
Results of Operations for the three months ended March 31, 2001-- WRC Media Inc.
and Subsidiaries
The results of operations of WRC Media and its subsidiaries encompass the
operations of CompassLearning and Weekly Reader and its subsidiaries, including
American Guidance and World Almanac. The results of operations of WRC Media and
its subsidiaries should be read together with the separate discussions of the
results of operations of Weekly Reader and CompassLearning.
In analyzing WRC Media's results for the three months ended March 31, 2000 and
2001, respectively, the seasonal nature of WRC Media's business should be
considered. As a result of seasonality, approximately 23% of WRC Media's
publication and related service revenues usually result in its first quarter,
23% in its second quarter, and 54% in the third and fourth quarters combined.
However, unlike this revenue stream, many of WRC Media's expenses are incurred
evenly throughout the year.
WRC Media analyzes its revenues, expenses and operating results on a percentage
of sales basis. The following table sets forth, for the periods indicated,
combined statements of operations data for WRC Media and its subsidiaries,
expressed in millions of dollars and as a percentage of net sales.
14
Three Months Ended March 31,
2000 2001
--------------------------------------------------------------
Amount % of Net Sales Amount % of Net Sales
------------ ---------------- ------------ ---------------
(Dollars in millions)
Sales, net (a) $ 50.2 100.0% $ 49.5 100.0%
Cost of goods sold (a) 16.9 33.7% 14.2 28.7%
------ ----- ------ -----
Gross profit $ 33.3 66.3% $ 35.3 71.3%
Costs and expenses:
Sales and marketing 11.8 23.5% 12.7 25.7%
Research and development 2.0 4.0% 1.3 2.6%
Distribution, circulation and fulfillment 3.2 6.4% 3.4 6.9%
Editorial 2.5 5.0% 2.9 5.9%
General and administrative 7.3 14.5% 7.2 14.5%
Depreciation 0.6 1.2% 0.8 1.6%
------ ----- ------ -----
27.4 54.6% 28.3 57.2%
Income before amortization of goodwill and intangible assets,
interest expense, income taxes and other, net 5.9 11.7% 7.0 14.1%
Amortization of goodwill and intangible assets 8.7 17.2% 16.9 34.1%
------ ----- ------ -----
Loss from operations (2.8) (5.5%) (9.9) (20.0%)
Interest expense, including amortization
of deferred financing costs (8.4) (16.7%) (8.6) (17.4%)
Other, net 0.1 0.2% (0.2) (0.4%)
------ ----- ------ -----
Loss before income tax expense (11.1) (22.0%) (18.7) (37.8%)
Income tax expense 0.5 1.0% 0.2 0.4%
------ ----- ------ -----
Net loss $(11.6) (23.0%) $(18.9) (38.2%)
====== ===== ====== =====
EBITDA (b) $ 6.5 12.9% $ 7.6 15.3%
====== ===== ====== =====
(a) Certain amounts have been reclassified in accordance with EITF 99-19,
"Reporting Revenue as Principal versus Net as an Agent".
(b) EBITDA is defined as income (loss) before interest expense, income taxes,
depreciation and amortization. EBITDA data is included because we
understand that this information may be considered by investors as an
additional basis on which to evaluate WRC Media's ability to pay interest,
repay debt and make capital expenditures. Because all companies do not
calculate EBITDA identically, the presentation of EBITDA in this report is
not necessarily comparable to similarly titled measures of other companies.
EBITDA does not represent and should not be considered more meaningful
than, or an alternative to, measures of operating performance determined in
accordance with generally accepted accounting principles.
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
Sales, net. For the three months ended March 31, 2001, net sales decreased $0.7
million, or 1.0%, to $49.5 million from $50.2 million for the same period in
2000. This decrease was primarily due to a decrease in sales at CompassLearning
of $0.6 million, or 4.1%, to $13.9 million for the three months ended March 31,
2001 from $14.5 million for the same period in 2000 combined with a decrease in
sales at Weekly Reader of $0.1 million, or 0.3%, to $35.6 million for the three
months ended March 31, 2001 from $35.7 million for the same period in 2000. The
decrease in sales at Weekly Reader was the result of (1) an increase in sales at
American Guidance Service of $0.2 million, or 1.5%, to $12.1 million for the
three months ended March 31, 2001 from $11.9 million for the same period in 2000
as a result of increases in sales of our curriculum products, primarily
textbooks; (2) a decrease in sales at World Almanac of $0.3 million, or 2.0%, to
$13.0 million from $13.3 million for the same period in 2000, as a result of
anticipated lower sales of Funk & Wagnalls Yearbook business. World Almanac's
net revenue for the first quarter of 2001 excluding the de-emphasized non-core
Yearbook sales increased $0.1 million, or 0.4%, to $11.5 million from $11.4
million for the same period in 2000. World Almanac is no longer soliciting new
subscribers for its Yearbooks since the print edition of the Funk & Wagnall's
Encyclopedia was discontinued. Accordingly, Funk & Wagnalls sales of Yearbooks
are naturally declining year-over-year, as it is entirely dependent
15
upon sales orders from existing customers via renewals; and (3) Weekly Reader's
sales, not including World Almanac and American Guidance, of $10.4 million were
essentially flat for the three months ended March 31, 2001 compared to the same
period in 2000.
