Exhibit 99.1
EXPLANATORY NOTE
As disclosed in our Form 8-K filed with the Securities and Exchange Commission
("SEC") on March 22, 2004, and in our Form 8-K filed with the SEC on March 24,
2004, in connection with the audit of our 2003 consolidated financial
statements, we have restated our previously audited consolidated balance sheet
as of December 31, 2002, and the related statements of stockholders' deficit and
operations for the year ended December 31, 2002 (the "restatement"). The
Company is in the process of restating its December 31, 2001 financial
statements. The restatement also included adjustments that affected periods
prior to 2001. The impact of the restatement on periods prior to 2002 was
reflected as an adjustment to beginning accumulated deficit as of January 1,
2002. This filing includes the restatement of our 2002 financial statements but
does not include our restated financial information for 2001. Because our
originally issued 2001 financial statements were audited by Arthur Andersen LLP,
an audit firm that has ceased operations, our restated 2001 financial statements
are being reaudited by our independent auditors, Deloitte & Touche LLP. The
reaudit was not completed as of the time of this filing. Upon completion of the
reaudit, we will file our Form 10-K, which will include the restatement of our
2001 financial statements.
The restatement primarily relates to (i) correction of errors made in the
application of GAAP and (ii) correction of certain of the Company's historical
accounting policies to conform to accounting principles generally accepted in
the United States ("GAAP"). Described below are the matters for which the
Company has restated its consolidated financial statements for 2001 and 2002.
The restated 2001 financial information presented below is unaudited.
o Software and Services Sale. In December 2002, the Company recorded a
$1,860 receivable of revenue from the sale of educational software and
services to a school district. Of this amount, $1,169 was recognized as
revenue during the fiscal quarter ended December 31, 2002, and $691 was
recorded as a deferred revenue liability as of December 31, 2002.
Accrued sales commissions of $342 also were recorded. In the first
quarter of 2003, this $1,169 of revenue previously recognized in
December 2002 was offset by recording a new bad debt reserve of $920
and by retaining an excess of $250 in the Company's allowance for
doubtful accounts, which excess amount would have otherwise been
reversed. The Company has concluded that the sale did not meet the
criteria under GAAP for revenue recognition for the year ended December
31, 2002, and that it incorrectly recorded the related bad debt reserve
and retained the excess allowance for doubtful accounts in 2003. The
Company has corrected these errors by reversing these transactions. The
net effect for the year ended December 31, 2002 was to increase net
loss by approximately $827. In addition, total assets decreased by
approximately $1,860 and total liabilities decreased by $1,033,
including a decrease in deferred revenue of $691 as of December 31,
2002.
Page 1 of 150
o ChildU Goodwill Reduction. The Company's subsidiary, ChildU, Inc., was
acquired in 2001. In connection with such acquisition, the Company
issued shares of its common stock to the holders of notes issued by
ChildU. The Company has determined that the value assigned to these
shares when the Company recorded the purchase price for this
acquisition in its historical financial statements for 2001 exceeded
the fair market value of these shares. Accordingly, the Company has
restated its financial statements to record correctly the fair market
value of these shares, which had the effect of reducing goodwill and
additional paid-in capital, by approximately $3,419 as of December 31,
2001. In addition, the Company allocated the entire purchase price to
goodwill, and had assigned that goodwill an estimated life of 40 years.
The asset acquired was software technology and not goodwill. The
Company has restated its financial statements to record the software
technology and to amortize such acquired technology over its estimated
useful life of five years, which had the effect of increasing
accumulated deficit as of January 1, 2002 by $976, and increasing
intangibles amortization expense by $1,672 in 2002. The Company also
incorrectly charged certain severance costs against acquisition
reserves, and accordingly has restated the 2002 financial statements to
correct for such errors. The net effect of such adjustment was to
increase the accumulated deficit as of January 1, 2002 by $708 and to
increase net loss by $1,092 for the year ended December 31, 2002.
Following the determination to restate the Company's financial statements for
2001 and 2002 for the matters described above, the Company also determined that
it would correct for certain errors made in the application of GAAP that had not
previously been corrected because in each such case it believed that the amount
of any such error was not material to its consolidated financial statements.
These matters are described below.
o CompassLearning/Weekly Reader Goodwill Reduction. In connection with
the acquisitions of CompassLearning, Inc. and Weekly Reader Corporation
in 1999, the Company also recorded certain other reserves for a planned
restructuring related to the acquisitions. The Company recorded
reserves of $5,538 related to estimated liabilities it believed it had
assumed at the date of such acquisitions. The Company also recorded a
reserve of $1,705 related to an estimated liability associated with the
rationalization of the shipping schedule of the Weekly Reader magazine
in 2000. The Company concluded that the purchase reserves associated
with these estimated liabilities, and the elements of the restructuring
plan that had not yet been completed should be reversed in 2001. The
excess purchase reserves associated with fiscal year 2000 activity
specifically, the $1,350 of costs incurred to evaluate
CompassLearning's software in order to determine a future growth
strategy; $2,250 of in-process R&D related to a Next-generation reading
system deemed not be technologically feasible; $1,800 of recruiting and
consulting costs incurred to transition the companies acquired to a
standalone public company and $150 for other estimated liabilities
assumed were reversed against goodwill and charged to accumulated
deficit as of January 1, 2002 as the Company determined that the
reversal of the excess purchase reserves and corresponding reduction in
goodwill should have been recorded in 2000. The Company also reversed
the $1,705 reserve, and reduced goodwill in a corresponding amount,
because the Company determined that such reserve had been incorrectly
recorded in 2000. The Company has determined that the reversal of the
excess purchase reserves and corresponding reduction of goodwill should
have been recorded in 2000 rather than 2001 and that the reversal of
the $1,705 reserve and corresponding reduction in goodwill should have
been recorded in 2000 rather than 2002. Accordingly, the Company has
restated its 2002 financial statements to correct these errors. The net
effect of the adjustments for the fiscal year ended December 31, 2001
will increase the accumulated deficit by $5,961.
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o Barter Transaction. In connection with a failed licensing barter
transaction for which it had incorrectly recorded revenue in 2001, the
Company had increased operating costs and expenses for 2001 by the
amount of the revenue recorded, instead of reversing such net revenue
amount, as required by GAAP. The Company is restating its financial
statements for 2001 to correct this error, with the net effect being to
reduce net revenue and operating costs and expenses by $1,500 for the
year ended December 31, 2001, with no impact on the Company's net loss.
o CompassLearning Minimum Purchase Guarantee. In connection with the
acquisition of CompassLearning, the Company entered into a minimum
purchase guarantee agreement with the seller of CompassLearning. In
2001, the Company incorrectly recorded as revenue amounts that the
seller was required to purchase under the agreement, which the seller
did not purchase. In its historical financial statements for 2001, the
Company also recorded an intangible asset in an amount equal to the
amount of revenue incorrectly recorded. In 2002 and 2003, amortization
of $527 and $235, respectively, of this intangible was recorded against
gross sales as purchases were actually made. Recording this intangible
asset and the related amortization did not conform to GAAP. The Company
has restated its financial statements to reverse this transaction, with
the net effect being to increase accumulated deficit by $762 for the
year ended December 31, 2001 and decrease the Company's net loss in
2002 by $527.
o Distributor Sales. Historically the Company recognized revenue under a
distribution contract between its subsidiary, World Almanac Education
Group, and a distributor at the time that the Company shipped our
products to the distributor rather than at the time those products were
resold by the distributor. The Company also recorded distribution fees
under this contract as operating costs and expenses, based on its
understanding of the distribution contract. The Company has determined
to recognize revenue only at the time the distributor ships these
products to its customer. In addition, the Company should have recorded
distributions fees as a reduction of revenue, rather than as a separate
operating cost and expense item. The Company has restated its financial
statements which increased its accumulated deficit by $449 for the
fiscal year ended December 31, 2001, decreased its net loss and
increased net assets by $168 for the year ended December 31, 2002.
Page 3 of 150
o Rent. The Company has two leases that have "free rent" incentives at
the commencement of the leases and also contain rent escalation clauses
(which clauses provide for rent increases over time) for which it was
required under GAAP to record the average rent expense ratably over the
lease term. In its historical 2001 financial statements, however, the
Company recorded the rent expense from these leases as it was paid. In
its historical 2002 financial statements, the Company began correctly
recording the average rent expense for these leases, but it calculated
the average rent using the remainder of the lease term instead of the
entire lease term. The Company has restated its financial statements to
correct these errors. As a result, rent expense increased in 2001
because the average rent to be paid over the lease terms was greater
than the actual rent paid in 2001 and rent expense decreased in 2002
and 2003 because of the longer lease terms used to calculate the
average rent. In 2001, the Company also incorrectly capitalized some
rent expense prior to its occupancy of a certain leased premise as a
prepaid rent asset and amortized it, rather than recording it as an
expense, as required by GAAP. The Company has restated its financial
statements to correct these errors, with the net effect being to
increase its accumulated deficit by $1,005, for the year ended December
31, 2001, to decrease its net loss by $412 and increase total assets by
$352 for the year ended December 31, 2002.
o Intercompany Sales. Certain sales between two subsidiaries of World
Almanac were recorded in 2001 as revenue for one subsidiary and as a
corresponding operating cost and expense for the other subsidiary,
rather than being eliminated, as required by GAAP. The Company has
restated its financial statements for 2001 to eliminate these
intercompany sales. As a result of this correction, revenue decreased
by $795 for the year ended December 31, 2001 with a corresponding
decline in operating costs and expenses, and no impact on the Company's
net loss for the year then ended.
o Common Stock Warrants. During 1999, the Company issued warrants to
purchase its common stock to purchasers of certain debt securities and
a lender under a term loan facility. The Company incorrectly recorded
the fair value of the warrants, as a liability due to a related party.
The Company has restated its 2002 financial statements to correctly
record the fair value of the warrants as additional paid-in capital. As
a result of this correction liabilities decreased by $2,160 and
additional paid-in capital increased by corresponding amount.
o Other. The Company has have made a number of other corrections,
including adjustments relating to various accruals such as compensation
and fringe benefit costs, deferred revenue, legal costs and other
immaterial items.
The net effect of the restatement is to increase the Company's accumulated
deficit by $10.6 million for the year ended December 31, 2001 and net loss by
$3.1 million for the year ended December 31, 2002. The restatement adjustments
to the Company's consolidated balance sheet at December 31, 2002 decreased the
amount of total current assets by $2.4 million, goodwill by $20.2 million, total
current liabilities by $0.4 million and additional paid in capital by $1.0
million and increased accumulated deficit by $13.7 million. The restatement
adjustments resulted in no change in Adjusted EBITDA for the year ended December
31, 2002.
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For a discussion of the individual restatement adjustments, see "Item 8.
Consolidated Financial Statements--WRC Media Inc. and Subsidiaries--Note 23.
Restatement" and "Item 8. Consolidated Financial Statements--Weekly Reader
Corporation and Subsidiaries--Note 18. Restatement." Additionally, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations." For more information on the impact of the restatement see "Item 6.
Selected Financial Data" in Part II of this report.
The Company has not amended its Annual Reports on Form 10-K or Quarterly Reports
on Form 10-Q for periods affected by the restatement and the financial
statements and related financial information contained in such reports should no
longer be relied upon.
All referenced amounts in this Current Report for prior periods and prior period
comparisons beginning with the 2002 fiscal year reflect the balances and amounts
on a restated basis.
We cannot assure you that there will not be changes to the Company's 2001
financial statements as a result of the reaudit of the Company's 2001 financial
statements by its independent auditors. The impact of the restatement on periods
prior to 2002 was reflected as an adjustment to beginning accumulated deficit as
of January 1, 2002.
Page 5 of 150
PART I
ITEM 1 BUSINESS OVERVIEW
We are a leading publisher of supplemental education materials for the Pre K-12
market. Our portfolio of products includes a broad range of print and electronic
supplemental instructional materials, testing and assessment products and
library materials. We believe our products have well-known brand names and that
they are recognized by our customers for their effectiveness and consistent,
high quality educational content.
On May 14, 1999, Ripplewood Holdings L.L.C., which specializes in private equity
investments, formed WRC Media Inc. (WRC Media or the Company) as a holding
company to pursue acquisitions in the media industry. WRC Media now serves as a
holding company for CompassLearning, Inc. (CompassLearning), Weekly Reader
Corporation and ChildU, Inc. (ChildU). Weekly Reader Corporation includes Weekly
Reader and its subsidiaries- Lifetime Learning Systems, Inc., American Guidance
Service, Inc. (AGS or American Guidance) and World Almanac Education Group
(World Almanac). CompassLearning was incorporated on May 12, 1999, and Weekly
Reader Corporation was incorporated on November 28, 1990. ChildU was
incorporated on June 1, 1999 and on May 9, 2001 ChildU was acquired by WRC
Media.
WRC Media acquired CompassLearning on July 14, 1999. Prior to this acquisition,
WRC Media had no material operations other than seeking acquisitions. On
November 17, 1999, WRC Media completed the recapitalization of the Supplemental
Education Group of PRIMEDIA Inc., consisting of the businesses of Weekly Reader,
American Guidance and World Almanac and their respective subsidiaries. As a
result of this transaction, Weekly Reader became a subsidiary of WRC Media. On
May 9, 2001, WRC Media Inc. and subsidiaries completed two acquisitions. WRC
Media entered into an Agreement and Plan of Merger with ChildU, Inc. ChildU was
incorporated on June 1, 1999 and is a leading provider of Internet-based
educational services to both individual and institutional consumers. Pursuant to
the agreement, each issued share of ChildU's common and preferred stock not
directly or indirectly owned by ChildU was converted into a contingent right to
receive a number of shares of WRC Media Inc. common stock. Concurrent with the
ChildU acquisition, on May 9, 2001, a subsidiary of the Company acquired the
assets of Lindy Enterprises, Inc. Lindy develops a curriculum-based skills
assessment and test preparation product that correlates to national and state
curriculum. Our operations, which consist of one business segment, are now
conducted primarily through two operating groups consisting of the following
five operating subsidiaries, each of which is a market leader in its respective
product categories.
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WEEKLY READER. Weekly Reader has been a leading publisher of classroom
periodicals for Pre-K-12 students for over 100 years. Weekly Reader, or its
former parent or affiliates of its former parent, acquired Facts On File News
Services in 1996, Gareth Stevens, Inc. in 1997 and American Guidance in 1998.
Weekly Reader is a leading publisher of 16 classroom periodicals which had a
2002-2003 school year circulation of 7.0 million subscribers. In addition to our
well-recognized classroom periodicals, such as Weekly Reader, Teen Newsweek and
Current Events, we also publish distinct, grade-specific workbooks. We also
custom publish instructional materials paid for by various sponsors, such as
Charles Schwab, Six Flags Theme Parks, Inc, General Motors, Center for Disease
Control and the National Fire Protection Association, which are distributed
primarily to K-12 students throughout the United States. For the year ended
December 31, 2003, Weekly Reader, not including American Guidance or World
Almanac, had net revenue of $46.1 million, representing approximately 23% of our
total net revenue during this period.
AMERICAN GUIDANCE SERVICE. AGS has been a leading publisher of individually
administered and group testing and assessment products, and supplemental
instructional materials for over 45 years. AGS's testing and assessment products
are primarily for K-12 students and its supplemental instructional materials are
primarily for low-performing students in middle and secondary schools. One or
more of AGS's testing and assessment products or supplemental instructional
materials are used in over 12,000 school districts, or approximately 80% of the
school districts in the United States. Our testing and assessment products are
used to diagnose learning disabilities and measure the cognitive ability,
educational achievement, or personal and social adjustment of individual
students. AGS's supplemental instructional materials include various textbooks
and worktexts, many of which we believe set the standard for quality in their
respective product categories, with full-color content and accompanying
extensive teacher support materials. In May 2001, AGS acquired the operating
assets of Lindy Enterprises, Inc. (Lindy). Lindy develops curriculum-based
skills assessment and test preparation products on CD-ROM that correlate to
national and state curricula. For the year ended December 31, 2003, AGS had net
revenue of $56.6 million, representing approximately 28% of our total net
revenue during this period.
COMPASSLEARNING. CompassLearning is a research-based technology learning
solutions company that produces educational assessment, curriculum and
management tools for grades Pre-K through 12, all of which are aligned to local,
state and national standards. Offering several thousand hours of interactive
standards-based managed curriculum that inspires educators and students to
explore and achieve success, CompassLearning has been serving the Pre-K to 12
market for over 30 years and its products have been a significant part of the
learning and teaching process in more than 21,000 schools, representing
approximately 19% of all the schools in the United States. For the year ended
December 31, 2003, CompassLearning had net revenue of $42.7 million,
representing approximately 21% of our total net revenue during this period.
CHILDU. ChildU, Inc. was incorporated on June 1, 1999 and is a provider of
Internet-based educational services to both individual and institutional
consumers. On May 9, 2001, the Company entered into an Agreement and Plan of
Merger with WRC Media. ChildU's expertise lies in the design of web-enabled
courseware. Teamed with the developers at CompassLearning, ChildU is
co-developing new web-enabled products for the Pre-K to 12 market. In 2002,
ChildU and CompassLearning began co-development of the new on-line product,
Odyssey, which had its first release in May 2002. Odyssey's online curriculum
solutions, developed by educators and built on sound instructional pedagogy,
utilize engaging, self-paced, project-based activities. For the year ended
December 31, 2003, ChildU had revenue of $7.9 million, representing
approximately 4% of our total net revenue during this period.
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WORLD ALMANAC. World Almanac has been a leading publisher of reference and
informational materials targeted to K-12 students, as well as other well-known
general reference and informational materials, for over 130 years. Over 58% of
the approximately 130,000 school and public libraries in the United States have
purchased products from World Almanac. World Almanac publishes well-known print
reference materials, such as The World Almanac and Book Of Facts and nonfiction
and fiction books for K-12 students under three Gareth Stevens imprints. In
addition, World Almanac publishes electronic reference materials such as the
Funk & Wagnalls Encyclopedia database and an Internet-based version of Facts On
File World News Digest, which in its print version is World Almanac's leading
subscription-based product with renewal rates averaging approximately 86% from
1997 through 2003. World Almanac also distributes third-party products that are
targeted for K-12 students through its World Almanac Education Library Services
("WAELS") catalogs. For the year ended December 31, 2003 World Almanac had net
revenue of $49.4 million, representing approximately 24% of our total net
revenue during this period.
COMPETITIVE STRENGTHS
We believe a number of competitive strengths that have contributed to our
leading market positions, include:
BROAD PRODUCT PORTFOLIO. We are a leading publisher in the supplemental
education materials market and one of the few companies with a comprehensive
portfolio of products covering all the major segments of this market. We offer a
wide range of products to our customers. This broad product portfolio allows us
to address the most attractive segments of the market and respond to emerging
trends and funding sources, including the rapidly developing market of parents
seeking to buy supplemental education materials. See "Products and Services" for
a detailed description of our product portfolio.
STRONG, WELL-ESTABLISHED BRAND NAMES. We believe that we have strong brand names
in each of the market segments we serve. Several of our most recognized print
titles have been in circulation for decades, including CURRENT EVENTS, a Weekly
Reader publication, which was first published in 1902, the PEABODY PICTURE
VOCABULARY TEST, which was first published in 1959, and THE WORLD ALMANAC AND
BOOK OF FACTS, which was first published in 1868. We believe that our products
are well known and trusted by teachers, other educational professionals and
parents for their effectiveness and consistent, high quality educational
content. Brand name and reputation are significant criteria in the purchasing
decision process for supplemental education materials as they are usually
selected at the discretion of individual teachers, school and school
district-level administrators or parents.
Page 8 of 150
STABLE REVENUE BASE. We have a significant base of long-term customers who have
exhibited substantial product loyalty, resulting in a consistent level of
revenues from recurring sales to these customers. In our experience, once a
teacher or administrator is familiar with and accustomed to using a supplemental
instructional product and has developed lesson plans using the product, the
teacher or administrator tends to purchase the same product year-after-year
leading to a high subscription renewal rate. In addition, we believe there is an
important component of trust in the quality, consistency and support of many of
our products which makes it difficult for a competitor to introduce new products
for the same subject area without significant investment and the support of key
opinion makers in the industry. As a result of this loyalty, many of our
products enjoy long customer histories with high renewal rates. About 75% of
schools purchasing Weekly Reader periodicals re-subscribe the following year. We
believe our school renewal rates are important because of the value we place on
ensuring that our periodicals remain available within any given school,
providing us with a base on which to further penetrate that school. In addition,
six of our top ten revenue - producing testing and assessment products, have
been published for over 25 years. Typically, these products have undergone
revisions to ensure that they reliably meet the existing population's curriculum
needs. Achievement tests generally require revisions every 8 to 10 years while
tests that measure personal and social adjustment or cognitive ability in some
cases do not require revision for as long as 15 years.
SUBSTANTIAL ELECTRONIC DELIVERY PLATFORM. At CompassLearning, we have over 30
years of experience in developing and providing electronically delivered
supplemental instructional materials. We believe that we are well positioned to
capitalize on this rapidly growing market segment. One or more of
CompassLearning's products have been sold to over 21,000 K-12 schools in the
United States, more schools than have been reached by any other publisher of
comprehensive electronic courseware. Most CompassLearning products can be
delivered in the school's platform of choice, LAN, WAN or Internet.
Our primary operating subsidiaries have web sites that promote their respective
products, provide product information and, in some cases, enable users to order
products over the Internet. Given the importance of quality and name recognition
to the development of Internet-based business, we believe that the strength of
our brands and our direct distribution channels position us well for significant
growth in this area.
STRONG DISTRIBUTION CHANNELS. Our products are used in over 80,000 schools, by
over ten million students, and in over 68,000 school and public libraries. We
have an extensive network with direct distribution channels into these end user
markets. Some of our products are sold using direct field and telephone sales,
emphasizing one-to-one relationships with teachers, school and school
district-level administrators and other educational professionals.
CompassLearning, for example, uses a three-pronged approach that provides every
customer a sales contact, an educational consultant and a technology support
person, for comprehensive customer service. We also utilize sophisticated direct
mail campaigns, which at Weekly Reader and World Almanac are enhanced by our
proprietary databases. These databases track the purchasing habits of teachers,
schools and/or librarians for many of our products as well as specific
demographics and other factors we believe affect purchasing habits.
EXPERIENCED MANAGEMENT TEAM. We have assembled an experienced management team at
both the administrative and the operating levels. This management team is led by
Martin E. Kenney, Jr., our Chief Executive Officer, who has over 25 years of
experience in educational publishing and electronic courseware. Prior to joining
WRC Media, Mr. Kenney was Executive Vice President of the Educational Publishing
Group and President of the Education Technology Group at Simon & Schuster, the
world's largest educational publisher at that time.
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PRODUCTS AND SERVICES
The following chart outlines our product offerings by primary operating
subsidiary in each of the segments of the supplemental education market in which
we compete:
COMPASSLEARNING
WEEKLY READER AMERICAN GUIDANCE AND ChildU WORLD ALMANAC
PRINT AND ELECTRONIC PERIODICALS: 16 BASIC SKILLS: ELECTRONIC TEACHING KITS: Kits
INSTRUCTIONAL grade or Supplemental COURSEWARE: developed by World
MATERIALS subject-specific textbooks and Approximately several Almanac Education
periodicals for pre worktexts targeted thousand hours of Library Services used
K-12 students and 2 for low-performing electronic courseware to teach a variety of
subscription students in middle for Pre-K - 12 skills including
supplements, and secondary students, primarily research skills, map
including Weekly schools covering for reading, math and skills and Language
Reader, Teen core curriculum language arts, Arts skills.
Newsweek and Current subjects. through the
Events. CompassLearning
TEST PREPARATION: Odyssey Product line.
SKILLS BOOKS: 142 Instructional
distinct, grade materials to prepare MANAGEMENT SYSTEM:
specific, workbooks for three of the Odyssey management
for K-9 students leading achievement system enables
that build and tests for K-12 teachers to track
reinforce basic students. student performance,
skills, including record grades, report
the Map Skills PERSONAL GROWTH: on progress and
series, or focus on Various personal prescribe lessons
current topics such growth materials based on results.
as health issues or covering topics such
upcoming as drug use
Presidential prevention and
elections. anti-violence
training,
SPONSORED self-esteem and
INSTRUCTIONAL career education
MATERIALS: A
variety of free
instructional
materials, including
print and video
products, paid for
by corporate, trade
association and/or
not-for-profit
sponsors primarily
for K-12 students.
TESTING AND N/A INDIVIDUALLY ASSEMENT TEST: N/A
ASSESSMENT PRODUCTS ADMINISTERED TESTS: CompassLearning
Assessment products Explorer assessment
for K-12 students tool evaluates
and adults, includes student performance,
Ability Assessment, meet the Assessment
Behavior & Social of educational
Skills Assessment, Progress (NAEP)
Language, Speech & objectives and is
Auditory Skills aligned with the core
Assessment. state standards.
GROUP ACADEMIC
TESTS: Classroom
testing, which
offers reliable
reading & math
diagnostics for
individual students
and aggregate data
for tracking yearly
progress at the
school and district
levels.
LIBRARY MATERIALS N/A N/A N/A K-12 REFERENCE AND
OTHER INFORMATINOAL
MATERIALS: Materials
developed by us
targeted to K-12
students such as THE
WORLD ALMANAC FOR
KIDS AND GARETH
STEVENS, INC.
products, as well as
materials developed
by third-parties and
distributed by us.
GENERAL REFERENCE AND
OTHER INFORMATION
MATERIALS: Materials
developed by us, such
as THE WORLD ALMANAC
AND BOOK OF FACTS,
FUNK & WAGNALLS
ENCYCLOPEDIA database
and FACTS ON FILE
WORLD NEWS DIGEST.
WEEKLY READER
Weekly Reader has five primary product lines: elementary school periodicals;
middle and secondary school periodicals; sponsored instructional materials
published by its subsidiary, Lifetime Learning Systems, Inc.; educational
workbooks and licensing.
Page 10 of 150
In addition, Weekly Reader licenses the content for commercial use by third
parties such as Houghton Mifflin, EBSCO and The Gale Group and sells also
advertising space in its publications.
ELEMENTARY SCHOOL PERIODICALS. Weekly Reader, first published in 1928, has
established itself as a leading source for current events information for
students in grades Pre-K to 6. Weekly Reader features six grade-specific
editions for students, with between 25 and 32 issues per school year for each
edition. Within Elementary, Weekly Reader also offers one optional monthly
supplement, ScienceSpin.
Subscriptions to Weekly Reader elementary school periodicals in the 2002-2003
school year represented approximately 37% of all elementary school periodical
subscriptions circulated in that year by the three major publishers of these
periodicals. We believe that three publishers account for virtually all
periodicals targeted for classrooms. According to publishers' Statements of
Ownership filed with the USPS in the fall of 2003 for average circulation for
the 2002-03 school year and issue nearest filing date for 2003-04 school year,
Weekly Reader's periodicals had the highest total circulation of elementary
school periodicals in the 2002-2003 school year, totaling approximately 5.3
million subscriptions.
Each edition of Weekly Reader is specifically written and designed for a
particular grade level in order to bring information on current events to
elementary school students at a conceptually appropriate level. The editions for
younger audiences contain "soft" news focusing on topics such as fire prevention
and animals. Higher-grade level editions contain "hard" news concerning topics
such as world news and current events, including, for example, the 2004
presidential primary elections, corporate corruption and the Middle East
conflict. A teacher's guide with background information, discussion topics and
follow-up questions is included with each issue of each edition.
MIDDLE AND SECONDARY SCHOOL PERIODICALS. We publish nine subject-specific
periodicals covering six subject areas for students in middle and secondary
schools and a Sex Supplement Educational publication. These include Current
Events, Teen Newsweek, Current Science, Writing, Read, Current Health 1 and 2,
Career World and Know Your World Extra with between 6 and 26 issues published
per school year per periodical. For example, Current Events first published in
1902, one of our most popular periodicals for middle school students, provides
information on current events tailored to the reading levels and school
curriculum of students in the sixth through tenth grades.
Weekly Reader's middle and secondary school periodical subscriptions in the
2002-2003 school year represented approximately 46% of all middle and secondary
school periodical subscriptions circulated that year by the two major publishers
which we believe account for virtually all middle and secondary school
periodicals targeted for classrooms. Weekly Reader's middle and secondary school
periodicals had the second highest total circulation of periodicals for these
schools in the 2002-2003 school year with approximately 1.7 million
subscriptions. In 2002 and 2003 approximately 75% middle and secondary schools
have renewed a subscription for the following year. To target the growing sixth
to eighth grade market, Weekly Reader entered into a relationship with Newsweek
magazine to create Teen Newsweek, which was launched in September 1999. Teen
Newsweek focuses on social studies and current events and contains
grade-appropriate news stories that link history, geography, government and
cultures to the news stories. The relationship is intended to capitalize on
Weekly Reader's expertise in publishing and marketing materials for classroom
use and Newsweek's strong news image.
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LIFETIME LEARNING SYSTEMS. Lifetime Learning Systems is a leader in the creation
and distribution of a variety of supplemental education materials which are paid
for by corporate, trade association and/or not-for-profit sponsors and are
distributed free to a target audience. The materials produced focus on topics
chosen by the sponsor and are typically targeted for use in K-12 classrooms.
Lifetime Learning Systems also produces sponsored supplemental education
materials targeted for the college and senior citizen markets. Lifetime Learning
Systems has created a variety of multiple media education materials over the
years including: posters, teacher's guides and reproducible student activities
and additional audio, CD and video material.
Sponsors of Lifetime Learning Systems, Inc. projects have included corporate
sponsors such as Charles Schwab, General Motors, Kimberly Clark, Gillette and
the New York Stock Exchange as well as not-for-profit sponsors such as the
National Fire Protection Association, Center for Disease Control, Florida
Department of Citrus and The Home Safety Council.
SKILLS BOOKS. We offer skills books, a line of workbooks and other supplemental
education materials that build and reinforce students' basic skills in
curriculum areas such as math or language arts as well as other titles, which
focus on life issues, such as current events or health. The skills book product
line includes 30 different series of workbooks including about 142 distinct,
grade-specific titles spanning K-9 grades. For example, the highly successful
Map Skills for Today series builds geographic literacy by teaching students
basic map-reading concepts and skills. The success of this series is
attributable to a sequential approach to teaching map skills that matches the
curriculum established by many school systems. Additional products include
series covering topics such as AIDS and anti-drug education.
WEEKLYREADER.COM. In addition to our presence in the classroom through printed
materials, we redesigned and re-launched Weekly Reader's website, with the goal
of strengthening the brand image of our print products and positioning Weekly
Reader to capitalize on electronic distribution opportunities. In 2002 the
website was expanded to include the WRTOOLKIT which gives subscribers the
ability to research topics in a database of archived articles. Weekly Reader's
website is a free site with pages specifically addressing students, teachers and
parents needs. It offers materials, in the form of articles, puzzles,
experiments and games, which correlate with the content of Weekly Reader
periodicals. In addition, the web site informs users about our periodicals and
skills books allowing customers to subscribe over the Internet.
LICENSING. Weekly Reader licenses the content of some of its publications,
promotes other products in its publications and provides its "seal of approval"
to various products. Weekly Reader's licensed content is generally recognized as
revenue over the term of the license agreement. Weekly Reader continues to sell
"Weekly Reader Editor's Choice" book selections licensed from trade book
publishers on QVC generating some of the largest one-day sales totals in Weekly
Reader's history.
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AGS
AGS has two principal product lines: testing and assessment products; and core
curriculum and supplemental instructional materials.
TESTING AND ASSESSMENT PRODUCTS. AGS's testing and assessment products provide
educators with reliable individually-administered and group tests, and manuals
explaining how to administer our tests. Our testing and assessment products and
supplemental instructional materials are primarily used in K-12 schools, but are
also used in community health centers, clinics, hospitals, correctional
facilities, community colleges and other adult education programs. These
products are used to diagnose learning disabilities and measure the cognitive
ability, educational achievement and personal and social adjustment of students.
AGS currently publishes over 30 testing and assessment products. AGS's testing
and assessment products are generally sold as part of a test kit. Test kits
typically contain the test record forms, "easels" used to administer the test
items, and a manual describing the proper method to score and evaluate the
particular test. Three of AGS's top five testing products, based on sales, have
been published for over 25 years. AGS's tests are revised periodically to ensure
that they reliably measure existing populations. Achievement tests generally
require revisions every eight to ten years while tests that measure personal and
social adjustment or cognitive ability in some cases do not require revision for
as long as 15 years.
Educators and clinicians apply AGS's testing and assessment products on an
individual basis to understand a student's particular educational needs. In our
experience, once the validity and effectiveness of a test is established and
accepted in the educational community, educators', psychologists' and
clinicians' familiarity with the product grows along with their reluctance to
change suppliers and learn different assessment content, administration
approaches and scoring techniques. These professionals often prefer to use the
same tests over a long period of time in order to compare performance of their
student populations. The goal of AGS is to increase its brand awareness in the
markets it serves - primarily specialists in the K-12 market. Our goal is to
establish the AGS name in association with our products and services. By
increasing our visibility as a company on a national and local level with
special educators, we will be able to help the customer connect our products
with our company name. To grow in our critical markets, AGS plans to
aggressively pursue five main areas for growing our product line:
- - Revisions - Many of our top-selling tests and curriculum are on
schedule to be revised over the next 5 years.
- - New Product - AGS annually increases its new product offering through
internal development.
- - Acquisitions - AGS historically has pursued acquisitions to enhance and
supplement its internal development efforts.
Page 13 of 150
- - Distribution - AGS has increased its emphasis on distributing
complementary products to its target markets. Gareth-Stevens and Weekly
Reader titles (over 150) have been added to four of our main catalogs
this fall, and we have added key reading assessments that will put us
in a good position to capture Reading First, federally funded reading
initiative, dollars.
- - New Markets - AGS will seek new segments with the education industry in
which to participate where it can leverage core capabilities in new
ways that supports entry into growing education markets.
SUPPLEMENTAL INSTRUCTIONAL MATERIALS. AGS's supplemental instructional materials
consist of curriculum-based instructional materials, many of which are for
low-performing students. Low-performing students are defined as those students
scoring in the lower 50th percentile of the student population at a particular
grade level. We focus primarily on serving middle and secondary schools with
additional sales to post-secondary markets, such as community colleges and
correctional facilities. We generally produce three types of instructional
materials: supplemental hardcover textbooks in core curriculum areas for
low-performing students, with related products such as workbooks; soft cover
worktexts in core curriculum areas for low-performing students; and test
preparation materials which can be used to prepare all students for leading
achievement tests.
AGS's supplemental hardcover textbooks are designed to provide comprehensive
coverage of skills and concepts in short, concise lessons. They are geared to a
fourth grade reading level or below with photography and content that are
appropriate for middle and secondary school students as well as adults.
We believe AGS's supplemental hardcover textbooks set the standard for quality
in the market, with full-color content and accompanying extensive teacher
support materials. Each textbook has a wrap-around teacher's edition that
reproduces the student edition with notes for the teacher indicated next to the
text such as overviews for each new lesson, alternative questions a teacher may
ask and answers to questions in the text. Each textbook has available a set of
quizzes, worksheets, problem sets and other materials that teachers are
permitted to reproduce for their classes. These materials also are available on
CD-ROM. Most of AGS's supplemental hardcover textbooks have related soft cover
workbooks, activity books and study guide programs including videos available in
print and on CD-ROM for self-guided learning.
AGS's soft cover worktexts also cover core curriculum areas. These worktexts are
designed as stand-alone products so that a teacher may use them to supplement
any textbook. These soft cover worktexts cover smaller portions of any given
curriculum area other than our supplemental hardcover textbooks.
Approximately 12% of AGS's net revenue for the year ended December 31, 2003 was
from sales of testing and assessment products, curriculum and supplemental
instructional materials in which the end users were not K-12 schools.
AGS also publishes a line of test-preparation materials developed to assist
students preparing to take three of the leading achievement tests: Stanford
Achievement Test (SAT), Iowa Test of Basic Skills (ITBS), and TERRANOVA
(Comprehensive Test of Basic Skills (CTBS) and Multiple Assessments tests).
Page 14 of 150
Additional preparation materials for state specific tests are also published.
AGS's test preparation materials are sold in package format.
COMPASSLEARNING
CompassLearning is a research-based technology learning solutions company that
produces educational assessment, curriculum, and management tools for grades
Pre-K through 12, all of which are aligned to local, state, and national
standards. The CompassLearning solutions are easily integrated into classroom
activities that support curricular goals. CompassLearning derives most of its
revenue from the sale of solution products and related professional development
and technical support services.
The CompassLearning solutions are focused on the following: comprehensive
assessment that diagnoses individual students based on state/national standards;
comprehensive curriculum in reading, mathematics, science and social studies
that is prescribed to each student based on our assessment system diagnosis or
based on teachers' assessment; learning management system that allows teachers
to track student performance and intervene as and when necessary and
administrators to track teacher/student progress; parent involvement through
access to the system allowing them to view student performance and progress at
school and being more involved; and professional development for teachers to
integrate this type of a system into their classroom.