The decrease in sales at CompassLearning was due to (1) a planned decrease in
hardware revenue of $1.9 million, or 70.4%, to $0.8 million for the three months
ended March 31, 2001 from $2.7 million for the same period in 2000, (2) a
decrease in service revenue from technical support (of older software) of $0.6
million, or 14.3%, to $3.6 million for the three months ended March 31, 2001
from $4.2 million for the same period in 2000 primarily as a result of lower
service contract renewal sales, and (3) a decrease in service revenue from
professional development services of $0.2 million or 7.4% to $2.5 million for
the three months ended March 31, 2001 from $2.7 million for the same period in
2000 offset by an increase in software revenue of $2.1 million, or 42.9%, to
$7.0 million for the three months ended March 31, 2001 from $4.9 million for the
same period in 2000 primarily as a result of higher market coverage with a more
seasoned sales force compared to one year ago, customers accelerating buying
decisions in order to be ready for summer sessions, and reduced market confusion
as a result of many smaller startup companies exiting the marketplace due to
poor sales performance and loss of additional financing. CompassLearning's net
revenue for the first quarter of 2001 excluding the de-emphasized non-core
hardware sales increased $1.3 million, or 11.0%, to $13.1 million from $11.8
million for the same period in 2000.
Net revenue for the first quarter of 2001 - excluding de-emphasized non-core
business lines of hardware and Yearbooks increased $1.4 million, or 3.1%, to
$47.1 million from $45.7 million for the same period in 2000, shown in the
following table:
Variance to
Q1 2000
Q1 Q1 ----------------------
Net Revenue (thousands) 2000 2001 $ %
- ------------------------------------ ------- ------ ------ ------
Weekly Reader 10,459 10,421 (38) (0.4%)
AGS 11,940 12,119 179 1.5%
World Almanac 13,308 13,042 (266) (2.0%)
Compass 14,527 13,909 (618) (4.3%)
------- ------ ------ ------
WRC Media - Consolidated 50,234 49,491 (743) (1.5%)
------- ------ ------ ------
Non-core revenues:
Compass Hardware business 2,690 848 (1,842) (68.5%)
World Almanac's Funk & Wagnall's
yearbook business
1,846 1,536 (310) (16.8%)
------- ------ ------ ------
WRC Media - Core Business 45,698 47,107 1,409 3.1%
======= ====== ====== ======
16
Gross profit. For the three months ended March 31, 2001, gross profit increased
by $2.0 million, or 6.0%, to $35.3 million from $33.3 million for the same
period in 2000. This increase was due to an increase in gross profit at
CompassLearning of $1.4 million, or 18.5%, to $8.7 million for the three months
ended March 31, 2001 from $7.3 million for the same period in 2000 combined with
an increase in gross profit at Weekly Reader of $0.6 million, or 2.3%, to $26.6
million for the three months ended March 31, 2001 from $26.0 million for the
same period in 2000. The increase in gross profit at Weekly Reader was a result
of (1) an increase in gross profit at American Guidance of $0.4 million, or
4.7%, to $8.9 million for the three months ended March 31, 2001 from $8.5
million for the same period in 2000 primarily due to the increased sales
described above; (2) an increase in gross profit at Weekly Reader, not including
World Almanac and American Guidance, of $0.1 million, or 1.2%, to $8.7 million
for the three months ended March 31, 2001 from $8.6 million for the same period
in 2000 due to a favorable cost of goods sold rate variance; (3)an increase in
gross profit at World Almanac of $0.1 million, or 0.6 % to $8.9 million for the
three months ended March 31, 2001 from $8.8 million for the same period in 2000
due to a favorable cost of goods sold rate variance. The increase in gross
profit at CompassLearning of $1.4 million, or 18.5%, to $8.7 million from $7.3
million in 2000 was primarily due to higher software revenue. CompassLearning's
gross profit as a percent of revenue significantly increased to 62.6% from 50.3%
for the same period in 2000 as a result of the change in sales mix. For the
three months ended March 31, 2001 CompassLearning's higher margin software
business represented 50.4% as a percentage of total revenues compared to 33.8%
as a percentage of total revenues for the same period in 2000. At
CompassLearning, it is our strategy to grow our core business; which is the high
margin electronic courseware business and the related professional development
services that emanate from that business, and continue to de-emphasize the
significantly lower margin hardware revenues, as well as the technical support
service revenue streams which have a declining service life cycle.