CompassLearning's Learning Odyssey(R) product line is a comprehensive library of
over 8,000 hours of interactive, standards-based, managed curriculum. The
Odyssey curriculum focuses on reading, mathematics, science, social studies, ELL
and data management tools designed for grades Pre-K through 12. Use of
stimulating graphics, interactive animation, and audio technology for all types
of learning instruction help motivate students to learn. Assessment products
assign lessons based on each student's needs. Products cover a full range of
development, from basic skill instruction, to critical thinking exercises, to
project-based learning. Management tools are designed to reduce the time
teachers spend on administrative tasks and increase one-on-one work with
students. The Odyssey product line is delivered in the school's platform of
choice including LAN, WAN and Internet access.
CompassLearning Explorer is an assessment tool designed to help evaluate student
performance. It covers the National Assessment of Educational Progress (NAEP)
objectives and is aligned with the core state standards. CompassLearning
Explorer offers criterion-referenced emulated tests, prescriptive learning paths
with the flexibility to integrate third-party products, as well as allowing for
customization to meet individual students' and teachers' needs. It can be
delivered via the Internet with computer-based and print components. Curriculum
options vary, letting students navigate with the program at their own pace or on
a timed basis.
A typical CompassLearning sale consists of software products packaged with
professional development and technical support services for an average price of
$30,000 per school per year. The curriculum sells for an average of $120 per
subject per grade level or $80 if included in a bundle plus $100 per workstation
for simultaneous access. The Odyssey management system sells for $3,500 and
CompassLearning Explorer sells for $5,000. Professional development services
price is $1,230 per day. These services are typically purchased under a contract
for specific number of days of service. Technical support services are typically
purchased under one-year contracts for an average cost of $3,990 per year. After
the expiration of any service contract, services can be purchased on an ongoing
basis.
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CompassLearning provides professional development services and technical support
services. CompassLearning has a team of educational consultants providing
professional development services to teachers, ranging from basic software
training to services designed to assist teachers in implementing and integrating
technology into the classroom.
CompassLearning offers various technical support services in connection with the
purchase and ongoing use of its software products. An initial buyer of our
software products typically purchases one year of toll-free telephone help line
services, on-site system engineer services and software updates.
WORLD ALMANAC
World Almanac's operations are divided into the following five divisions: World
Almanac Books, World Almanac Education Library Services, Gareth Stevens, Inc.,
Facts On File News Services and Funk & Wagnalls.
WORLD ALMANAC BOOKS. The World Almanac(R) and Book Of Facts is, we believe, one
of the most widely used and well-respected general reference publications in the
United States. In 1999, the Library Journal named it one of the top three best
reference sources of the past millennium still in use today. We believe The
World Almanac(R) and Book Of Facts provides more complete and up-to-date
information than competing almanacs. Its comprehensiveness and brand identity
are critical assets. In print for over 130 years, The World Almanac(R) and Book
Of Facts perennially makes the New York Times' bestseller list. World Almanac
Books also licenses the content of The World Almanac(R) and Book Of Facts to
third parties for inclusion in their products. Since 1995, World Almanac Books
has also published The World Almanac For Kids, with over 2,000,000 copies sold
to date.
WORLD ALMANAC EDUCATION LIBRARY SERVICES. World Almanac Education Library
Services is a niche distributor of reference and informational materials, which
it targets primarily to K-12 school and public libraries. There are
approximately 112,000 K-12 school libraries and 16,000 public libraries in the
United States. World Almanac Education Library Services reviews and selects
materials from third-party publishers for inclusion in its twelve catalogs. The
catalogs also include The World Almanac(R) and Book Of Facts, The World Almanac
For Kids and several best selling series from Gareth Stevens, Inc. World Almanac
Education Library Services mailed a total of approximately 2.3 million catalogs
in 2003. World Almanac Education Library Services also publishes a small amount
of proprietary teaching kits, including kits covering research skills, map
skills and Language Arts skills, which include items such as lesson plans for
books we believe are appropriate for classroom use to encourage multiple-copy
sales.
Page 16 of 150
GARETH STEVENS, INC. Gareth Stevens, Inc. publishes nonfiction and fiction books
for K-12 students. These books cover a broad spectrum of topics including
nature, science, social studies, reference, and language arts, all closely
related to curriculum standards. Approximately 79% of Gareth Stevens, Inc.'s
sales derive from books published under the three Gareth Stevens' imprints:
Gareth Stevens Publishing (K-6), World Almanac Library (4-8), and Weekly Reader
Early Learning Library (Pre-K-3). In the Gareth Stevens Publishing imprint, a
majority of these titles are sourced from domestic and international third
parties for which Gareth Stevens, Inc. usually holds at a minimum exclusive
distribution rights for K-12 school and public libraries in North America.
Royalty advances are generally paid on titles sourced in this manner and then
usually earned out over the life of the title. In the World Almanac Library and
Weekly Reader Early Learning Library imprints, the majority of titles are
created by Gareth Stevens and in most of the cases in which Gareth Stevens, Inc.
does not own the title, we hold the worldwide rights to the titles. The
remaining approximately 21% of Gareth Stevens, Inc.'s sales result from the
telesales distribution of books from other publishers, primarily two lines from
Rosen publishing (a K-3 line and a 6-12 line), and books from a handful of other
publishers, including Capstone, Heinemann Library, Crabtree, and Compass Point,
sold on consignment through the LibraryOne Direct division.
FACTS ON FILE NEWS SERVICES. World Almanac, through Facts On File News Services,
publishes and sells subscription news reference products in print and Internet
formats. There are five print products: Facts On File World News Digest; Issues
And Controversies On File; Today's Science On File; Editorials On File; and
Software And CD-ROM Reviews On File.
Its core product, Facts On File World News Digest, is a highly respected
publication used by libraries as a comprehensive index of world events dating
back to 1940 in both the print and electronic version. Librarians, journalists
and library patrons typically use Facts On File News Services products to
research historical events. The in-house editorial staff of Facts On File World
News Digest distills key news information from more than 100 different
newspapers, periodicals, journals and government Internet sources and uses it to
update the product weekly in the print and Internet formats. The core print
product has an annual subscription list price of $960, which is discounted for
public and school libraries. The print edition of Facts On File World News
Digest sold over 2,400 subscriptions in 2003 and continues to meet with great
acceptance, as evidenced by renewal rates averaging approximately 86% from 1997
through 2003. Subscriptions to the print edition have gradually declined as it
is replaced by Internet-based versions of the product described below.
To take advantage of accelerated library spending on electronic delivery of
reference materials, World Almanac launched FACTS.com in 1999, an on-line
version of Facts On File World News Digest. The increased functionality of the
Internet version allows World Almanac to price this product higher than the
print version. The Internet version has a list price of $1,695 for a single-site
installation, with price discounts per site for multiple-site installation. In
2000, we launched three additional World Almanac databases as part of the
Reference Suite @ Facts.com web service: Issues and Controversies On File,
Today's Science On File and the World Almanac Reference Database. In 2003 we
launched Facts For Learning, an elementary school reference and research
product. FACTS.com subscriptions are sold primarily through telemarketing.
Page 17 of 150
FUNK & WAGNALLS. World Almanac operates in the electronic encyclopedia business
through Funk & Wagnalls. Although the Funk & Wagnalls Encyclopedia is no longer
published in print format, Funk & Wagnalls licenses an electronic version of its
encyclopedic database to various third parties and is delivered via FACTS.com.
Funk & Wagnalls also annually sells a general yearbook containing a review of
the major news events that transpired in the previous year and a science
yearbook containing a review of the major scientific events in the previous
year. The yearbooks (general and science) are licensed from World Book
Encyclopedia, Inc. The active subscriber list for these two publications, which
primarily consists of former subscribers to the print edition of the Funk &
Wagnalls Encyclopedia, is approximately 40,000 for the general yearbook and
13,000 for the science yearbook. Most science yearbook subscribers are also
general yearbook subscribers. We do not target new subscribers for these
yearbooks; however, renewal rates have averaged approximately 82% for the
general yearbook and 78% for the science yearbook from 1997 through 2003.
PRODUCT AND CONTENT DEVELOPMENT
WEEKLY READER. Weekly Reader has a team working in product and content
development. This team includes: editors and writers, who are typically grade
and subject specialists with journalism or teaching experience; and designers,
who are responsible for the "look and feel" of the products, including the
layout of each publication.
Editors, writers and designers work in teams on any particular project including
planning meetings used for determining content and educational focus, the
selection of appropriate graphics and photographs and final editing before
submission for printing. The time it takes to develop our products varies
substantially according to the type of product. Product development for a new
periodical typically takes approximately nine months from concept to initial
marketing, whereas new issues of our existing periodicals typically take
approximately one to two weeks from conception to printing. Our skills books
typically take approximately eight to twelve months from concept to initial
marketing for an entirely new title, and approximately four to six months for
updated versions of existing titles. Development times for Lifetime Learning
Systems, Inc.'s products vary substantially depending upon the scope of work
considered, however, the average contract takes approximately three to four
months from concept to distribution.
Weekly Reader's periodicals are written by a combination of staff and freelance
writers. Our staff of editors, writers and designers determines the subject
matter for the particular edition after which the content is primarily written
and edited by Weekly Reader's employees. For ScienceSpin, however, once the
content and educational focus for a particular issue is determined internally,
the writing is contracted out to third parties with the relevant scientific
knowledge and the ability to write for the applicable target audience. Teen
Newsweek is written internally based upon content from upcoming stories in
Newsweek made available to our writers prior to Newsweek's publication, and our
own internally created content. The Teen Newsweek writers determine which
stories are appropriate for the targeted audience and then rewrite the stories
with age appropriate information and language. Teen Newsweek's content is
subject, in all cases, to Newsweek's approval.
Page 18 of 150
Weekly Reader's skills books are typically written by freelance writers at the
direction of Weekly Reader's editors. Lifetime Learning Systems, Inc.'s programs
are developed in a variety of multiple media by an in-house editorial and design
staff with varying degrees of direction provided by the applicable sponsor. In
the past, some sponsors of Lifetime Learning Systems, Inc. projects have
approached Lifetime Learning Systems, Inc. with a specific concept for which
they are seeking implementation and production, while other sponsors simply have
a message they wish to get across to a target audience and request proposals as
how best to accomplish that goal.
Prior to distribution, whether created internally or externally, all of Weekly
Reader and Lifetime Learning Systems' products are reviewed by a senior editor
for their age and content appropriateness.
AGS. AGS's new and revised testing and assessment products are developed
internally by in-house personnel, most of who are trained in one or more
specialties including psychology, education, early childhood development and
speech/language, among other disciplines. In some cases the in-house personnel
revise existing products under the direction of well known external authors who
control the original copyright or content of the test and who receive royalties
from the sale of these tests.
Our testing and assessment products are firmly rooted in established
psychological and pedagogic theory, and our product development philosophy is
customer focused. New test concepts are usually derived from the marketplace,
often from our sales representatives who are in contact with teachers, guidance
counselors, school psychologists, school administrators and other professionals
who identify a testing need.
We also develop new products through a systematic review of industry trends,
including emerging trends in the education community, or in conversations with
educators and other professionals who attend various trade and professional
conferences where we are an exhibitor or attendee. Occasionally, we will be
approached by an external author with a new test concept, which we will then
evaluate in terms of its overall market potential. AGS also distributes a few
select assessments from other publishers.
After we have created or revised a test, we then subject it to field tests. Once
field-testing and any indicated adjustments are complete, the test undergoes
standardization, generally being tested on 200 students per age year targeted by
the test and covering a broad range of demographic characteristics. In addition,
we seek support for the test from key opinion makers in the subject area of the
test. Only at this stage do we begin to market the test. The process is similar
for most revisions of existing tests because when a test is updated, the new
content similarly must be field-tested and then the revised test must undergo
standardization. The development cycle for a new test or to make revisions to an
existing test is typically five years from concept through the launch of the new
or revised test. The life cycle for the new or revised test can be up to 15
years or more.
Page 19 of 150
We develop supplemental instructional products internally and externally with
developers and in close consultation with outside authors, on a royalty basis or
on a fee-for-service arrangement. New product concepts are derived from various
sources, including in-house development staff, outside authors and our sales
force based on their regular meeting with educators and administrators.
Most of these instructional products have a development cycle of approximately
one year. In general, we solicit bids for our new products from outside
developers and award the contract based on price and other factors relating to
the developer's ability to deliver the finished product according to our exact
specifications.
COMPASSLEARNING AND CHILDU. CompassLearning and ChildU have a combined product
development team of about 57 employees. Product development expertise consists
of software engineers, programmers, quality assurance analysts, technical
writers, instructional designers, and project managers. The co-development
effort will focus on three primary objectives: delivering a Pre-K through 12
web-enabled curricula; developing a state-of-the-art instructional management
system; and creating a national-standards-based assessment product.
CompassLearning and ChildU are leveraging off-shore software and content
development resources to reduce cost and expedite delivery. This initiative has
helped the Company increase productivity significantly.
WORLD ALMANAC. World Almanac has a in-house editorial staff that: in the case of
the World Almanac Books and Funk & Wagnalls, works in conjunction with outside
work-for-hire editors to develop its content; in the case of the Facts On File
New Services products, develops the content of these products; in the case of
Gareth Stevens, editorial and creative staff work with outside work for-hire
editors and licensors to develop content as well as develop content internally.
Individual members of the in-house editorial staff are generally responsible for
only one of the product lines. The contents of our Funk & Wagnalls yearbooks are
licensed from third parties. The Gareth Stevens, Inc. nonfiction and fiction
books are comprised of either content licensed from third parties and then
repackaged and/or rewritten for the K-12 market in the United States or,
especially in the case of books for the World Almanac Library and Weekly Reader
Early Learning Library imprints, original content developed by in-house staff,
freelance writers, and other providers of editorial services. World Almanac
Education Library Services has a three-person creative staff which designs the
layout for the catalogs and selects the reference and informational materials
which will be included in the catalogs.
World Almanac Education Library Services updates its catalogs twice each year.
New editions of The World Almanac(R) and Book Of Facts and The World Almanac For
Kids are published each year. New product development is currently focused on
offering products through Internet delivery. In 2000, we launched the following
three additional World Almanac databases as part of the Facts On File News
Services web service: Issues & Controversies On File, Today's Science On File
and the World Almanac Reference Database. In 2003, we launched Facts For
Learning, an elementary school reference and research product. Also, in 2003 our
Facts On File archives available through the internet were updated back to 1940.
Page 20 of 150
CUSTOMERS
Our targeted customers, who vary depending on the product line, are teachers,
school and school district-level administrators, librarians, other educational
professionals and parents.
Weekly Reader's periodicals and other instructional materials are purchased
mainly by teachers, as well as by school and school district-level
administrators. In addition, schools sometimes ask parents of students to pay
for their children's subscriptions to Weekly Reader periodicals.
Customers of Lifetime Learning System, Inc.'s products generally are:
corporations; trade associations; not-for-profit organizations; and government
agencies.
Customers of AGS's assessment products generally are guidance counselors, school
psychologists, speech pathologists, special education teachers and other similar
school district-level specialists.
Customers of AGS's supplemental instructional materials generally are teachers
and school-level administrators as well as school district-level administrators.
AGS also has customers outside of K-12 schools for its testing and assessment
products and supplemental instructional materials, which includes clinical
psychologists, community colleges, adult educational programs and correctional
facilities.
One or more of AGS's testing and assessment or supplemental instructional
products are used in over 12,000 school districts, or approximately 80% of the
school districts in the United States.
CompassLearning's customers consist primarily of school and school
district-level administrators, including: superintendents; curriculum directors;
technology directors; and principals.
Although individual teachers do not typically make final purchasing decisions,
they frequently have substantial input in the decision making process. One or
more of CompassLearning's products has been sold to more than 21,000 K-12
schools, representing approximately 19% of all schools in the United States.
In 2003, approximately 87% of World Almanac's sales were to schools and
libraries. The remaining 13% of its sales consisted of sales of yearbooks to
former encyclopedia purchasers and sales of The World Almanac(R) and Book Of
Facts and The World Almanac For Kids to consumers.
Funk & Wagnalls licenses its electronic encyclopedia database to various
licensees and sells its yearbooks primarily to former print encyclopedia
purchasers. Facts On File News Services sells Facts On File World News Digest
and its other products to libraries of all types. World Almanac Education
Library Services and Gareth Stevens, Inc. sell their products primarily to
school libraries and to a lesser extent to public libraries. Over 58% of the
approximately 130,000 school and public libraries in the United States have
purchased products from World Almanac.
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SALES, MARKETING AND DISTRIBUTION
We have an extensive network with direct distribution channels to reach our
primary customers. Our four primary operating subsidiaries use one or more of
the following methods to sell and market our products: direct mail, direct
sales, telemarketing and distribution through retail channels. The chart set
forth below contains information regarding sales, marketing and distribution by
Weekly Reader, American Guidance, CompassLearning and World Almanac, including
their primary distribution channels.
WEEKLY READER AMERICAN GUIDANCE COMPASSLEARNING WORLD ALMANAC
Primary Method of Direct Mail Direct Sales Force Direct Sales Force Direct Mail: World
Sales and Marketing (field and telesales) Almanac Education
Library Services and
Funk & Wagnalls
Telemarketing:
Gareth Stevens,
Inc., World Almanac
Library Services and
Facts On File News
Services Retail
Marketing: World
Almanac Books
Number of Mailings in Total mail quantity N/A N/A World Almanac
2003 of 9.0 million pieces Education Library
Services generally
mails four times a
year; Yearbook mail
campaigns once a year
Number of Schools/ Over 114,000 schools; 233,000 customer N/A Approximately
Teachers/Libraries in 3.7 million teachers locations 112,000 schools,
Database 16,300 school
districts, 15,900
public libraries,
3,900 academic
libraries
Estimated Number of Over 55,000 schools Over 12,000 school Over 21,000 schools Over 76,000 school
Schools/School districts and public libraries
Districts/Libraries have purchased
with our products products from World
Almanac
DIRECT MAIL. Direct mail consists mainly of well-planned mailings that target
current and prospective customers, often with enclosed product samples and
catalogs, which are used to generate product sales. This marketing technique is
utilized to a significant extent by Weekly Reader, World Almanac's World Almanac
Education Library Services, and to a lesser extent by American Guidance,
CompassLearning and World Almanac's Funk & Wagnalls.
Weekly Reader's classroom periodicals are marketed primarily through the use of
direct mailings. Its experienced and skilled marketing staff has developed
detailed mailing schedules and marketing strategies to reach current and
prospective customers. In the marketing of its classroom periodicals, Weekly
Reader has developed and maintained a valuable and proprietary database tracing
the purchasing habits of approximately 3.7 million individual teachers and
administrators and approximately 114,000 schools over the past five years as
well as various demographic factors in each locale. In 2003, Weekly Reader
mailed over 0.7 million catalogs and 9.0 million direct mail pieces primarily to
teachers as well as to school and school district-level administrators.
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World Almanac also uses direct mail to generate sales. World Almanac's World
Almanac Education Library Services also uses direct mail to sell its products.
This division of World Almanac has developed a sophisticated database that
tracks customers and purchasing habits, including monetary value of an average
purchase and other relevant factors, which it uses to target customers with the
appropriate catalogs. Most of World Almanac Education Library Services' sales
are generated from mailings of its main catalog, which is sent to existing
customers, and its prospect catalog, which is mailed to prospective customers.
World Almanac mailed approximately 6.0 million direct mail pieces in 2003, and
including 2.3 million catalogs.
AGS printed and mailed more than 2.0 million promotional materials and catalogs
in 2003, aimed at developing customer leads, spurring direct-response sales and
building overall marketplace awareness of its brand and products.
World Almanac's Funk & Wagnalls primarily markets its yearbooks to former
subscribers of its previously published print format encyclopedia using direct
mail.
TELEMARKETING. Telemarketing involves the use of the telephone to contact
current and prospective customers as a means of generating sales. World
Almanac's Gareth Stevens, Inc. World Almanac Education Library Services and
Facts On File News Services utilize this marketing technique to a significant
extent, while CompassLearning and Weekly Reader use it to a lesser extent.
Gareth Stevens, Inc.'s marketing strategy consists primarily of selling products
through its active and growing telemarketing program. The telemarketing division
generates approximately 49% of all Gareth Stevens, Inc. sales by contacting
existing and prospective accounts to solicit commitments to preview titles from
Gareth Stevens, Inc. and other third-party publishers. Through the preview
process, librarians are invited to receive copies of Gareth Stevens, Inc. titles
or the third-party titles it distributes. The librarians then have the
opportunity to review actual copies of the selected titles at their convenience.
Gareth Stevens, Inc. telemarketers follow up with these librarians over a
specified time period to ensure that the product has been received and reviewed.
Any titles not selected for purchase are picked up from the librarian's
location, with all postage and handling expenses borne by Gareth Stevens, Inc.
Depending on the school year cycle, there are usually between 50 and 100
part-time and full-time telesales representatives in the Gareth Stevens, Inc.
telemarketing unit.
CompassLearning's inside sales group, comprised of six people, assists its
direct sales force by qualifying sales leads in conjunction with funding
eligibility and also promotes renewal sales of professional development and
technical support services contracts.
World Almanac's Facts On File News Services' strategy for attracting new
customers consists of using targeted prospects derived from a variety of sources
including rented lists, followed by telemarketing calls from representatives who
are recruited and trained by Facts On File News Services. World Almanac
Education Library Services also has recently increased its telemarketing
capacity to promote its products.
Page 23 of 150
Weekly Reader's internal telemarketing group consists of seven individuals,
targeting new subscribers. Weekly Reader also conducts telemarketing campaigns,
to assist in the generation of renewal sales.
DIRECT SALES FORCES. AGS, CompassLearning and Weekly Reader's Lifetime Learning
Systems, Inc. each primarily use a direct sales force to sell and market their
products.
To market its testing and supplemental instructional materials, AGS pursues a
strategy of developing strong relationships with its current and prospective
customers primarily by using its sales organization.
These representatives work closely with schools to determine which of AGS's
products best serve the needs of a specific school's student body. Unlike
traditional telemarketing, AGS's telephone (inside) sales representatives
develop relationships with customers and occasionally make field visits. All of
AGS's sales representatives go through a training process with defined
objectives that they must satisfy during the initial six months of their
employment and each year thereafter. In addition, AGS enlists professionals on a
per diem basis to provide instruction to educators concerning test
administration, scoring and other professional training such as disciplinary
methods and substance abuse and violence prevention techniques.
CompassLearning maintains a direct sales force of 52 sales representatives. The
sales representatives are each assigned to a sales region within the United
States. Each member of the direct sales force has access to CompassLearning's
database of detailed information concerning the school districts, current
customers, school funding and other data for its sales territories. On the basis
of this information, the sales representatives seek to establish relationships
with, and brand awareness for, CompassLearning's products among existing and
potential customers in their respective districts by making personal sales
visits to the schools or school administrators.
Weekly Reader's Lifetime Learning Systems, Inc. has a small dedicated field
based marketing and sales representatives who make presentations directly to
potential corporate, trade association and not-for-profit organization clients.
These representatives are covering the largest DMA (Designated Market Areas) in
the United States. Presentations generally consist of proposals for education
materials and programs to be shipped free to teachers and schools under the
client's sponsorship.
RETAIL MARKETING/WHOLESALERS. Approximately 76% of World Almanac Books' revenue
is generated from product sold through retail bookstores or through wholesalers
into mass-market locations such as supermarkets and newsstands. World Almanac
Books' products are also sold to book clubs and other resellers as well as into
libraries through World Almanac Education Library Services. In addition, Gareth
Stevens, Inc. distributes approximately 36% of its products through its network
of wholesalers to libraries.
Page 24 of 150
INTERNET WEB SITES. Weekly Reader, AGS, and World Almanac all have free Internet
web sites, which allow customers to order their products. The Weekly Reader web
site: features pages specifically addressing students, teachers, and parents;
and offers materials in the form of puzzles, experiments and games that
correlate with the content of Weekly Reader periodicals.
The AGS web site, launched in 1996, provides extensive company information,
customer service information, order placement information and a complete
description of its products. The web site also includes product forums which
give detailed information about those specific products. AGS had approximately
$6.8 million in web site sales, including orders initiated with an Internet
effort code and actual online orders, in 2003.
World Almanac has multiple websites that offer a variety of content/services.
Both the World Almanac Education Library Services and Gareth Stevens websites
offer Internet ordering as well as provide a complete description of their
products. The World Almanac for Kids website offers materials in the form of
games, quizzes and reference facts that correlate with the content of The World
Almanac for Kids book. In addition to free Internet websites, World Almanac
sells subscription based Internet products through its Facts On File News
Services unit.
The CompassLearning web site serves as a customer resource for information about
the software solutions.
SHIPMENT. Our periodicals are typically shipped second-class mail directly from
the location at which they were printed. Teen Newsweek, however, is delivered by
truck and/or air directly to United States Postal Service bulk mail centers to
speed delivery. Our other print materials are typically delivered by
fourth-class mail or, in some cases, by the United Parcel Service or other
courier services. Since 1986, we have distributed Facts On File World News
Digest through third parties, which provide electronic on-line delivery of
databases to libraries and have paid these distributors a royalty for each
subscription. Because we have now developed our own Internet delivery format, we
expect our use of these distributors to decline.
COMPETITION
WEEKLY READER. Our primary competitors in the Pre K-12 classroom periodicals
market are Scholastic Inc. and Time, Inc. These publishers together with Weekly
Reader publish virtually the entire market of periodicals targeted for Pre K-12
classrooms. Scholastic Inc. publishes nine editions in the elementary school
market and eight editions in the middle and secondary school market. Time, Inc.
publishes three editions in the elementary school market and no editions in the
middle and secondary school market. Competition in the school periodicals market
is based primarily on content, price, reputation, and customer service.
In the elementary school periodicals market, we believe we have a competitive
advantage over both our competitors with respect to grade appropriate content
that has close ties to school curriculum.
In the secondary school periodicals market, our competitive strengths include
content that has strong educational value and ties to school curriculum.
Page 25 of 150
In skills books we compete with many large and small publishers, primarily on
the basis of: subject matter expertise and price.
In sponsored supplemental educational materials, Lifetime Learning Systems
competes primarily with Scholastic Inc., as well as with other regional
competitors. Competition in this market is based on editorial quality,
distribution capability and cost.
Lifetime Learning Systems' core competencies, which we believe give us a
significant competitive advantage over our smaller competitors, include: the
Weekly Reader brand recognition with our corporate sponsors; multiple media
product development offerings; and broad distribution capabilities through both
its own and Weekly Reader's distribution channels.
AGS. In the assessment area, our principal competitors are The Psychological
Corporation, The Riverside Publishing Company and CTB/McGraw-Hill.
These companies focus mainly on norm referenced achievement tests, which are
administered in large groups, while individually administered assessment tests,
our target market, represent a secondary product line. We believe we are well
positioned to compete successfully in both the individually administered
assessment test market and the supplemental print instructional materials market
based on our reputation, content and ability to reach the customer base.
In the individually administered assessment test market, where quality and
reputation are the primary decision criteria, we have been providing
market-leading materials for over 45 years.
We believe we are internationally recognized for publishing technically sound
diagnostic assessments that are primarily used to identify strengths and
weaknesses at the individual level. Because we believe none of our competitors
has matched our depth in content, authorship and test instruction in
speech/language assessments, we maintain a competitive advantage in the
individually administered assessment test market.
COMPASSLEARNING. Within the electronic courseware market, we compete primarily
with other providers of integrated curriculum software and, to a lesser extent,
with independent software vendors and traditional print education publishers.
Our primary competitors are: Plato Learning/Lightspan; NCS Learn; and Riverdeep.
Competition in the supplemental electronic instructional materials market is
based primarily upon product effectiveness, design flexibility and relationships
with customers. We believe we are competitive on all these factors. Our new
Odyssey product recently won excellence awards from Technology and Learning
magazine and is ahead of most of our competitors in its architecture,
flexibility and curriculum depth/breadth.
WORLD ALMANAC. World Almanac Education Library Services is a niche player in the
school and public library distribution business. Competitors range from full
service distributors, such as Follet Library Resources and Baker & Taylor
Corporation, to smaller ones such as Gumdrop Books, Inc. and Davidson
Publishing, Inc. World Almanac Education Library Services competes with larger
distributors by providing: more product information; better customer service;
and a pre-screened selection of the season's titles.
Page 26 of 150
Gareth Stevens, Inc. competes in the K-12 nonfiction and fiction-publishing
segment of this market which is highly fragmented with many competitors ranging
from small publishers that specialize in the library market to larger publishers
that also sell into the trade market. Some of Gareth Stevens, Inc.'s larger
competitors (and their library imprints or subsidiaries) include: Reed Elsevier
(Heinemann Library, Raintree Steck Vaughn); Scholastic (Children's Press,
Franklin Watts); The Gale Group (Lucent, Greenhaven, KidsHaven, Blackbirch);
Capstone Publishing; Haights Cross (Chelsea House); Rosen Publishing Group
(Rosen, Rosen Central, PowerKids Press); Lerner Publishing.
Competition in the electronic reference materials category is somewhat more
concentrated. Some of the larger competitors in this category include: The Gale
Group, Inc.; EBSCO Industries, Inc.; ProQuest, Inc.
Products sold to school and public libraries tend to be less price sensitive
than in a consumer market. The World Almanac(R) and Book Of Facts competes
primarily with the three other almanacs currently available: The
Time/Information Please Almanac; The New York Times Almanac; and Encyclopedia
Britannica Almanac.
We believe that our almanac has a market share greater than 70% competition in
all of these segments is primarily based on reputation and brand names of
products, the length of time products have been on the market and the uniqueness
of a product. We believe we have a competitive advantage with all these factors.
Our competitors, however, have larger publishing organizations, and therefore
are able to generate greater potential economies of scale than we can. Our
larger competitors, which offer broader product lines, also provide more
comprehensive shopping opportunities to library customers than we do with our
narrower product focus.
PRODUCTION, FULFILLMENT AND CUSTOMER SERVICE
All of our print products are printed and bound by third parties with whom we
have contracts. We believe that outside printing and binding services at
competitive prices are available, and we currently use a different printer for
each product line. Most of our pre-press production, typesetting, layout and
design functions are conducted in-house, with the exception of American Guidance
where most pre-press and product assembly is conducted by third-party vendors.
Our non-print products, such as Lifetime Learning Systems, Inc.'s videos and
CompassLearning's CD-ROMs, are produced internally and, if necessary, replicated
by third parties. Some of World Almanac's divisions rely on internal production
capabilities while others utilize third-party manufacturers.
The principal raw materials utilized in our products are paper and ink. Paper is
purchased by Weekly Reader and several of World Almanac's divisions from both
suppliers and printers directly based on pricing and, to a lesser extent,
availability, while American Guidance purchases finished goods including paper
components from the printers of its publications. Ink utilized by our
publications is provided by the respective printers of our publications and
included in the cost of print production. Both paper and ink are commodity
products which are affected by demand, capacity and economic conditions. We
believe that adequate sources of supply are, and will continue to be, available
to fulfill our requirements.
Page 27 of 150
Order processing, customer service, cash application, collection functions and
fulfillment are typically performed at separate locations for each of our
operating subsidiaries, including at: Delran, New Jersey for Weekly Reader;
Circle Pines and Shoreview, Minnesota for AGS; Phoenix, Arizona, Springfield,
Illinois and San Diego, California for CompassLearning; and Delran, New Jersey,
Milwaukee, Wisconsin, New York, New York and Cleveland, Ohio for World Almanac.
However, fulfillment for some of World Almanac's products are conducted by third
parties.
INTELLECTUAL PROPERTY
WEEKLY READER. Each printed periodical or skills book is copyrighted by Weekly
Reader, including any materials written by freelance or third-party contract
writers. Photographs or artwork used in our products are typically used pursuant
to one-time licenses which grant us the right to use the photograph or artwork
in the particular product and within the United States only. Some material from
third parties is reprinted with permission for one-time use. Ownership of the
intellectual property rights in the materials produced by Lifetime Learning
Systems, Inc. are negotiated on a case-by-case basis with each sponsor.
AGS. Our tests, the accompanying score sheets and test record forms, and
supplemental instructional materials are protected by copyrights. Some material
from third parties is reprinted with permission. In addition, some products use
registered trademarks.
COMPASSLEARNING. CompassLearning's computer software products are copyrighted by
CompassLearning, but incorporate software under license from other entities,
where needed. In addition, we periodically obtain permission to use excerpts of
third-party materials on an ongoing basis in some of our products or obtain a
license from these parties to act as a distributor of their products.
WORLD ALMANAC. World Almanac owns copyrights for each edition of The World
Almanac(R) and Book Of Facts, The World Almanac For Kids, all Facts On File News
Services products other than Editorials On File which consists of editorials
reprinted with permission, all Gareth Stevens, Inc. books which are written
in-house or commissioned, the Funk & Wagnalls Encyclopedia database and the
World Almanac Education Library Services catalogs. World Almanac is typically a
licensee of the content of the remainder of its products, other than products it
solely distributes, in which it has no intellectual property rights.
Page 28 of 150
ENVIRONMENTAL MATTERS
We are subject to environmental laws and regulations relating to the protection
of the environment, including those that regulate the generation and disposal of
hazardous materials and worker health and safety. We believe that we currently
conduct our operations in substantial compliance with applicable environmental
laws and regulations. Based on our experience to date, the nature of our
operations and an environmental indemnity from PRIMEDIA delivered with the 1999
recapitalization transactions by which WRC Media acquired its interest in Weekly
Reader and World Almanac, we believe that the future cost of compliance with
existing environmental laws and regulations and liability for known
environmental claims will not have a material adverse effect on our financial
condition or results of operations.
EMPLOYEES
At December 31, 2003, we had a total of approximately 904 employees. None of our
employees are represented by any union or other labor organization. We have had
no recent strikes or work stoppages and believe our relations with our employees
are good.
PART I.
ITEM 2. PROPERTIES
The Company maintains its headquarters in the metropolitan New York area, where
it leases approximately 35,000 square feet of space for executive offices and
certain of its operating divisions. The Company is investigating consolidation
and subleasing possibilities for more economic and efficient operation. In 2003,
the Company entered into an agreement to sublease about 13,000 square feet of
excess space in the headquarter location. The Company also leases an aggregate
of approximately 420,000 square feet of office, warehouse and mixed use space in
Connecticut, California, Arizona, Minnesota, Florida, New Jersey, Ohio, Illinois
and Wisconsin.
The Company considers its properties adequate for its current needs. No
difficulties are anticipated in negotiating lease renewals as leases expire or
in finding other satisfactory space, if current premises become unavailable.
PART I.
ITEM 3. LEGAL PROCEEDINGS
Various claims and lawsuits arising out of the normal course of business are
pending against the Company. The results of these proceedings are not expected
to have a material adverse effect on the Company's consolidated financial
position or results of operations.
As previously disclosed in our Form 8-K filed with the SEC on December 15, 2003,
the SEC is conducting a preliminary inquiry concerning the Company and has
requested that the Company voluntarily provide the SEC with various documents.
The Company cannot predict the final outcome of this inquiry at this time. The
Company is cooperating fully with the SEC inquiry.
Page 29 of 150
PART I.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year covered by this report, no matter was
submitted to the vote of security holders, through the solicitation of proxy or
otherwise.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S SENIOR SUBORDINATED NOTES
The Company's 12.75% Senior Subordinated Notes are traded on the
Over-the-Counter Market under the symbol WRCMED.
PART II.
ITEM 6. SELECTED HISTORICAL FINANCIAL INFORMATION WRC MEDIA AND ITS SUBSIDIARIES
The Selected Historical Financial Information for the periods set forth in this
Item 6 has been revised to reflect the restatement. For a discussion of the
restatement, see "Item 8. Consolidated Financial Statements--WRC Media Inc. and
Subsidiaries--Note 23. Restatement." No information has been provided in this
Item 6 for 2001 or prior periods. The impact of the restatement on periods prior
to 2002 has been reflected as an adjustment to beginning accumulated deficit as
of January 1, 2002.
The following table presents selected historical consolidated financial
information for WRC Media and its subsidiaries as of and for the years ended
December 31, 2002 and 2003. The selected historical consolidated financial
information presented in the table below is derived from the historical
consolidated financial statements of WRC Media and its subsidiaries as of and
for the years ended December 31, 2002 and 2003, which are included elsewhere in
this report. The selected historical consolidated financial information does not
purport to indicate results of operations as of any future date or for any
future period. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Results
of Operations-WRC Media and Subsidiaries," and the financial statements of WRC
Media and its subsidiaries and the notes to them, included elsewhere in this
report.