WRC Media's gross profit as a percentage of sales increased to 71.3% for the
three months ended March 31, 2001 from 66.3% for the same period in 2000,
primarily due to change in sales mix previously noted.
Costs and expenses. For the three months ended March 31, 2001, costs and
expenses increased by $.9 million, or 3.3%, to $28.3 million from $27.4 million
for the same period in 2000. This was primarily attributable to increased sales
and marketing expenses, which increased $0.9 million for the three months ended
March 31, 2001, or 7.6%, to $12.7 million from $11.8 million for the same period
in 2000.
17
Income before amortization of goodwill and intangible assets, interest expense,
income taxes and other, net. For the three months ended March 31, 2001, income
before amortization of goodwill and intangible assets, interest expense, income
taxes and other, net increased by $1.1 million, or 18.6%, to $7.0 million from a
loss of $5.9 million for the same period in 2000, and as a percentage of sales
increased to 14.1% from 11.7% for the same period in 2000. These decreases were
primarily due to the increase in gross profit described above, partially offset
by the increase in sales and marketing expense, also described above.
Amortization of goodwill and intangible assets. For the three months ended March
31, 2001, amortization of goodwill and intangible assets increased by $8.2
million, or 95.3%, to $16.9 million from $8.7 million for the same period in
2000. This increase was primarily due to an increased appraisal valuation of
some WRC Media intangible assets, which allow WRC Media to increase the rate of
amortization of some intangible assets.
Loss from operations. For the three months ended March 31, 2001, loss from
operations increased $7.1 million, or 259.3%, to $9.9 million from $2.8 million
for the same period in 2000. This increase was primarily due to the increase in
amortization of goodwill and intangible assets of $8.2 million described above.
Interest expense, including amortization of deferred financing costs. For the
three months ended March 31, 2001, interest expense increased by $0.2 million,
or 2.4%, to $8.6 million from $8.4 million for the same period in 2000 and
interest expense as a percentage of sales increased to 17.4% from 16.7% for the
same period in 2000. Interest expense for the three months ended March 31, 2001
and 2000 relates to debt and amortization of deferred financing costs associated
with the Acquisition and Recapitalization.
Other, net. For the three months ended March 31, 2001, other , net decreased
$0.2 million, or 300.0%, to an expense of $0.2 million from income of $0.1
million for the same period in 2000. This decrease was primarily due to a
management fee incurred from a shareholder, which was not charged in 2000.
Income tax provision (benefit). For the three months ended March 31, 2001,
provision for income taxes decreased by $0.3 million or 60.0% due to an income
tax provision of $0.2 million down from a provision for income taxes of $0.5
million for the same period in 2000.
Net loss. For the three months ended March 31, 2001, net loss increased by $7.3
million, or 63.6%, to $18.9 million from $11.6 million for the same period in
2000 primarily as a result of the $8.2 million increase in amortization expenses
for intangible assets resulting from the Acquisition and Recapitalization
described above. Net loss as a percentage of net sales increased to negative
38.2% for the three months ended March 31, 2001 from negative 23.0% for the same
period in 2000.
18
EBITDA. For the three months ended March 31, 2001, EBITDA increased $1.1
million, or 16.3%, to $7.6 million from $6.5 million for the same period in
2000. This increase is primarily attributable to $2.0 million of greater gross
profit for the first quarter of this year compared to the same period in 2000,
offset by $0.9 million of higher sales and marketing expenses. As discussed
above, CompassLearning contributed $1.4 million of the $2.0 million higher gross
profit in the quarter resulting from higher software sales.
19
Results of Operations for the three months ended March 31, 2001 -- Weekly Reader
Corporation and Subsidiaries
The following table sets forth, for the periods indicated, combined statements
of operations data for Weekly Reader and its subsidiaries expressed in millions
of dollars and as a percentage of net sales.