Page 30 of 150
ITEM 6 SELECTED FINANCIAL DATA
For the year ended For the year ended
December 31, 2002 December 31, 2003
----------------- -----------------
STATEMENT OF INCOME DATA:
SALES, NET $ 207,831 $ 202,704
GROSS PROFIT 147,909 146,303
SALES AND MARKETING 48,754 47,201
RESEARCH AND DEVELOPMENT 1,728 1,424
GENERAL AND ADMINISTRATIVE EXPENSES (a) 50,203 50,670
OTHER OPERATING COSTS:
RESTRUCTURING COSTS AND OTHER NON-RECURRING EXPENSE (b) 8,594 1,018
GOODWILL AND INTANGIBLE ASSET
AMORTIZATION AND DEPRECIATION ( c ) 21,999 21,301
INCOME (LOSS) FROM OPERATIONS 16,631 24,689
INTEREST EXPENSE, NET 29,844 29,159
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (d) 72,022 --
NET LOSS (98,558) (7,774)
BALANCE SHEET DATA:
(END OF YEAR)
WORKING CAPITAL (DEFICIT) (43,690) (35,927)
TOTAL ASSETS 356,864 337,332
LONG TERM OBLIGATIONS (Long term debt, including current portion and
Redeemable preferred stock) 383,906 401,169
TOTAL STOCKHOLDERS' DEFICIT (143,755) (169,572)
OTHER DATA:
CAPITAL EXPENDITURES, including pre-publication costs $ 11,146 $ 10,408
- ----------
(a) General and administrative expenses comprise distribution, circulation
and fulfillment, editorial and general and administrative expenses.
(b) For the year ended December 31, 2003 and 2002, $1,018 and $8,594 of
restructuring costs and other non-recurring expense was recorded to
account for the Company's 2002 Plan of Restructuring, respectively. The
major integration and cost reduction initiatives included in the 2002
Plan of Restructuring consisted of: closure of facilities and a
reduction in work force. One hundred and seven positions were
eliminated throughout WRC Media. The workforce reduction involved each
of the four operating units of the Company. For the year ended December
31, 2003, an additional $826 of restructuring costs was recorded, for
$605 in lease costs adjustment due to updating assumptions used in
determining the fair value of remaining lease obligations associated
with facilities vacated in 2002 and additional severance in the amount
of $221 related to an executive severed in 2002. As well, $192 of due
diligence and other costs related to an acquisition that was not
completed and is not expected to be completed in the foreseeable
future.
(c) Includes depreciation of fixed assets, amortization of prepublication
costs, goodwill, and other intangibles..
(d) On January 1, 2002, the Company adopted SFAS No. 142 for its goodwill
and identifiable intangible assets. As a result, the Company recorded a
transitional goodwill and indefinite lived intangible asset impairment
charge of $72,022 at American Guidance Service, Inc. a subsidiary of
Weekly Reader Corporation. This charge is reported as a cumulative
effect of change in accounting principle, as of January 1, 2002, in the
Consolidated Statements of Operations.
Page 31 of 150
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
WEEKLY READER
The Selected Historical Financial Information for the periods set forth in this
Item 6 has been revised to reflect the restatement. For a discussion of the
restatement, see "Item 8. Consolidated Financial Statements--Weekly Reader
Corporation and Subsidiaries--Note 18. Restatement." No information has been
provided in this Item 6 for 2001 or prior periods. The impact of the restatement
on periods prior to 2002 has been reflected as an adjustment to beginning
accumulated deficit as of January 1, 2002.
The following table presents selected historical consolidated financial
information for Weekly Reader and its subsidiaries as of and for the years ended
December 31, 2002 and 2003. The selected historical consolidated financial
information presented below is derived from the historical consolidated
financial statements of Weekly Reader as of and for the years ended December 31,
2002 and 2003, which are included elsewhere in this report. The selected
historical consolidated financial statements do not indicate results of
operations as of any future date or for any future period. This information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations--Weekly
Reader and Subsidiaries" and the financial statements and related notes to them
included elsewhere in this report.
ITEM 6 SELECTED FINANCIAL DATA
For the year ended For the year ended
December 31, 2002 December 31, 2003
----------------- -----------------
STATEMENT OF INCOME DATA:
SALES, NET $ 155,013 $ 152,111
GROSS PROFIT 116,397 114,416
SALES AND MARKETING 28,345 28,241
GENERAL AND ADMINISTRATIVE EXPENSES (a) 43,149 44,002
OTHER OPERATING COSTS:
RESTRUCTURING COSTS AND OTHER NON-RECURRING EXPENSE (b) 4,280 (516)
GOODWILL AND INTANGIBLE
AMORTIZATION AND DEPRECIATION ( c ) 11,041 11,808
INCOME FROM OPERATIONS 29,582 30,881
INTEREST EXPENSE, NET 28,849 28,091
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (d) 72,022 --
NET INCOME (LOSS) (71,625) 2,042
BALANCE SHEET DATA:
(END OF YEAR)
WORKING CAPITAL (DEFICIT) (15,826) (3,810)
TOTAL ASSETS 143,039 138,879
LONG TERM OBLIGATIONS (Long term debt, including current
portion and Redeemable preferred stock) 392,786 409,104
TOTAL STOCKHOLDERS' DEFICIT (310,428) (321,241)
OTHER DATA:
CAPITAL EXPENDITURES (including prepublication costs) $ 10,834 $ 9,576
- ----------
(a) General and administrative expenses comprise distribution, circulation
and fulfillment, editorial and general and administrative expenses.
Page 32 of 150
(b) For the years ended December 31, 2003 and 2002 ($516) and $4,280 of
restructuring costs and other non-recurring expense were recorded to
account for the Company's 2002 Plan of Restructuring. The major
integration and cost reduction initiatives included in the 2002 Plan of
Restructuring consisted of: closure of facilities and a reduction in
work force. Fifty-one positions were eliminated throughout Weekly
Reader Corporation. The workforce reduction involved each of the three
operating units of Weekly Reader Corporation. For the year ended
December 31, 2003, an additional $516 of restructuring income was
recorded, for a $516 lease cost income adjustment due to updating
assumptions used in determining the fair value of remaining lease
obligations associated with facilities vacated in 2002.
(c) Includes depreciation of fixed assets, amortization of prepublication
costs, goodwill, and other intangibles.
(d) On January 1, 2002, the Company adopted SFAS No. 142 for its goodwill
and identifiable intangible assets. As a result, the Company recorded a
transitional goodwill and indefinite lived intangible asset impairment
charge of $72,022 at American Guidance Service, Inc. a subsidiary of
Weekly Reader Corporation. This charge is reported as a cumulative
effect of a change in accounting principle as of January 1, 2002, in
the Consolidated Statements of Operations.
PART II.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth in this Item 7 has been revised to reflect the restatement.
For a discussion of the restatement adjustments, see "Item 8. Consolidated
Financial Statements--WRC Media Inc. and Subsidiaries--Note 23. Restatement" and
"Item 8. Consolidated Financial Statements--Weekly Reader Corporation and
Subsidiaries.--Note 18. Restatement." The Management's Discussion and Analysis
of Financial Condition and Results of Operations set forth in this Item 7 does
not include any 2001 financial information, including for prior period
comparison purposes. Because our originally issued 2001 financial statements
were audited by Arthur Andersen LLP, an audit firm that has ceased operations,
our 2001 restated financial statements are being reaudited by our independent
auditors, Deloitte & Touche LLP.
The following discussion is intended to assist in understanding the financial
condition as of December 31, 2003 of WRC Media Inc. ("WRC Media") and its
subsidiaries, Weekly Reader Corporation and its subsidiaries, and their results
of operations for the years ended December 31, 2002 and 2003. You should read
the following discussion in conjunction with the Consolidated Financial
Statements of WRC Media and its subsidiaries and Weekly Reader Corporation and
its subsidiaries ("Weekly Reader") and the Notes thereto included in "Item 8.
Consolidated Financial Statements." Unless the context otherwise requires, the
terms "we," "our," and "us" refer to WRC Media and its subsidiaries. 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.
Page 33 of 150
OVERVIEW
We are a leading publisher of supplemental education materials for the Pre K-12
education market. Our portfolio of products includes a broad range of both print
and electronic supplemental instructional materials, testing and assessment
products and library materials, several of which have been published for over
100 years. Weekly Reader is a leading publisher of classroom periodicals based
on the 2002-2003 school year circulation of 7.0 million subscribers. In addition
to our well-recognized classroom periodicals, such as Weekly Reader and Current
Events, we publish distinct, grade-specific basic and life skills workbooks. AGS
has been a leading publisher of individually administered and group testing and
assessment products, and supplemental instructional materials for over 45 years.
AGS's testing and assessment products are primarily for K-12 students and its
supplemental instructional materials are primarily for low-performing students
in middle and secondary schools. CompassLearning is a research-based technology
learning solutions company that produces educational assessment, curriculum and
management tools for grades Pre-K through 12, all of which are aligned to local,
state and national standards. Offering more than 8,000 hours of interactive
standards-based managed curriculum that inspires educators and students to
explore and achieve success, CompassLearning has been serving the Pre-K to 12
market for over 30 years. World Almanac has been a leading publisher of
reference and informational materials targeted to K-12 students, as well as
other well-known general reference and informational materials, for over 130
years. World Almanac publishes well-known print reference materials, such as The
World Almanac and Book Of Facts and nonfiction and fiction books for K-12
students under three Gareth Stevens imprints. In addition, World Almanac
publishes electronic reference materials such as the Funk & Wagnalls
Encyclopedia database and an Internet-based version of Facts On File World News
Digest, which in its print version is World Almanac's leading subscription-based
product. World Almanac also distributes third-party products that are targeted
for K-12 students through its World Almanac Education Library Services ("WAELS")
catalogs.
Our revenues consist primarily of: subscription revenues from our periodicals;
revenues from sales of printed products including nonfiction and fiction books,
workbooks, worktexts, reference materials and test preparation materials;
computer courseware and hardware; professional development services; and
technical support services.
Our operations are conducted primarily through the following four operating
subsidiaries: Weekly Reader; American Guidance; World Almanac; and
CompassLearning.
In 2001, the Company acquired ChildU, Inc. a provider of Internet-based
educational services to both individual and institutional consumers. ChildU net
revenue for the year ended December 31, 2003 was $7.9 million representing about
4% of WRC Media total revenues.
RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The Company has restated its previously issued financial statements as of and
for the year ended December 31, 2002. The Company is in the process of restating
its December 31, 2001 financial statements. The restatement also affects periods
prior to 2001. The impact of the restatement on periods prior to 2002 is
reflected as an adjustment to the beginning accumulated deficit as of January 1,
2002. The restatement for 2002 is reported in this Current Report on Form 8-K
and the restatement for 2001 and 2002 will be reported in our Annual Report on
Form 10-K for the year ended December 31, 2003 when we file that Annual Report.
The restatement (i) corrects certain of the Company's historical accounting
policies to conform to GAAP and (ii) corrects certain errors made in the
application of GAAP.
Throughout Management's Discussion and Analysis of Financial Condition and
Results of Operations, all referenced amounts for prior periods and prior period
comparisons reflect the balances and amounts on a restated basis.
Page 34 of 150
All referenced amounts for 2003 are derived from the audited consolidated
financial statements as of and for the year ended December 31, 2003 included in
this filing and all referenced amounts for 2002 are derived from the audited
restated consolidated financial statements as of and for the year ended December
31, 2002 included in this filing.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements require us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosures of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to allowances for doubtful accounts, reserves for sales returns
and allowances and the recoverability of long-lived assets. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances. These form the basis of our
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates, which would affect our reported results from operations. We believe
the following is a description of the critical accounting policies and estimates
used in the preparation of our consolidated financial statements.
REVENUE RECOGNITION
The Company's revenue recognition policies for its principal businesses are as
follows:
o PERIODICALS - Revenue is deferred and recognized ratably over the
subscription period, as the periodicals are delivered.
o EDUCATIONAL PUBLISHING - For shipments to schools, revenue is
recognized on passage of title, which occurs upon shipment. Shipments
to depositories are on consignment. Revenue is recognized based on
reported shipments from the depositories to the schools. Likewise,
shipments to the distributor of the World Almanac and Book Of Facts and
the World Almanac For Kids books are treated similar to a consignment
sale. Revenue is recognized based on reported shipments from the
distributor to its customers (primarily retail book stores). For
certain software-based product, the Company offers new customers
installation and training. In such cases, revenue is recognized when
installation and training are complete.
Page 35 of 150
o REFERENCE AND TRADE - Revenue from the sale of children's books through
the wholesale channel are recognized when books are shipped to
wholesalers. Sales to school and public libraries made through the
telemarketing preview channel are recorded upon return of unwanted
preview product. Historically, the sale of children's books to
bookstores and mass merchandisers primarily were recognized by the
Company at the time of shipment, when title transfers to the customer
and a reserve for estimated returns was established at the time of sale
and recorded as a reduction to revenue. Actual returns were charged to
the reserve as received. The Company delivered the books through a
distributor to the bookstores and mass merchandisers under a
distribution contract between its subsidiary, World Almanac Education
Group, and a distributor at the time that the Company shipped its
products to the distributor rather than at the time those products were
resold by the distributor.
o EDUCATIONAL SOFTWARE AND RELATED PRODUCTS AND SERVICES - Software
revenues are recognized 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, we recognize 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. 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.
Page 36 of 150
o LICENSING - Licensing revenue is recorded in accordance with royalty
agreements at the time licensed materials are available to the licensee
and collections are reasonably assured.
o ADVERTISING - Revenue is recognized when the periodicals are shipped
and available to the subscribers.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Allowances for doubtful accounts are estimated losses resulting from our
customers' failure to make required payments. The Company continually monitors
collections from customers and provides a provision for estimated credit losses
based upon historical experience. The Company aggressively pursues collection
efforts on these overdue accounts and upon collection reverses the write-off in
future periods. If future payments by our customers were to differ from our
estimates, we may need to increase or decrease our allowances for doubtful
accounts.
RESERVE FOR SALES RETURNS
Reserves for sales returns and allowances are primarily related to our printed
publications. The Company estimates and maintains these reserves based primarily
on its distributors' historical return practices and our actual return
experience. If actual sales returns and allowances differ from the estimated
return and allowance rates used, we may need to increase or decrease our reserve
for sales returns and allowances.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates the recoverability of our long-lived assets,
including property and equipment, and finite lived intangible assets, whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable or in connection with its annual financial review process. Our
evaluations include analyses based on the undiscounted cash flows generated by
the underlying assets, profitability information, including estimated future
operating results and/or trends. If the value of the asset determined by these
evaluations is less than its carrying amount, impairment is recognized for the
difference between the fair value and the carrying value of the asset. Future
adverse changes in market conditions or poor operating results of the related
business may indicate an inability to recover the carrying value of the assets,
thereby possibly requiring an impairment charge to the carrying value of the
asset, in the future.
GOODWILL AND OTHER IDENTIFIED INTANGIBLE ASSETS
We test goodwill for impairment annually and whenever events or circumstances
make it more likely than not that an impairment may have occurred, such as a
significant adverse change in the business climate or a decision to sell or
dispose of a reporting unit. Determining whether an impairment has occurred
requires valuation of the respective reporting unit, which we estimate using a
discounted cash flow methodology. In applying this methodology, we rely on a
number of factors, including actual operating results, future business plans,
economic projections and market data.
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If this analysis indicates goodwill is impaired, measuring its impairment
requires a fair value estimate of each identified tangible and intangible asset.
We test other identified intangible assets with defined useful lives and that
are subject to amortization by comparing the carrying amount to the sum of
undiscounted cash flows expected to be generated by the asset. We test
intangible assets with indefinite lives annually for impairment using a fair
value methodology such as discounted cash flows.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The Company's contractual obligations and commercial commitments as of December
31, 2003 are as follows:
Contractual Obligations and Commercial Commitments
Contractual Less than After
Obligation Total 1 year 2-3 years 4-5 years 5 years
---------- -------- --------- --------- --------- --------
Long-Term Debt $275,678 $ 13,477 $110,201 $ -- $152,000
Operating Leases (net of
sub-lease income) 33,934 5,990 10,423 6,958 10,563
Employment
Obligations 4,477 3,741 736 -- --
Other Long-Term
Obligations 141,518 -- -- -- 141,518
-------- -------- -------- -------- --------
Total Contractual
Cash Obligations $455,607 $ 23,208 $121,360 $ 6,958 $304,081
======== ======== ======== ======== ========
Other Total Amount of Commitment Expiration Per Period
Commercial Amounts Less than After
Commitments Committed 1 year 2-3 years 4-5 years 5 years
----------- --------- --------- --------- --------- --------
Lines of Credit $ 28,000 $ -- $ 28,000 $ -- $ --
Standby Letters
Of Credit 2,000 -- -- -- 2,000
-------- -------- -------- -------- --------
Total Contractual
Cash Obligations $ 30,000 $ -- $ 28,000 $ -- $ 2,000
======== ======== ======== ======== ========
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REVENUES
For the year ended December 31, 2003, WRC Media and its subsidiaries had net
revenue of $202.7 million. On a separate company basis, for the year ended
December 31, 2003, Weekly Reader (excluding American Guidance and World Almanac)
had net revenue of $46.1 million, American Guidance had net revenue of $56.6
million, World Almanac had net revenue of $49.4 million, CompassLearning had net
revenue of $42.7 million and ChildU had net revenue of $7.9 million.
Weekly Reader's revenues are derived from its own operations, including those of
its subsidiary Lifetime Learning Systems, Inc., as well as from the operations
of American Guidance and World Almanac. Weekly Reader, not including American
Guidance or World Almanac, derives revenues from three primary sources:
periodicals; skills books; and sponsored instructional materials published by
its subsidiary, Lifetime Learning Systems, Inc. Weekly Reader's periodicals are
sold as subscriptions, the great majority of which are for periods of twelve
months or less, with a significant amount of each year's revenues coming from
subscription renewals. Lifetime Learning Systems, Inc.'s sponsored supplemental
educational materials are paid for by corporate, trade associations or
not-for-profit sponsors and are distributed for free primarily to K-12 students.
American Guidance derives revenues from two product lines: testing and
assessment products; and core-curriculum and supplemental instructional
materials. Testing and assessment products are typically sold in kits containing
the test, test record forms, easels used to administer the test, scoring sheets
and a manual describing the proper use of the test. Each test uses a different
test record form, which typically come in packages of 25 and must be purchased
from American Guidance for as long as the school uses the test. Some tests are
used for over 15 years. American Guidance's core-curriculum supplemental
instructional materials are sold primarily to middle and secondary schools.