Three Months Ended March 31,
2000 2001
------------------------------ ------------------------------
Amount % of Net Sales Amount % of Net Sales
------------ ---------------- ------------ ----------------
(Dollars in millions)
Sales, net $ 35.7 100.0% $ 35.6 100.0%
Cost of goods sold 9.7 27.2% 9.0 25.3%
------------ ---------------- ------------ ----------------
Gross profit $ 26.0 72.8% $ 26.6 74.7%
Costs and expenses:
Sales and marketing 5.9 16.5% 6.8 19.1%
Distribution, circulation and fulfillment 3.2 9.0% 3.4 9.6%
Editorial 2.5 7.0% 2.9 8.1%
General and administrative 5.2 14.6% 5.3 14.9%
Depreciation 0.5 1.4% 0.5 1.4%
------------ ---------------- ------------ ----------------
17.3 48.5% 18.9 53.1%
Income before amortization of goodwill and intangible assets,
interest expense, income taxes and other, net 8.7 24.3% 7.7 21.6%
Amortization of goodwill and intangible assets 3.2 9.0% 2.8 7.9%
Income from operations 5.5 15.3% 4.9 13.7%
Interest Expense (8.2) (22.9%) (8.3) (23.3%)
Other, net - - - -
------------ ---------------- ------------ ----------------
Loss before income tax expense (2.7) (7.6%) (3.4) (9.6%)
Income tax expense 0.5 1.4% - -
------------ ---------------- ------------ ----------------
Net loss $ (3.2) (9.0%) $ (3.4) (9.6%)
============ ================ ============ ================
EBITDA (a) $ 9.2 25.8% $ 8.2 23.0%
============ ================ ============ ================
(a) EBITDA is defined as income (loss) before interest expense, income
taxes, depreciation and amortization. EBITDA data is included because we
understand that this information may be considered by investors as an
additional basis on which to evaluate Weekly Reader Corporation's ability
to pay interest, repay debt and make capital expenditures. Because all
companies do not calculate EBITDA identically, the presentation of EBITDA
in this report is not necessarily comparable to similarly titled measures
of other companies. EBITDA does not represent and should not be considered
more meaningful than, or an alternative to, measures of operating
performance determined in accordance with generally accepted accounting
principles.
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
Sales, net. For the three months ended March 31, 2001, net sales decreased $0.1
million, or 0.3%, to $35.6 million from $35.7 million for the same period in
2000. This decrease in sales was the result of (1) an increase in sales at
American Guidance Service of $0.2 million, or 1.5%, to $12.1 million for the
three months ended March 31, 2001 from $11.9 million for the same period in 2000
as a result of increases in sales of our curriculum products, primarily
textbooks; (2) a decrease in sales at World Almanac of $0.3 million, or 2.0%, to
$13.0 million from $13.3 million for the same period in 2000, as a result of
anticipated lower sales of Funk & Wagnalls Yearbook business. World Almanac's
net revenue for the first quarter of 2001 excluding the de-emphasized non-core
Yearbook sales increased $0.1 million, or 0.4%, to $11.5
20
million from $11.4 million for the same period in 2000. World Almanac is no
longer soliciting new subscribers for its Yearbooks since the print edition of
the Funk & Wagnall's Encyclopedia was discontinued. Accordingly, Funk & Wagnalls
sales of Yearbooks are naturally declining year-over-year, as it is entirely
dependent upon sales orders from existing customers via renewals; and (3) Weekly
Reader's sales, not including World Almanac and American Guidance, of $10.4
million were essentially flat for the three months ended March 31, 2001 compared
to the same period in 2000.
Gross profit. For the three months ended March 31, 2001, gross profit increased
by $0.6 million, or 2.3%, to $26.6 million from $26.0 million for the same
period in 2000. The increase in gross profit at Weekly Reader was a result of
(1) an increase in gross profit at American Guidance of $0.4 million, or 4.7%,
to $8.9 million for the three months ended March 31, 2001 from $8.5 million for
the same period in 2000 primarily due to the increased sales described above;
(2) an increase in gross profit at Weekly Reader, not including World Almanac
and American Guidance, of $0.1 million, or 1.2%, to $8.7 million for the three
months ended March 31, 2001 from $8.6 million for the same period in 2000 due to
a favorable cost of goods sold rate variance; 3) an increase in gross profit at
World Almanac of $0.1 million, or 0.6%, to $8.9 million for the three months
ended March 31, 2001 from $8.8 million for the same period in 2000 due to a
favorable cost of goods sold rate variance. Gross profit as a percentage of
sales increased to 74.7% for the three months ended March 31, 2000 from 72.8%
for the same period in 2000.
Costs and expenses. For the three months ended March 31, 2001, costs and
expenses increased by $1.6 million, or 9.2%, to $18.9 million for the three
months ended March 31, 2001 from $17.3 million for the same period in 2000
primarily due to an increase in sales and marketing expenses of $0.9 million and
an increase in editorial expenses of $0.4 million. In 2001 at Weekly Reader
(excluding American Guidance and World Almanac), we increased the sales and
marketing budget related to direct mail by 14%; and implemented a research based
circulation recapture plan with a goal of increasing our market share. Costs and
expenses as a percentage of sales increased to 53.1% for the three months ended
March 31, 2001 from 48.5% for the same period in 2000.
Income before amortization of goodwill and intangible assets, interest expense,
income taxes and other, net. For the three months ended March 31, 2001, income
before amortization of goodwill and intangible assets, interest expense, income
taxes and other, net decreased by $1.0 million, or 11.5%, to $7.7 million from
$8.7 million for the same period in 2000 and, as a percentage of sales,
decreased to 21.6% from 24.3% for the same period in 2000. These decreases were
primarily due to the factors described above.
Amortization of goodwill and intangible assets. For the three months ended March
31, 2001, amortization of goodwill and intangible assets decreased by $0.4
million, or 12.5%, to $2.8 million from $3.2 million for the same period in
2000. This decrease was primarily due to intangible assets with lower
amortization schedules in the later part of their lives, and intangible assets
that have been fully amortized.
21
Income from operations. For the three months ended March 31, 2001, income from
operations decreased by $0.6 million, or 10.9%, to $4.9 million from $5.5
million for the same period in 2000 and, income from operations as a percentage
of sales decreased to 13.7% from 15.3% for the same period in 2000. These
decreases were primarily due to the factors described above.
Interest expense. For the three months ended March 31, 2001, interest expense
increased by $0.1 million, or 1.2%, to $8.3 million from $8.2 million for the
same period in 2000 and interest expense as a percentage of sales increased to
23.3% from 22.9% for the same period in 2000. The interest expense for the three
months ended March 31, 2001 and 2000 relates to debt associated with the
Acquisition and Recapitalization. Since Weekly Reader is jointly and severally
liable for that debt, the interest expense related to that debt is reflected in
the financial statements of Weekly Reader.
Income tax provision (benefit). For the three months ended March 31, 2001,
provision for income taxes decreased by $0.5 million or 100.0% to $0.0 from a
provision for income taxes of $0.5 million for the same period in 2000.
Net loss. For the three months ended March 31, 2001, net loss increased by $0.2
million, or 6.3%, to $3.4 million from $3.2 million for the same period in 2000.
Net loss as a percentage of net sales increased to 9.6% for the three months
ended March 31, 2001 from 9.0% for the same period in 2000. These increases were
primarily due to the factors described above.
EBITDA. For the three months ended March 31, 2001, EBITDA decreased $1.0
million, or 10.9%, to $8.2 million from $9.2 million for the same period in
2000. This decrease is primarily attributable to $1.6 million of increased
expenses, primarily selling expenses, partially offset by $0.6 million greater
gross profit for the first quarter of 2001 compared to the same period in 2000.
22
Results of Operations for the three months ended March 31, 2001 --
CompassLearning, Inc.
The following table sets forth, for the periods indicated, statement of
operations data for CompassLearning, expressed in millions of dollars and as a
percentage of net revenue.
Three Months Ended March 31,
2000 2001
--------------------------------- --------------------------------
Amount % of Net Sales Amount % of Net Sales
------------ ------------------ ----------- ------------------
(Dollars in millions)
Revenue, net (a) $ 14.5 100.0% $ 13.9 100.0%
Cost of goods sold (a) 7.2 49.7% 5.2 37.4%
------------ ------------------ ----------- ------------------
Gross profit $ 7.3 50.3% $ 8.7 62.6%
Costs and expenses:
Sales and marketing 5.9 40.7% 5.9 42.4%
Research and development 2.0 13.8% 1.3 9.4%
General and administrative 2.1 14.5% 2.0 14.4%
Depreciation 0.2 1.4% 0.3 2.2%
------------ ------------------ ----------- ------------------
10.2 70.4% 9.5 68.4%
Loss before amortization of goodwill and intangible assets,
interest expense, income taxes and other, net (2.9) (20.1%) (0.8) (5.8%)
Amortization of goodwill and intangible assets 2.6 17.9% 2.5 18.0%
Loss from operations (5.5) (38.0%) (3.3) (23.8%)
Interest expense (8.2) (56.6%) (8.4) (60.4%)
Other, net - - - -
------------ ------------------ ----------- ------------------
Loss before income tax expense (13.7) (94.6%) (11.7) (84.2%)
Income tax expense - - - -
------------ ------------------ ----------- ------------------
Net loss (13.7) (94.6%) (11.7) (84.2%)
============ ================== =========== ==================
------------ ------------------ ----------- ------------------
EBITDA (b) $ (2.7) (18.6%) $ (0.4) (2.9%)
============ ================== =========== ==================
(a) Certain amounts have been reclassified in accordance with EITF
99-19, "Reporting Revenue as Principal versus Net as an Agent.