World Almanac derives revenues primarily from the sale of its reference and
informational materials, including: printed products and electronic databases;
nonfiction and fiction books; and the distribution of third-party products
targeted for K-12 students.
Weekly Reader's subscriptions are recorded as deferred revenue when received and
recognized as income over the term of the subscription, whereas sales of its
other products, including sponsored instructional materials, skills books, tests
and other supplemental instructional materials, are recognized as revenue upon
shipment, net of an allowance for returns.
CompassLearning's revenues are derived from its: software products; professional
development services; technical support services; and hardware sales.
Software products consist of electronic courseware, management system and
assessment tools derived on a school's platform of choice including LAN, WAN and
Internet access.
Page 39 of 150
Professional development services generally consist of a specific number of days
of training. Technical support service contracts are typically for one-year
periods and are provided at varying levels, from telephone help-line services to
priority systems engineer dispatching. CompassLearning's electronic courseware
customers purchase, on average, six days of professional development services
and a one-year technical support contract for help-line and systems engineer
services in connection with their software purchases. These service contracts
are frequently renewed following the expiration of the initial service period,
with approximately 58% of technical support and approximately 19% of
professional development contract dollars for the year ended December 31, 2003
coming from renewal contracts. CompassLearning's services revenues, particularly
those attributable to renewals of existing services contracts, have been
decreasing recently as a result of: the improved quality of our software
products, which require less technical support; and more customers supplying
their own training and support services through in-house expertise.
Professional development services revenue is recognized as the services are
performed and technical support services revenue is recognized ratably over the
related contract.
CompassLearning's hardware business revenues are generally derived from
reselling hardware to customers who request that CompassLearning provide a
package of software and hardware. Currently, CompassLearning is a reseller for
Apple, Gateway and Dell computers in order to accommodate requests by customers
for complete hardware and software solutions. Revenues from sales of hardware
are typically recognized upon shipment.
OPERATING COSTS AND EXPENSES
For Weekly Reader, operating costs and expenses are comprised primarily of: cost
of goods sold; sales and marketing; distribution, circulation and fulfillment;
editorial; general and administrative expenses; corporate overhead costs; and
depreciation and amortization.
Weekly Reader's cost of goods sold for its products consist primarily of paper,
printing, binding costs, freight and royalty costs. Sales and marketing expenses
are typically for employees and direct marketing costs including: postage;
paper; printing; advertising; mailing list rental fees; and telemarketing costs.
Distribution, circulation and fulfillment expenses are typically for postage,
internal and third-party fulfillment, warehousing, shipping and customer
service.
Weekly Reader's editorial costs consist of expenses incurred for employees as
well as third-party contractors, such as development houses and freelancers, net
of capitalization.
General and administrative expenses consist primarily of: salaries and fringe
benefits for executives as well as for finance, information technology,
purchasing, facilities and human resources employees and related departmental
costs; information technology expenses, other than salaries; and real estate
expenses. General and administrative expenses also include corporate overhead
expense including costs for: amounts allocated as corporate overhead by WRC
Media for services and administrative functions shared with WRC Media's other
operating companies, including, but not limited to: executive management costs;
real estate expenses; and third-party costs.
Page 40 of 150
CompassLearning's operating costs and expenses consist primarily of: cost of
products sold; sales and marketing; research and development; and general and
administrative expenses.
Sales and marketing expenses are the largest component of operating costs and
expenses and consist primarily of direct sales force expenses, primarily
compensation, sales commissions and travel and entertainment as well as expenses
for promotional activities.
Cost of products sold consist primarily of: production and packaging costs and
royalty expenses; salaries and related costs of employees providing professional
development services and technical support services for CompassLearning's
services business; and the cost to CompassLearning to purchase the hardware for
resale, as well as the internal cost to support this line of business.
Research and development costs consist primarily of salaries and related costs
of employees, as well as temporary staff hired as needed. Beginning in 2002,
certain software development costs related to the CompassLearning / ChildU
co-developed Odyssey on-line software product were capitalized. For the year
ended December 31, 2003 capitalized software development costs associated with
the Odyssey on-line software product approximated $4.8 million.
Consolidated Results of Operations For the year ended December 31, 2003-- WRC
Media Inc. and Subsidiaries
The results of operations of WRC Media and its subsidiaries encompass the
operations of Weekly Reader and its subsidiaries, including AGS and World
Almanac, CompassLearning, and ChildU, Inc. ("ChildU"). The results of operations
of WRC Media and its subsidiaries should be read together with the separate
discussion of the results of operations of Weekly Reader.
In analyzing WRC Media's results for the years ended December 31, 2002 and 2003,
the seasonal nature of WRC Media's business should be considered. As a result of
seasonality, approximately 20% of WRC Media's publication and related service
revenues usually occur in its first quarter, 20% in its second quarter, and 60%
in the third and fourth quarters combined. However, unlike this revenue stream,
many of WRC Media's expenses are incurred evenly throughout the year.
Page 41 of 150
Years Ended December 31,
2002 2003
------------------------- -------------------------
Amount % of Net Revenue Amount % of Net Revenue
------ ---------------- ------ ----------------
(Dollars in millions)
Revenue, net $207.8 100.0% $202.7 100.0%
Cost of goods sold 59.9 28.8% 56.4 27.8%
------ ---- ------ ----
Gross profit 147.9 71.2% 146.3 72.2%
Costs and expenses:
Sales and marketing 48.8 23.5% 47.2 23.3%
Research and development 1.7 0.8% 1.4 0.7%
Distribution, circulation and fulfillment 14.0 6.7% 14.6 7.2%
Editorial 10.8 5.2% 10.4 5.1%
General and administrative 25.4 12.2% 25.7 12.7%
Restructuring costs and other non-recurring 8.6 4.2% 1.0 0.5%
expenses
Depreciation 3.0 1.5% 2.2 1.1%
Amortization of intangible assets 19.0 9.1% 19.1 9.4%
------ ---- ------ ----
131.3 63.2% 121.6 60.0%
------ ---- ------ ----
Income from operations 16.6 8.0% 24.7 12.2%
------ ---- ------ ----
Interest expense, including amortization
of deferred financing costs (29.8) (14.3%) (29.1) (14.4%)
Loss on investments (3.1) (1.5%) -- 0.0%
Other income (expense), net 0.7 0.3% (1.2) (0.6%)
------ ---- ------ ----
Loss before income tax provision and cumulative effect
of change in accounting principle (15.6) (7.5%) (5.6) (2.8%)
Income tax provision 11.0 5.3% 2.2 1.0%
------ ---- ------ ----
Loss before cumulative effect of change
in accounting principle (26.6) (12.8%) (7.8) (3.8%)
Cumulative effect of change in accounting principle (72.0) (34.6%) -- 0.0%
------ ---- ------ ----
Net loss $(98.6) (47.4%) $ (7.8) (3.8%)
====== ===== ====== ====
Adjusted EBITDA (a) $ 47.1 22.7% $ 48.6 24.0%
====== ==== ====== ====
- ----------
(a) Adjusted EBITDA represents (loss) before interest expense, taxes,
depreciation, amortization and other (income) charges including
restructuring costs of $8.6 million for the year ended December 31,
2002 and restructuring costs and other non-recurring expenses of $1.0
million for the year ended December 31, 2003. Adjusted EBITDA data is a
non-GAAP measure and is included in our discussion because we believe
that this information may be considered by investors as an additional
basis on which to evaluate WRC Media's performance. Because all
companies do not calculate Adjusted EBITDA identically, the
presentation of Adjusted EBITDA in this report is not necessarily
comparable to similarly titled measures of other companies. Adjusted
EBITDA is not intended to represent cash flow from operating activities
and should not be considered an alternative to net income or loss (as
determined in conformity with GAAP) as an indicator of our operating
performance or to cash flow as a measure of liquidity. It is presented
herein as we evaluate and measure each business unit's performance
based on their Adjusted EBITDA results. We also use Adjusted EBITDA to
evaluate management performance. Adjusted EBITDA may not be available
for our discretionary use as there are requirements to repay debt,
among other payments.
WRC Media analyzes its revenues, expenses and operating results on a percentage
of net revenue basis. The following table sets forth, for the periods indicated,
consolidated statements of operations data for WRC Media and its subsidiaries,
expressed in millions of dollars and as a percentage of net revenue.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Revenue, net. For the year ended December 31, 2003, net revenue decreased $5.1
million, or 2.5%, to $202.7 million from $207.8 million in 2002. This decrease
was primarily due to a decrease in net revenue at CompassLearning of $7.8
million, or 15.4%, to $42.7 million from $50.5 million in 2002 combined with a
decrease in net revenue at Weekly Reader of $2.9 million, or 1.9%, to $152.1
million from $155.0 million in 2002. These revenue decreases were partially
offset by net revenue at ChildU. ChildU net revenue increased by $5.6 million,
or 243.5%, to $7.9 million from $2.3 million in 2002. This increase in revenue
was driven by greater revenue from ChildU's on-line software products.
Page 42 of 150
The decrease in net revenue at Weekly Reader was primarily due to (1) a decrease
in net revenue at World Almanac of $3.2 million, or 6.1% to $49.4 million from
$52.6 million in 2002 primarily as a result of lower net revenue of $1.7 million
or 7.4% at WAE Library Services and $1.3 million or 8.2%, where at Gareth
Stevens, due in part to state budget deficits, which have directly impacted
catalog channel at WAE Library Services and the telemarketing and wholesale
channel sales at Gareth Stevens; (2) a decrease in net revenue at AGS of $1.3
million, or 2.2%, to $56.6 from $57.9 million in 2002 curriculum revenue
decreased $2.8 million, partially offset by higher Assessment revenue of $1.5
million; partially offset by (3) an increase in net revenue at Weekly Reader,
not including World Almanac and AGS, of $1.6 million, or 3.6%, to $46.1 million
from $44.5 million in 2002. This increase was primarily attributable to higher
revenue at Lifetime Learning Systems, Inc., a subsidiary of Weekly Reader as a
result of increased sponsored supplemental educational material shipments of
$2.6 million; increased licensing revenue of $0.5 million due to higher net
revenue from the QVC channel; partially offset by a decline in periodical
circulation revenue of $1.5 million due to the challenging K-12 funding
environment.
For the twelve months ended December 31, 2003, CompassLearning net revenue
decreased $7.8 million or 15.4% to $42.7 million from $50.5 million in 2002.
This decrease was primarily due to (1) a decrease in software revenue of $5.5
million, or 21.2%, to $20.5 million from $26.0 million in 2002, (2) a decrease
in service revenue from technical support of $1.1 million, or 8.1%, to $12.4
million from $13.5 million in 2002, (3) a decrease in professional development
revenue of $0.7 million, or 7.1%, to $9.1 million from $9.8 million in 2002 and
(4) a decrease in hardware revenue of $0.5 million, or 41.7%, to $0.7 million
from $1.2 million in 2002. Together with ChildU, total revenue from sales of
educational software products increased $0.1 million from $28.3 million to $28.4
million.
The K-12 funding environment continues to be impacted by growing state budget
deficits, which have been causing reductions in state and local educational
spending, including spending on supplemental educational materials. While we
believe WRC Media will benefit from the provisions in the Federal No Child Left
Behind Act (the "NCLB Act"), most of the increase in Federal educational funding
in 2003 was offset by lower state and local education funding in 2003. Although
we expect that Federal educational funding will increase in 2004 as a result of
the NCLB Act, we do not believe this funding improvement will be sufficient to
offset cuts in state and local education funding. These cuts and delayed
purchases have negatively affected our top-line net revenue and may continue to
affect our top-line performance at least through the first half of fiscal year
2004. The uncertainty in the current operating environment makes it difficult to
forecast future results.
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Gross profit. For the year ended December 31, 2003, gross profit decreased by
$1.6 million or 1.1%, to $146.3 million from $147.9 million in 2002. This
decrease was due to the revenue decrease discussed above. At CompassLearning
gross profit decreased $4.8 million, or 16.0%, to $25.2 million from $30.0
million in 2002 driven by lower software revenue. Gross margin at
CompassLearning as a percent of revenue decreased to 59.0% in 2003 from 59.4% in
2002. At ChildU, gross profit increased $5.2 million, or 346.7%, to $6.7 million
from $1.5 million in 2002 primarily due to the higher revenue discussed above.
Gross profit at Weekly Reader decreased $2.0 million or 1.7% to $114.4 million
for the year ended December 31, 2003 from $116.4 million in 2002 primarily as a
result of (1) a decrease in gross profit at World Almanac of $2.6 million, or
7.2%, to $33.5 million from $36.1 million in 2002. Gross profit at World Almanac
as a percent of revenue decreased to 67.8% from 68.6% in 2002 mainly due to a
change in product mix; (2) a decrease in gross profit at AGS of $0.6 million, or
1.4% to $43.5 million from $44.1 million in 2002 driven by the AGS volume
decrease described above partially offset by an increase in gross profit as a
percent of revenue to 76.9% from 76.2% partially offset by (3) an increase in
gross profit at Weekly Reader, not including AGS and World Almanac of $1.2
million, or 3.3%, to $37.4 million from $36.2 million in 2002. Overall, WRC
Media consolidated gross profit as a percent of revenue increased slightly to
72.2% for the year ended December 31, 2003 from 71.2% in 2002 mainly due to the
change in sales mix discussed above.
Costs and expenses. For the year ended December 31, 2003, operating costs and
expenses decreased by $9.7 million, or 7.4%, to $121.6 million from $131.3
million in 2002. Costs and expenses as a percentage of net revenue decreased to
60.0% from 63.2% in 2002. This decrease was primarily the result of: (i) $7.6
million or 88.4% decrease in restructuring and other non-recurring charges; (ii)
lower sales and marketing expense of $1.6 million or 3.3% due in part to the
lower revenue discussed above resulting in lower variable sales and marketing
expenses such as sales commissions; (iii) lower depreciation of $0.8 million
partially offset by higher amortization of intangibles of $0.1 million:
partially offset by (iv) higher general and administrative expense of $0.3
million primarily due to higher professional fees of $1.1 million due to legal
matters, an SEC inquiry and increased audit fees, higher recruiting fees of $0.5
million related to management changes and higher employee severance costs of
$0.4 million partially offset by a reduction of rent expense of $1.8 million
through the consolidation of facilities.
Income from operations. For the year ended December 31, 2003, income from
operations increased by $8.1 million, or 48.8%, to $24.7 million from $16.6
million in 2002. This increase was primarily due to lower gross profit offset by
lower costs and expenses described above.
Interest expense, including amortization of deferred financing costs. For the
year ended December 31, 2003, interest expense decreased by $0.7 million, or
2.3%, to $29.1 million from $29.8 million in 2002 and interest expense as a
percentage of net revenue increased slightly to 14.4% from 14.3% in 2002.
Loss on investments. During the year ended December 31, 2002 the Company
recorded a loss on investment of $3.1 million. The loss in the prior period
related to equity losses attributable to WRC Media's minority investment in
ThinkBox, Inc. There were no losses on investments during the 2003 period.
Other income (expense), net. For the year ended December 31, 2003, other income
(expense), net decreased $1.9 million or 271.4% to ($1.2) million expense from
$0.7 income 2002. This decrease was primarily driven by a $1.7 million gain from
hedging transactions in the 2002 period.
Page 44 of 150
Income tax provision. For the year ended December 31, 2003, the provision for
income taxes decreased by $8.8 million or 80.0% to an income tax provision of
$2.2 million from a provision for income taxes of $11.0 million for the same
period in 2002. The Company recorded non-cash deferred income tax expense of
$8.7 million on January 1, 2002 and $2.0 million during the years ended December
31, 2002 and 2003, which would not have been required prior to the adoption of
SFAS 142. The non-cash charge of $8.7 million on January 1, 2002 was recorded to
increase the valuation allowance related to the Company's net operating losses.
As a result of the adoption of SFAS 142, book amortization will not occur during
the carry-forward period of the operating losses. In addition, since book
amortization of tax-deductible goodwill and trademarks ceased on January 1,
2002, the Company will have deferred tax liabilities that will arise each year
because the taxable temporary differences related to the amortization of these
assets will not reverse prior to the expiration period of the Company's
deductible temporary differences unless the related assets are sold or an
impairment of the assets is recorded.
Net loss. For the year ended December 31, 2003, net loss decreased by $90.8
million, or 92.1%, to $7.8 million from $98.6 million in 2002 primarily due to
the charges of the $72.0 million non-cash impairment charge recorded as a
cumulative effect of a change in accounting principle, $8.8 million of non-cash
tax provision, due to the Company's adoption of SFAS No. 142 described above.
Net loss as a percentage of net revenue decreased to negative 3.8% from negative
47.4% in 2002.
Adjusted EBITDA. For the year ended December 31, 2003, Adjusted EBITDA increased
$1.5 million, or 3.2%, to $48.6 million from $47.1 million for the same period
in 2002. This decrease is primarily attributable to the factors described above.
Adjusted EBITDA represents (loss) before interest expense, taxes, depreciation,
amortization and other (income) charges including restructuring costs of $8.6
million for the year ended December 31, 2002 and restructuring costs and other
non-recurring expenses of $1.0 million for the year ended December 31, 2003.
Adjusted EBITDA data is a non-GAAP measure and is included in our discussion
because we believe that this information may be considered by investors as an
additional basis on which to evaluate WRC Media's performance. Because all
companies do not calculate Adjusted EBITDA identically, the presentation of
Adjusted EBITDA in this report is not necessarily comparable to similarly titled
measures of other companies. Adjusted EBITDA is not intended to represent cash
flow from operating activities and should not be considered an alternative to
net income or loss (as determined in conformity with GAAP) as an indicator of
our operating performance or to cash flow as a measure of liquidity. It is
presented herein as we evaluate and measure each business unit's performance
based on their Adjusted EBITDA results. We also use Adjusted EBITDA to evaluate
management performance. Adjusted EBITDA may not be available for our
discretionary use as there are requirements to repay debt, among other payments.
As of December 31, 2003, there were $118.7 million senior secured term loans
under the senior credit facilities, of which Adjusted EBITDA as defined in the
credit agreement is utilized in for assessing compliance with the financial
covenants of the agreement. If either of the covenants was to be violated, the
debt would become callable which could adversely affect the Company's financial
condition and liquidity. The reconciliation of Adjusted EBITDA to net loss is as
follows:
Page 45 of 150
For the years ended December 31,
Adjusted EBITDA reconciliation to Net Loss 2002 2003
-------- --------
Net Loss $(98,558) $ (7,774)
Non-Cash Expenses -- 300
Depreciation and amortization of intangibles** 24,213 23,769
Income taxes 10,980 2,151
Interest expense 29,844 29,159
Cumulative effect of change in accounting 72,022 --
principle
Restructuring costs 8,594 826
Non-recurring expenses -- 192
-------- --------
Adjusted EBITDA $ 47,095 $ 48,623
======== ========
- ----------
** Amount includes amortization of capitalized software costs of $2,214
and $2,468 for 2002 and 2003, respectively which are included in
operating costs and expenses above.
Results of Operations For the year ended December 31, 2003 -- 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.
Years Ended December 31,
2002 2003
------------------------- -------------------------
Amount % of Net Revenue Amount % of Net Revenue
------ ---------------- ------ ----------------
(Dollars in millions)
Revenue, net $155.0 100.0% $152.1 100.0%
Cost of goods sold 38.6 24.9% 37.7 24.8%
------ ---- ------ ----
Gross profit 116.4 75.1% 114.4 75.2%
Costs and expenses:
Sales and marketing 28.3 18.3% 28.2 18.6%
Distribution, circulation and fulfillment 14.0 9.0% 14.6 9.6%
Editorial 10.9 7.0% 10.4 6.8%
General and administrative 18.3 11.8% 19.0 12.5%
Restructuring costs 4.3 2.8% (0.5) (0.3%)
Depreciation 1.9 1.2% 1.7 1.1%
Amortization of intangible assets 9.1 5.9% 10.1 6.6%
------ ---- ------ ----
86.8 56.0% 83.5 54.9%
------ ---- ------ ----
Income from operations 29.6 19.1% 30.9 20.3%
Interest expense (28.8) (18.6%) (28.1) (18.5%)
Other income (expense), net 1.7 1.1% (0.2) (0.1%)
------ ---- ------ ----
Loss before income tax provision and cumulative
effect of change in accounting principle 2.5 1.6% 2.6 1.7%
Income tax provision 2.1 1.3% 0.6 0.4%
------ ---- ------ ----
(Loss) income before cumulative effect of change
in accounting principle 0.4 0.3% 2.0 1.3%
Cumulative effect of change in accounting principle (72.0) (46.5%) -- 0.0%
------ ---- ------ ----
Net (loss) income $(71.6) (46.2%) $ 2.0 1.3%
====== ===== ====== ===
Adjusted EBITDA(a) $ 46.7 30.1% $ 42.0 27.6%
====== ==== ====== ====
Page 46 of 150
- ----------
(a) Adjusted EBITDA represents (loss) before interest expense, taxes,
depreciation, amortization and other (income) charges including
restructuring costs of $4.3 million for the year ended December 31,
2002 and of ($0.5) million for the year ended December 31, 2003.
Adjusted EBITDA data is a non-GAAP measure and is included in our
discussion because we believe that this information may be considered
by investors as an additional basis on which to evaluate WRC Media's
performance. Because all companies do not calculate Adjusted EBITDA
identically, the presentation of Adjusted EBITDA in this report is not
necessarily comparable to similarly titled measures of other companies.
Adjusted EBITDA is not intended to represent cash flow from operating
activities and should not be considered an alternative to net income or
loss (as determined in conformity with GAAP) as an indicator of our
operating performance or to cash flow as a measure of liquidity. It is
presented herein as we evaluate and measure each business unit's
performance based on their Adjusted EBITDA results. We also use
Adjusted EBITDA to evaluate management performance. Adjusted EBITDA may
not be available for our discretionary use as there are requirements to
repay debt, among other payments.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Revenue, net. For the year ended December 31, 2003, net revenue decreased $2.9
million, or 1.9%, to $152.1 million from $155.0 million in 2002. The decrease in
sales at Weekly Reader was primarily due to a decrease in sales at World Almanac
of $3.2 million, or 6.1% to $49.4 million from $52.6 million in 2002, a decrease
in sales at AGS of $1.3 million, or 2.2%, to $56.6 from $57.9 million in 2002,
partially offset by an increase in sales at Weekly Reader, not including World
Almanac and AGS, of $1.6 million, or 3.6%, to $46.1 million from $44.5 million
in 2002.
The decrease in net revenue at Weekly Reader was primarily due to (1) a decrease
in net revenue at World Almanac of $3.2 million, or 6.1% to $49.4 million from
$52.6 million in 2002 primarily as a result of lower net revenue of $1.7 million
or 7.4% at WAE Library Services and $1.3 million or 8.2%, where at Gareth
Stevens, due in part to state budget deficits, which have directly impacted
catalog channel at WAE Library Services and the telemarketing and wholesale
channel sales at Gareth Stevens; (2) a decrease in net revenue at AGS of $1.3
million, or 2.2%, to $56.6 from $57.9 million in 2002 curriculum revenue
decreased $2.8 million, partially offset by higher Assessment revenue of $1.5
million; partially offset by (3) an increase in net revenue at Weekly Reader,
not including World Almanac and AGS, of $1.6 million, or 3.6%, to $46.1 million
from $44.5 million in 2002. This increase was primarily attributable to higher
revenue at Lifetime Learning Systems, Inc., a subsidiary of Weekly Reader as a
result of increased sponsored supplemental educational material shipments of
$2.6 million; increased licensing revenue of $0.5 million due to higher net
revenue from the QVC channel; partially offset by a decline in periodical
circulation revenue of $1.5 million due to the challenging K-12 funding
environment.
The K-12 funding environment continues to be impacted by growing state budget
deficits, which have been causing reductions in state and local educational
spending, including spending on supplemental educational materials. While we
believe WRC Media will benefit from the provisions in the Federal No Child Left
Behind Act (the "NCLB Act"), most of the increase in Federal educational funding
in 2003 was offset by lower state and local education funding in 2003. Although
we expect that Federal educational funding will increase in 2004 as a result of
the NCLB Act, we do not believe this funding improvement will be sufficient to
offset cuts in state and local education funding. These cuts and delayed
purchases have negatively affected our top-line net revenue and may continue to
affect our top-line performance at least through the first half of fiscal year
2004. The uncertainty in the current operating environment makes it difficult to
forecast future results.
Page 47 of 150
Gross profit. For the year ended December 31, 2003 gross profit at Weekly Reader
decreased $2.0 million or 1.7% to $114.4 million from $116.4 million in 2002
primarily as a result of (1) a decrease in gross profit at World Almanac of $2.6
million, or 7.2%, to $33.5 million from $36.1 million in 2002. Gross profit at
World Almanac as a percent of revenue decreased to 67.8% from 68.6% in 2002
mainly due to a change in product mix; (2) a decrease in gross profit at AGS of
$0.6 million, or 1.4% to $43.5 million from $44.1 million in 2002 driven by the
AGS volume decrease described above partially offset by an increase in gross
profit as a per cent of revenue to 76.9% from 76.2% partially offset by (3) an
increase in gross profit at Weekly Reader, not including AGS and World Almanac
of $1.2 million, or 3.3%, to $37.4 million from $36.2 million in 2002. Gross
profit as a percentage of sales increased slightly to 75.2% for the year ended
December 31, 2003 from 75.1% in 2002.
Costs and expenses. For the year ended December 31, 2003, operating costs and
expenses decreased $3.3 million, or 3.8%, to $83.5 million from $86.8 million in
2002. Cost and expenses as a percentage of net revenue decreased to 54.9% from
56.0% in 2002. This decrease in costs and expenses was primarily driven by; (i)
a decrease in restructuring costs of $4.8 million or 111.6%; (ii) a decrease in
editorial costs of $0.5 million or 4.6%; partially offset by (iii) a increase in
general and administrative costs of $0.7 million or 3.8%; (iv) an increase in
amortization of intangible assets of $1.0 million or 11.0%; and (v) an increase
in distribution, circulation and fulfillment costs of $0.6 million or 4.3%.
Restructuring costs decreased due to $4.3 million in expense recorded in 2002
related to the "2002 Plan of Restructuring" compared to the $0.5 million in
income related to adjustments for updated assumptions of the original plan
primarily for lease termination costs. The increase in general and
administrative expenses primarily related to the partial allocation of the
separation reserve of $1.1 million for a senior executive, the allocation of
higher professional fees of $0.2 million due to legal matters, a SEC inquiry and
increased audit fees, and the allocation of higher recruiting fees of $0.4
million related to management changes offset by a reduction of rent expense of
$0.4 million through consolidation of facilities and $0.6 million reduction of
fixed overhead costs. The increase in amortization of intangible assets
primarily relates to increased investment in pre-publication costs related to
ongoing investment in product development.
Income from operations. For the year ended December 31, 2003, income from
operations increased by $1.3 million, or 4.4%, to $30.9 million from $29.6
million for the same period in 2002 for the reasons described above. Income from
operations as a percentage of net revenue increased to 20.3% from 19.1% for the
same period in 2002. This increase was primarily due to the factors described
above.
Interest expense. For the year ended December 31, 2003, interest expense
decreased by $0.7 million, or 2.4%, to $28.1 million from $28.8 million for the
same period in 2002. Interest expense as a percentage of net revenue decreased
to 18.5% from 18.6% for the same period in 2002.
Page 48 of 150
Income tax provision. For the year ended December 31, 2003, the provision for
income taxes decreased by $1.5 million, or 71.4%, to $0.6 million from $2.1
million for the same period in 2002. Weekly Reader recorded non-cash deferred
income tax expense of approximately $1.4 million on January 1, 2002 related to
the adoption of SFAS 142. The non-cash charge of $1.4 million on January 1, 2002
was recorded to increase the valuation allowance related to the deferred tax
asset associated with Weekly Reader's net operating losses. Historically, Weekly
Reader did not need a valuation allowance for the portion of its net operating
loss equal to the excess of tax over book amortization on tax-deductible
goodwill and trademarks since the liability was expected to reverse during the
carryforward period of the net operating losses. As a result of the adoption of
SFAS 142, the timing of the reversal of this liability is indefinite and can no
longer be offset by Weekly Reader's net operating loss carryforwards. While book
amortization of tax-deductible goodwill and trademarks ceased on January 1,
2002, Weekly Reader will continue to amortize these assets for tax purposes. As
a result, Weekly Reader will have deferred tax liabilities that will arise each
quarter because the taxable temporary differences related to the amortization of
these assets will not reverse prior to the expiration period of Weekly Reader's
deductible temporary differences unless the related assets are sold or an
impairment of the assets is recorded. Accordingly, Weekly Reader recorded
non-cash deferred income tax expense of $0.6 million for each of the year ended
December 31, 2002 and 2003.
Net (loss) income. For the year ended December 31, 2003, net income increased by
$73.6 million to net income of $2.0 million from a net loss of $71.6 million for
the same period in 2002 primarily due to the non-cash charges of $72.0 million
non-cash impairment charges recorded as a cumulative effect of a change in
accounting principle, $1.4 million of non-cash income tax provision resulting
from the Company's adoption of SFAS No. 142 as described above. Net (loss)
income as a percentage of net revenue improved to 1.3% from negative 46.2% for
the same period in 2002.
Adjusted EBITDA. For the year ended December 31, 2003, Adjusted EBITDA decreased
$4.7 million, or 10.1%, to $42.0 million from $46.7 million for the same period
in 2002. This decrease is primarily attributable to the factors described above.
Adjusted EBITDA represents (loss) before interest expense, taxes, depreciation,
amortization and other (income) charges including restructuring costs of $4.3
million for the year ended December 31, 2002 and a restructuring income
adjustment of ($0.5) million for the year ended December 31, 2003. Adjusted
EBITDA data is a non-GAAP measure and is included in our discussion because we
believe that this information may be considered by investors as an additional
basis on which to evaluate WRC Media's performance. Because all companies do not
calculate Adjusted EBITDA identically, the presentation of Adjusted EBITDA in
this report is not necessarily comparable to similarly titled measures of other
companies. Adjusted EBITDA is not intended to represent cash flow from operating
activities and should not be considered an alternative to net income or loss (as
determined in conformity with GAAP) as an indicator of our operating performance
or to cash flow as a measure of liquidity. It is presented herein as we evaluate
and measure each business unit's performance based on their Adjusted EBITDA
results. We also use Adjusted EBITDA to evaluate management performance.
Adjusted EBITDA may not be available for our discretionary use as there are
requirements to repay debt, among other payments. The reconciliation of Adjusted
EBITDA our net (loss) income is as follows:
Page 49 of 150
For the years ended December 31,
Adjusted EBITDA reconciliation to Net (Loss) Income 2002 2003
-------- --------
Net (Loss ) Income $(71,625) $ 2,040
Depreciation and amortization of intangibles 11,041 11,808
Income taxes 2,101 552
Interest expense 28,849 28,091
Cumulative effect of change in accounting principle 72,022 --
Restructuring costs 4,280 (516)
-------- --------
Adjusted EBITDA $ 46,668 $ 41,975
======== ========
LIQUIDITY AND CAPITAL RESOURCES
General
At December 31, 2003 WRC Media's sources of cash were its (1) operating
subsidiaries, Weekly Reader Corporation, CompassLearning, Inc., and ChildU, Inc.
and (2) a $30.0 million revolving credit facility, of which the Company had
agreed as of December 30, 2003, to borrow no more than $26.0 million. As of
December 31, 2003, $5.0 million of the revolving credit facility had been drawn
down at an interest rate that approximated 6.5%. Additionally, the Company has a
stand-by letter of credit, renewable annually, in the amount of $2.0 million,
which serves as security for a real estate lease entered into by the Company.
While this letter of credit is in effect, it reduces available borrowing under
the 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 time period, and borrowings generally will be at its lowest
point in the fourth quarter.
Prior to the refinancing discussed below, our senior secured credit agreement
(the "First-Lien Facility") consisted of a $30.0 million revolving credit
facility with a maturity of November 17, 2005, of which we had agreed as of
December 30, 2003 not to borrow more than $26.0 million, a $31.0 million
amortizing term loan A facility with a maturity of November 17, 2005, a $100.0
million amortizing term loan B facility with a maturity of November 17, 2006 and
a $10.0 million amortizing additional term loan A facility with a maturity of
November 17, 2006. As of December 31, 2003, there were $118.7 million in
aggregate principal amount of term loans outstanding under the First-Lien
Facility. The terms of our First-Lien Facility required us on an ongoing basis
to meet certain financial covenants, including a maximum leverage ratio covenant
and a minimum fixed charge coverage ratio covenant. Compliance with these
covenants was measured as of the last day of each fiscal quarter. Each ratio
became more stringent periodically during the fiscal year ended December 31,
2003 and through March 31, 2004. With respect to the fourth quarter ended
December 31, 2003, we were required to have a leverage ratio no greater than
5.00:1.0 and a fixed charge coverage ratio no less than 1.10:1.0 and thereafter
beginning with the quarter ending March 31, 2004, we were required to have a
leverage ratio no greater than 4.00:1.0 and a fixed charge ratio no less than
1.50:1.0. We were not in compliance with these covenants as of December 31,
2003. For the year ended December 31, 2003, our leverage ratio was 5.73:1 and
our fixed charge coverage ratio was 1.05:1. We successfully reached an agreement
with our senior lenders under which they would continue to make available to the
Company additional borrowings under the Company's revolving credit facility
through March 31, 2004. Under the agreement, the lenders waived through March
31, 2004 WRC Media's failure to comply with certain financial covenants as of
December 31, 2003, and WRC Media agreed to limit borrowings, including currently
outstanding borrowings and letters of credit, under its revolving credit
facility to $26.0 million out of the $30.0 million facility.
Page 50 of 150
After giving effect to the restatement described in "Item 8. Consolidated
Financial Statements--WRC Media Inc. and Subsidiaries--Note 23. Restatement," we
were and are in compliance with the financial covenants under the First-Lien
Facility as then in effect for all of the reporting periods affected, other than
the fourth quarter of 2003, for which the lenders under the 2001 First-Lien
Facility granted us a waiver through March 31, 2004.
On March 29, 2004, we refinanced all of our term loans under the First-Lien
Facility with a $145.0 million senior, second-priority lien secured financing
that was provided to the Company pursuant to a term loan facility (the
"Second-Lien Facility"). The proceeds of the Second-Lien Facility were used (i)
to refinance in full all term loans outstanding under the First-Lien Facility,
(ii) to pay fees and expenses related to the Second-Lien Facility and all
transactions contemplated in connection therewith and (iii) for general
corporate purposes of the Company, including paying down $15.0 million of
borrowings under its revolving credit facility.
All payment obligations under the Second-Lien Facility are secured by a
second-priority lien on the collateral securing the First-Lien Facility;
provided that all obligations under the Second-Lien Facility will rank equally
in right of payment with all payment obligations under the First-Lien Facility
and will not be subordinated in any respect to the First-Lien Facility. The
final maturity of the Second-Lien Facility will be March 29, 2009. At the
Company's option, the loans will bear interest at either the Administrative
Agent's (i) alternate base rate plus 4.00% per annum loans" or (ii)
reserve-adjusted LIBO rate plus 5.00% per annum.
The Second-Lien Facility has one financial covenant, a maximum ratio (the
"Senior Leverage Ratio") of Senior Secured Debt to trailing four quarter EBITDA
not to exceed 4.25:1.00 for any fiscal quarter, except the fiscal quarter ended
June 30, 2005 for which the Senior Leverage Ratio shall not exceed 4.50:1.00, in
each case to be tested on the last day of each fiscal quarter and computed for
the Company and its consolidated subsidiaries.
In connection with entering into the Second-Lien Facility, we entered into an
amendment and restatement of our First-Lien Facility, which now consists solely
of a $30.0 million revolving credit facility. The cash available under our
First-Lien Facility, together with the cash from our operating subsidiaries,
Weekly Reader Corporation, CompassLearning, Inc. and ChildU, Inc., is considered
adequate for the Company's needs for the foreseeable future.
Page 51 of 150
The First-Lien Facility, as amended and restated, has a maturity of December 29,
2008, and has one financial covenant, a Senior Leverage Ratio of senior secured
debt to trailing four quarter EBITDA (as defined therein) not to exceed
4.00:1.00 for any fiscal quarter, except the fiscal quarter ended June 30, 2005
for which the Senior Leverage Ratio may not exceed 4.25:1.00, in each case to be
tested on the last day of the fiscal quarter and computed for the Company and
its consolidated subsidiaries. Interest on revolving loan borrowings under the
First-Lien Facility will bear interest at a rate per annum equal to the LIBO
rate as defined in the First-Lien Facility plus 3.5% or the alternate base rate
as defined in the First-Lien Facility plus 2.5%. After giving effect to the
refinancing, $8.0 million was outstanding under our First-Lien Facility. The
credit agreement for our First-Lien Facility is secured by liens on
substantially all of our assets, and the credit agreement for our Second-Lien
Facility is secured by second-priority liens on all the assets securing the
First-Lien Facility.