(b) EBITDA is defined as income (loss) before interest expense, income
taxes, depreciation and amortization. EBITDA data is included because we
understand that this information may be considered by investors as an
additional basis on which to evaluate CompassLearning's ability to pay
interest, repay debt and make capital expenditures. Because all companies
do not calculate EBITDA identically, the presentation of EBITDA in this
report is not necessarily comparable to similarly titled measures of other
companies. EBITDA does not represent and should not be considered more
meaningful than, or an alternative to, measures of operating performance
determined in accordance with generally accepted accounting principles.
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
Revenue, net. For the three months ended March 31, 2001, net revenue decreased
$0.6 million, or 4.1%, to $13.9 million from $14.5 million for the same period
in 2000. This decrease was due to (1) a planned decrease in hardware revenue of
$1.9 million, or 70.4%, to $0.8 million for the period ended March 31, 2001 from
$2.7 million in 2000, (2) a decrease in service revenue from technical support
(of older software) of $0.6 million, or 14.3%, to $3.6 million for the period
ended March 31, 2001 from $4.2 million in 2000 primarily as a result of lower
service contract renewal sales, and (3) a decrease in service revenue from
professional development services of $0.2 million or 7.4% to $2.5 million for
the period ended March 31, 2001 from $2.7 million in 2000 offset by an increase
in software revenue of $2.1 million, or 42.9%, to $7.0 million for the period
ended March 31, 2001 from $4.9 million in 2000 primarily as a result of higher
market coverage with a seasoned sales force, customers accelerating buying
decisions in order to be ready for summer sessions, and reduced market confusion
as a result of many smaller
23
startup companies exiting the marketplace due to poor sales performance or loss
of additional financing.
F (U) Variance
2000 2001 $ %
----------------------------- ----------------------------
Software $ 4.9 $ 7.0 2.1 42.9%
Professional Development 2.7 2.5 (0.2) (7.4%)
Technical Support 4.2 3.6 (0.6) (14.3%)
Hardware 2.7 .8 (1.9) (70.4%)
----------------------------- ----------------------------
Revenue, net 14.5 13.9 (0.6) (4.1%)
Less: Non-core revenues:
Hardware (a) (2.7) (0.8) 1.9 -
Technical Support (b) (4.2) (3.6) 0.6 -
----------------------------- ----------------------------
Core Revenues $ 7.6 $ 9.5 1.9 25.0%
============================= ============================
(a) CompassLearning's hardware business revenues are generally derived
from reselling hardware to customers who request that CompassLearning
provide a package of software and hardware. In prior years, CompassLearning
offered hardware to customers as a wholesaler of private label and other
products. However, because of the less profitable nature of the business
compared to CompassLearning's other businesses and to reduce the need for
inventory and the risk of technological change rendering inventory
obsolete, CompassLearning began discontinuing its wholesale hardware
business in the mid 1990's. Currently, CompassLearning has arrangements
with Apple, IBM, Compaq, Gateway, and Dell computers in order to
accommodate requests by customers for complete hardware and software
solutions.
(b) CompassLearning's service revenues, particularly those attributable
to renewals of existing services contracts, have been decreasing recently
as a result of:
o the improved quality of our software products, which require less
technical support;
o more customers supplying their own training and support services
through in-house expertise; and
o the allocation by customers of a greater amount of limited resources to
upgrade their hardware and software systems for Year 2000 compliance.
It is our strategy to grow our core business, which is the electronic courseware
and the related professional development services of training our customers in
implementing that electronic courseware most efficiently. Revenue from these
sources increased $1.9 million or 25.0% to $9.5 million for the period ended
March 31, 2001 compared to $7.6 million in 2000.
Gross profit. For the three months ended March 31, 2001, gross margin increased
$1.4 million, or 18.5%, to $8.7 million from $7.3 million in 2000 primarily due
to higher software revenue. Gross profit as a percent of revenue increased to
62.6% from 50.3% for the same period in 2000.
Costs and expenses. For the three months ended March 31, 2001, costs and
expenses decreased $0.7 million, or 7.2%, to $9.5 million from $10.2 million in
2000, and costs and expenses as a percentage of revenue decreased to 68.4% from
70.4% in 2000. The decrease was primarily due to $0.7 million decrease in
research and development expense and $0.1 million decrease in general and
administrative expenses, offset by $0.1 million increase in depreciation
expense.
Sales and marketing expense remained constant in 2001 at $5.9 million with 2000,
while expense as a percentage of revenue increased to 42.4% from 40.7% in 2000.
Changes
24
included $0.4 million increase in commissions offset by $0.4 million decrease in
outside services and training expense.
Research and development expense decreased $0.7 million, or 36.5%, to $1.3
million from $2.0 million and as a percentage of revenue decreased to 9.4% from
13.8% in 2000. The decrease was primarily due to a decrease in expenses
resulting from a change in the company strategy to exit LAN/WAN software
development to pursue new WEB strategies.
General and administrative expense decreased $0.1 million, or 4.8%, to $2.0
million from $2.1 million, and as a percentage of revenue decreased to 14.4%
from 14.5% in 2000. There was a $0.3 million decrease in compensation and
recruiting offset by a $0.2 million increase in other operating expenses.
Loss before amortization of goodwill and intangible assets, interest expense,
income taxes and other, net. For the three months ended March 31, 2001, the loss
before amortization of goodwill and intangible assets, interest expense, income
taxes and other, net decreased $2.1 million, or 73.4%, to $0.8 million from $2.9
million in 2000 and, as a percentage of net revenue, decreased to a negative
5.8% from a negative 20.1% in 2000, primarily due to the factors described
above.
Amortization of goodwill and intangible assets. For the three months ended March
31, 2001, amortization of goodwill and intangible assets decreased $0.1 million,
or 3.8%, to $2.5 million from $2.6 million for the same period in 2000.
Loss from operations. For the three months ended March 31, 2001, loss from
operations decreased $2.2 million, or 40.0%, to $3.3 million from a loss of $5.5
million for the same period in 2000, and loss from operations as a percentage of
net revenue decreased to 23.8% from 38.0% for the same period in 2000. These
decreases were primarily due to the factors described above.
Interest expense. For the three months ended March 31, 2001, interest expense
increased $0.2 million, or 2.4%, to $8.4 million from $8.2 million in 2000.
CompassLearning is jointly and severally liable for debt associated with the
Acquisition and Recapitalization; therefore, the interest expense related to
that debt is reflected in the financial statements of CompassLearning.
Net loss. For the three months ended March 31, 2001, net loss decreased $2.0
million, or 14.6%, to $11.7 million from $13.7 million in 2000, and net loss as
a percentage of net revenue decreased to a negative 84.2% from a negative 94.6%
in 2000, primarily due to the factors described above.
EBITDA. For the three months ended March 31, 2001, EBITDA loss decreased $2.3
million, or 85.2%, to a loss of $0.4 million from a loss of $2.7 million for the
same period in 2000. This increase is primarily attributable to $1.4 million of
greater gross profit for the first quarter of 2001 compared to the same period
in 2000, combined with $0.7 million of lower research and development expenses.
Sales mix, in part, explained the significantly reduced operating loss (measured
in terms of EBITDA) at CompassLearning for the first quarter ended March 31,
2001 versus 2000. CompassLearning gross profit increased $1.4 million, or
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18.5%, for the first quarter of 2001 compared to the same period in 2000,
primarily due to the replacement of $0.5 million of hardware gross margin with
$1.5 million of higher software gross margin attributable to higher software
sales. CompassLearning's gross profit margin improved to 62.6% for the first
quarter - from 50.3% for the same period in 2000.
Liquidity and Capital Resources
WRC Media's sources of cash are its operating subsidiaries, Weekly Reader and
CompassLearning, and a $30.0 million revolving credit facility. As of March 31,
2001, $12.0 million of the revolving credit facility has been drawn.
Additionally, we have applied for and received a stand-by letter of credit in
the amount of $2.0 million in connection with a real estate lease. While this
letter of credit is in effect, it reduces available borrowing under our
revolving credit facility by $2.0 million.
For the January through June time period, WRC Media and its subsidiaries usually
experience negative cash flow due to the seasonality of its business. As a
result of this business cycle, borrowings usually increase during the period
January through June, and borrowings generally will be at its lowest point in
October. WRC Media's cash and cash equivalents of $2.9 million at March 31, 2001
did not change from December 31, 2000.
WRC Media and its subsidiaries' principal uses of cash are for debt service,
capital expenditures, working capital and acquisitions. For the three months
ended March 31, 2001, WRC Media and its subsidiaries' operations used $10.6
million in cash.
For the three months ended March 31, 2001, WRC Media and its subsidiaries'
investing activities consisted of capital expenditures of $.4 million. Weekly
Reader's capital expenditures, which consisted primarily of expenditures for
property and equipment, were $0.3 million for the three months ended for March
31, 2001. CompassLearning's capital expenditures, which consisted primarily of
purchases of computer equipment, were $0.1 million for the three months ended
March 31, 2001.
WRC Media and its subsidiaries' financing activities consist of making drawings
from, and repayments to, our revolving credit facility and retiring amounts due
under our senior secured term loans. For the three months ended March 31, 2001,
financing activities provided cash of $11.0 million, which resulted from
borrowings of $12.0 million under the revolving credit facility and a repayment
of $1.0 million of the senior secured term loans.
Working Capital
As of March 31, 2001, working capital for WRC Media and its subsidiaries was a
deficit of $21.7 million. There are no unusual registrant or industry practices
or requirements relating to working capital items.
Seasonality
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Our operating results have varied and are expected to continue to vary from
quarter to quarter as a result of seasonal patterns. Weekly Reader and
CompassLearning's sales are significantly affected by the school year. Weekly
Reader's sales in the third, and to a lesser extent the fourth, quarter are
generally the strongest as products are shipped for delivery prior to the start
of the school year. CompassLearning's sales are generally strongest in the
second quarter, and to a lesser extent the fourth quarter. CompassLearning's
sales are strong in the second quarter generally because schools frequently
combine funds from two budget years, which typically end on June 30 of each
year, to make significant purchases, such as purchases of CompassLearning's
electronic courseware, and because by purchasing in the second quarter, schools
are able to have the software products purchased installed over the summer and
ready to train teachers when they return from summer vacation. CompassLearning's
fourth quarter sales are strong as a result of sales patterns driven in part by
its commissioned sales force seeking to meet year-end sales goals as well as by
schools purchasing software to be installed in time for teachers to be trained
prior to the end of the school year in June.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk. Market risk, with respect to our business, is the
potential loss arising from adverse changes in interest rates. We manage our
exposure to this market risk through regular operating and financing activities
and, when deemed appropriate, through the use of derivatives. We use derivatives
as risk management tools and not for trading purposes.
We are subject to market risk exposure related to changes in interest rates on
our $138.4 million (as of March 31, 2001) senior secured term loans under our
senior credit facilities. Interest on borrowings under our senior credit
facilities will bear interest at a rate per annum equal to:
(1) for the revolving credit facility maturing in six years and
the $27.9 million senior secured term loan A facility maturing in
six years, the LIBO rate as defined in the credit agreement plus
3.25% or the alternate base rate as defined in the credit
agreement plus 2.25% subject to performance-based step downs; and
(2) for the $98.5 million senior secured term loan B facility
maturing in seven years, the LIBO rate plus 4.00% or the alternate
base rate plus 3.00%.
Our senior credit facilities require us to obtain interest rate protection for
at least 50% of our senior secured term loans for the duration of the senior
credit facilities. On May 3, 2000, we entered into an arrangement with a
notional value of $65.0 million, which terminates on November 17, 2001 and
requires us to pay a floating rate of interest based on the three-month LIBO
rate as defined in that arrangement with a cap rate of 8.0%.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On April 2, 2001, registrant reported, on Form 8-K, the results for the fiscal
year ended December 31, 2000.
On April 9, 2001, registrant reported, on Form 8-K, a statement issued by the
President of registrant.
On April 26, 2001, registrant reported, on Form 8-K, the results for the fiscal
quarter ended March 31, 2001.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DATE
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/s/ David F. Burgstahler May 7, 2001
- -------------------------------------------------
David F. Burgstahler
Director: WRC Media, Weekly Reader and CompassLearning
/s/ Ralph D. Caulo May 7, 2001
- -------------------------------------------------
Ralph D. Caulo
Non-Executive Vice-Chairman: WRC Media
/s/ Timothy C. Collins May 7, 2001
- -------------------------------------------------
Timothy C. Collins
Director: WRC Media, Weekly Reader and CompassLearning
/s/ D. Ronald Daniel May 7, 2001
- -------------------------------------------------
D. Ronald Daniel
Non-Executive Chairman: WRC Media, Weekly Reader and CompassLearning
/s/ Martin E. Kenney, Jr May 7, 2001
- -------------------------------------------------
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
/s/ James N. Lane May 7, 2001
- -------------------------------------------------
James N. Lane
Director: WRC Media, Weekly Reader and CompassLearning
/s/ Charles L. Laurey May 7, 2001
- -------------------------------------------------
Charles L. Laurey
Director: WRC Media, Weekly Reader and CompassLearning; and
Secretary: WRC Media, Weekly Reader and CompassLearning
/s/ Robert S. Lynch May 7, 2001
- -------------------------------------------------
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
/s/ Richard Nota May 7, 2001
- -------------------------------------------------
Richard Nota
Vice President, Finance: WRC Media
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