Under the terms of the indenture for our 12 3/4% Senior Subordinated Notes due
2009 (the "Notes"), we are required to furnish "all quarterly and annual
financial information that would be required to be contained in a filing with
the Securities and Exchange Commission (the `SEC') on Forms 10-Q and 10-K if the
Company were required to file such forms, including a `Management's Discussion
and Analysis of Financial Condition and Results of Operations' and, with respect
to the annual information only, a report thereon by the Company's certified
independent accountants. . ." in each case within the time periods specified in
the SEC's rules and regulations. Because our 2001 financial statements were
audited by Arthur Andersen LLP, an audit firm that has ceased operations, the
restatement of our 2001 financial statements requires a reaudit of such
financial statements. The reaudit of our 2001 financial statements was not
completed at the time of this filing and the 2001 financial statements are not
included in this filing. We believe that upon furnishing our audited 2003
financial statements to the holders of our Notes and filing such statements with
the SEC, we will be in compliance with the information requirements of the
indenture for our Notes. We cannot assure you, however, that the trustee or
noteholders will not claim that we are in breach of the indenture's information
requirements, or that after any such claim is made and the applicable cure
period has expired, the trustee or noteholders will not send a notice to
accelerate repayment of the Notes.
If the reaudit of our 2001 financial statements is completed and a report
thereon issued by our independent auditors as required by the indenture prior to
any claim of breach being made, the potential for such a claim would be
eliminated. If a breach of the information requirements of the indenture were to
be claimed and the trustee or holders of at least 25% of the aggregate principal
amount of the Notes were to provide written notice of such breach, we would
vigorously defend against any such claim. Even if such claim of breach were to
prevail, we would have 60 days from the date of written notice of such claim of
breach to cure the breach and avoid an event of default under the indenture. If
the reaudit of our 2001 financial statements is completed and a report thereon
issued by our independent auditors as required by the indenture prior to the end
of the 60 day cure period, the right to accelerate our Notes or the indebtedness
under our credit agreements as a result of the alleged breach of the indenture's
information requirements would be eliminated. We have engaged our independent
auditors to perform a reaudit of the 2001 financial statements and expect to be
able to provide our auditors with the information necessary for them to complete
their reaudit prior to the end of the cure period, if any claim of breach of the
indenture's information requirements is made.
Page 52 of 150
While we are diligently working to provide such documentation, we cannot assure
you that we will be able to provide the information necessary to complete the
reaudit or that the reaudit of the 2001 financial statements will be completed
and a report thereon issued by our independent auditors as required by the
indenture. If there is an event of default under the indenture, the trustee or
holders of at least 25% of the aggregate principal amount of the Notes would
have the right to accelerate payment of our Notes, and the lenders under our
First-Lien Facility and our Second-Lien Facility also would have the right to
accelerate payment thereunder. As of December 31, 2003, $152,000,000 in
aggregate principal amount of the Notes was outstanding. If repayment of the
First-Lien Facility, the Second-Lien Facility or the Notes were to be
accelerated, we would not be able to repay such amounts and such acceleration
would have a material adverse effect on our financial condition and liquidity.
Liquidity, Working Capital and Capital Resources
As of December 31, 2003, WRC Media and its subsidiaries had negative working
capital of $34.5 million. WRC Media's cash and cash equivalents were
approximately $1.4 million at December 31, 2003. WRC Media and its subsidiaries'
operations provided approximately $1.7 million in cash for the year ended
December 31, 2003. WRC Media and its subsidiaries' principal uses of cash are
for debt service, working capital and expenses relating to potential
acquisitions.
WRC Media and its subsidiaries' investing activities for the year ended December
31, 2003, included investments in software development of approximately $4.8
million and capital expenditures of approximately $1.6 million.
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 year ended December 31, 2003,
financing activities used net cash of $3.0 million, which primarily resulted
from net borrowings of $5.0 million under the revolving credit facility which
was offset by $8.0 million repayment of the senior secured term loans. The
senior second-priority secured term loans under our Second-Lien Facility, which
refinanced all the senior secured term loans under our First-Lien Facility, do
not amortize and we do not expect our financing activities going forward to
include regular periodic retirement of term loans prior to maturity.
Derivative Financial Instruments
As disclosed in Note 3 to the consolidated financial statements, the Company
uses derivative financial instruments to reduce its exposure to interest rate
volatility. In 2003, the Company used interest rate swaps and caps to reduce
exposure to interest rate changes. At December 31, 2003, Weekly Reader
Corporation had one outstanding derivative financial instrument in place, an
interest rate cap on 50% of its senior secured term loans as required by the
First-Lien Facility as then in effect. Our amended restated First-Lien Facility
and our Second-Lien Facility require us to obtain interest rate protection that,
when taken together with the aggregate principal amount of our indebtedness
subject to a fixed interest rate, will result in at least 50% of our total
indebtedness being other fixed, hedged or capped for the duration of the
applicable facility. On November 15, 2003, we entered into financial instruments
with a notional value of $61.0 million, which terminates on November 15, 2004
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 2.5%. The fair value of
the interest rate cap as of December 31, 2003 was de-minimus.
Page 53 of 150
Seasonality
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
net revenue are significantly affected by the school year. Weekly Reader's net
revenue in the third, and to a lesser extent the fourth, quarters are generally
the strongest as products are shipped for delivery during the school year.
CompassLearning's net revenues were historically strongest in the second
quarter, and to a lesser extent the fourth quarter. However, due to tight
funding environment in the last couple of years, the trend is shifting towards
the fourth quarter being the strongest, followed by the second quarter. The
strength in the second quarter is generally attributed to the end of the school
fiscal year (June 30th) and the need for the schools to spend the money prior to
year end. In addition, by purchasing in the second quarter, schools are able to
have the software products purchased and installed over the summer and ready to
train teachers when they return from summer vacation. However, due to budget
cuts, schools do not have excess money by the end of their fiscal year resulting
in lower sales for CompassLearning in our second fiscal quarter.
CompassLearning's fourth quarter revenue is strong as a result of sales patterns
driven by new school year money being appropriated and funded, CompassLearning's
commissioned sales force seeking to meet year-end sales goals as well as schools
purchasing software to be installed in time to take advantage of it during the
second half of the school year.
Inflation
We do not believe that inflation has had a material impact on our financial
position or results of operations for the periods discussed above. Although
inflationary increases in paper, postage, labor or operating costs could
adversely affect operations, we have generally been able to offset increases in
costs through price increases, labor scheduling and other management actions.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
FIN 45 elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain guarantees
that it has issued. FIN 45 requires a guarantor to recognize, at the inception
of a guarantee, a liability for the fair value of the obligations undertaken in
issuing the guarantee. The disclosure provisions of FIN 45 were effective for
financial statements of periods ending after December 15, 2002. The Company
adopted the disclosure provisions of FIN 45 effective December 31, 2002. The
recognition provisions of FIN 45 regarding a guarantor's obligation must be
applied to guarantees issued after December 31, 2002. The adoption of the
recognition provisions of FIN 45, effective January 1, 2003, did not have a
significant effect on the Company's consolidated financial position or results
of operations.
Page 54 of 150
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variables Interest Entities ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. In December 2003, the FASB issued FIN No. 46
(Revised) ("FIN 46R") to address certain FIN 46 implementation issues. This
interpretation requires that the assets, liabilities, and results of activities
of a Variable Interest Entity ("VIE") be consolidated into the financial
statements of the enterprise that the primary beneficiary of the VIE. FIN 46R
also requires additional disclosures by primary beneficiaries and other
significant variable interest holders. This interpretation is effective no later
than the end of the first interim or reporting period ending after March 15,
2004, except for those VIE's that are considered to be special purpose entities,
for which the effective date is no later than the end of the first interim or
annual reporting period ending after December 15, 2003. The adoption of FIN 46R
is not expected to have a significant impact on the Company's consolidated
financial position or results of operations.
Statement of Financial Accounting Standards ("SFAS") No. 143 "Accounting for
Asset Retirement Obligations"("SFAS 143"), became effective for us on January 1,
2003. SFAS No. 143 requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes a cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The adoption of SFAS 143 did not have any
impact on the Company's consolidated financial position or results of
operations.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends and
clarifies accounting for derivative instruments, and for hedging activities
under SFAS 133. Specifically, SFAS 149 requires that contracts with comparable
characteristics be accounted for similarly. Additionally, SFAS 149 clarifies the
circumstances in which a contract with an initial net investment meets the
characteristics of a derivative and when a derivative contains a financing
component that requires special reporting in the statement of cash flows. This
Statement is generally effective for contracts entered into or modified after
June 30, 2003 and did not have a significant impact on the Company's
consolidated financial position or results of operations.
Page 55 of 150
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. This statement will become effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
shall be effective for the Company at the beginning of the first interim period
beginning after December 15, 2003. For financial instruments created before the
issuance date of this statement and still existing at the beginning of the
interim period of adoption, transition shall be achieved by reporting the
cumulative effect of a change in an accounting principle by initially measuring
the financial instruments at fair value or other measurement attribute required
by this statement. The adoption of the statement will require the Company to
reclassify its 15% Series B Redeemable Preferred Stock from the mezzanine
section of the balance sheet to other long-term liabilities. Future dividend
payments for the 15% Series B Redeemable Preferred Stock will be recorded to
interest expense in the consolidated statement of operations.
On December 23, 2003, the FASB issued SFAS No. 132 (Revised 2003), Employers'
Disclosures about Pensions and Other Postretirement Benefits, an amendment of
FASB Statements No. 87, 88 and 106. It requires additional disclosures to those
in the original Statement 132 about the assets, obligations, cash flows and net
periodic benefit cost of defined benefit pension plans and other defined benefit
post-retirement plans. The majority of the provisions of this statement apply to
financial statements issued for fiscal years ending after December 15, 2003.
Factors That May Affect The Future Results And Financial Condition
This Current Report on Form 8-K contains forward-looking statements. Additional
written and oral forward-looking statements may be made by the Company from time
to time in SEC filings and otherwise. The Company cautions readers that results
predicted by forward-looking statements, including, without limitation, those
relating to the Company's future business prospects, revenues, working capital,
liquidity, capital needs, interest costs and income, are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those indicated in the forward-looking statements, due to factors including
the following and other risks and factors identified from time to time in the
Company's filings with the SEC:
The Company's ability to continue to produce successful supplemental education
material and software products;
Reductions in state and local funding for educational spending materials
resulting, among other things, from increasing state budget deficits;
Uncertainty in the current operating environment which makes it difficult to
forecast future results;
Page 56 of 150
The Company's ability to provide the information necessary to complete the
reaudit of our 2001 financial statements, our auditor's ability to complete the
reaudit of our 2001 financial statements and the risk of default and
acceleration under our indenture in connection with the timing for completion of
the reaudited 2001 financial statements;
The risk of changes to our 2001 financial statements as a result of the reaudit
of our 2001 financial statements;
The preliminary SEC inquiry we previously disclosed in our Form 8-K filed with
the SEC on December 15, 2003, is ongoing, and we cannot predict the final
outcome of the inquiry at this time;
The ability of the Company's print and electronic supplemental instructional
materials to continue to successfully meet market needs;
The Company's ability to maintain relationships with its creative talent;
Changes in purchasing patterns in and the strength of educational, trade and
software markets;
Competition from other supplemental education materials companies;
Significant changes in the publishing industry, especially relating to the
distribution and sale of supplemental educational materials;
The effect on the Company of volatility in the price of paper and periodic
increases in postage rates;
The Company's ability to effectively use the Internet to support its existing
businesses and to launch successful new Internet initiatives;
The general risks inherent in the market and the impact of rising interest rates
with regard to its variable debt facilities; and
The terms of our First-Lien Facility and Second-Lien Facility require us on an
ongoing basis to meet certain maximum secured leverage ratio covenants. A
default under either credit agreement could result in acceleration of our
payment obligations thereunder and would have a material adverse effect on our
financial condition and liquidity.
The foregoing list of factors should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company prior to the
date hereof. The Company disclaims any intention or obligation to update or
revise forward-looking statements, whether as a result of new information,
future events or otherwise.
Page 57 of 150
PART II
ITEM 7A 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 were subject to market risk exposure related to changes in interest rates on
our $118.7 million (as of December 31, 2003) senior secured term loans under our
First-Lien Facility and we will continue to be subject to market risk on our
$145.0 million (as of March 29, 2004) Second-Lien Facility. Interest on
revolving loan borrowings under our First-Lien Facility maturing in December
2008 will bear interest at a rate per annum equal to the LIBO rate as defined in
the First-Lien Facility plus 3.5% or the alternate base rate as defined in the
First-Lien Facility plus 2.5%. Interest on the term loans under our Second-Lien
Facility maturing in March 2009 will bear interest at a rate per annum equal to
the LIBO rate as defined in the Second-Lien Facility plus 5.0% or the alternate
base rate as defined in the Second-Lien Facility plus 4.0%.
The First-Lien Facility and the Second-Lien Facility require us to obtain
interest rate protection that, when taken together with the aggregate principal
amount of the Company's indebtedness subject to a fixed interest rate, will
result in at least 50% of our total indebtedness being either fixed, hedged or
capped for the duration of the applicable facility. On November 15, 2003, we
entered into an arrangement with a notional value of $60.1 million, which
terminates on November 15, 2004 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 2.5%. The fair value of the interest rate cap as of December 31,
2003 was de-minimus.
Page 58 of 150
PART II
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements and
Financial Statement Schedule PAGE(S)
WRC MEDIA INC. AND SUBSIDIARIES
(CO-ISSUER OF SENIOR SUBORDINATED NOTES):
Independent Auditors' Report--Deloitte & Touche LLP 60
Consolidated Balance Sheets as of December 31, 2002 (as restated) and 2003 61
Consolidated Statements of Operations for the Years
Ended December 31, 2002 (as restated) and 2003 63
Consolidated Statements of Stockholders' Deficit for the Years
Ended December 31, 2002 (as restated) and 2003 64
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2002 (as restated) and 2003 65
Notes to Consolidated Financial Statements 66
WEEKLY READER CORPORATION AND SUBSIDIARIES
(CO-ISSUER OF SENIOR SUBORDINATED NOTES):
Independent Auditors' Report--Deloitte & Touche LLP 100
Consolidated Balance Sheets as of December 31, 2002 (as restated) and 2003 101
Consolidated Statements of Operations for the Years Ended
December 31, 2002 (as restated) and 2003 103
Consolidated Statements of Stockholders' Deficit for the Years Ended
December 31, 2002 (as restated) and 2003 104
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002 (as restated) and 2003 105
Notes to Consolidated Financial Statements 106
Page 59 of 150
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders' of
WRC Media Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of WRC Media Inc.
and subsidiaries (the "Company") as of December 31, 2003 and 2002, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for the years ended December 31, 2003 and 2002. Our audits also included
the financial statement schedule listed in the index at Item 15. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes 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, such consolidated financial statements present fairly, in all
material respects, the financial position of WRC Media Inc. and subsidiaries as
of December 31, 2003 and 2002, and the results of their operations and their
cash flows for the years ended December 31, 2003 and 2002, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects the information set forth therein.
As discussed in Notes 3 and 7 of the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting Standards No. 142 as of
January 1, 2002.
As discussed in Note 23, the consolidated financial statements for the year
ended December 31, 2002 have been restated.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, it is possible that the trustee or
noteholders of the Company's 12 3/4% Senior Subordinated Notes may assert a
breach of the requirement under the indenture for the Company to furnish audited
financial statements for 2001. The potential claim that the Company is in breach
of the indenture or a potential attempt to accelerate the payment of such notes,
together with uncertainty as to the timing or ability to complete a reaudit of
the 2001 financial statements and to furnish an independent auditors' report as
required by the indenture in order to obviate such a claim, raises substantial
doubt about the Company's ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
DELOITTE & TOUCHE LLP
New York, New York
March 30, 2004
Page 60 of 150
WRC MEDIA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share data)
December 31,
ASSETS 2002 2003
------ -------- --------
(As Restated
See Note 23)
CURRENT ASSETS:
Cash and cash equivalents $ 9,095 $ 1,432
Accounts receivable (net of allowances for doubtful accounts and sales returns
of $3,298 and $2,519, respectively) 36,147 30,027
Inventories, net 15,445 16,652
Prepaid expenses 2,935 3,367
Other current assets 1,797 1,889
-------- --------
Total current assets 65,419 53,367
PROPERTY AND EQUIPMENT, net 6,299 5,526
CAPITALIZED SOFTWARE, net 4,970 7,293
GOODWILL 143,149 143,149
DEFERRED FINANCING COSTS, net 6,165 4,939
OTHER INTANGIBLE ASSETS, net 105,936 92,610
OTHER ASSETS AND INVESTMENTS 24,926 30,448
-------- --------
Total assets $356,864 $337,332
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 61 of 150
WRC MEDIA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(amounts in thousands, except share and per share data)
December 31,
LIABILITIES AND STOCKHOLDERS' DEFICIT 2002 2003
------------------------------------- --------- ---------
(As Restated
See Note 23)
CURRENT LIABILITIES:
Accounts payable $ 20,869 $ 16,963
Accrued payroll, commissions and benefits 8,688 9,356
Current portion of deferred revenue 39,419 35,900
Other accrued liabilities 23,317 17,166
Current portion of long-term debt 7,721 8,477
--------- ---------
Total current liabilities 100,014 87,862
DEFERRED REVENUE, net of current portion 1,004 959
DEFERRED TAX LIABILITY 10,700 12,700
LONG-TERM DEBT 266,219 262,925
--------- ---------
Total liabilities 377,937 364,446
--------- ---------
COMMITMENTS AND CONTINGENCIES:
15% SERIES B REDEEMABLE PREFERRED STOCK, including accrued dividends and accretion of
warrant value (3,000,000 and 5,508,080 shares outstanding, respectively)
(Liquidation preference of $137,702) 109,966 129,767
--------- ---------
WARRANTS ON COMMON STOCK OF SUBSIDIARIES 11,751 11,751
--------- ---------
COMMON STOCK SUBJECT TO REDEMPTION 965 940
--------- ---------
STOCKHOLDERS' DEFICIT:
Common stock ($.01 par value, 20,000,000 shares authorized; 7,009,750 outstanding
in 2002 and 7,008,406 outstanding in 2003) 70 70
18% convertible preferred stock, ($.01 par value, 750,000 shares authorized,
459,525 outstanding in 2002 and 547,980 outstanding in 2003) 18,381 21,919
Additional paid-in capital 131,453 131,753
Accumulated other comprehensive loss (3,357) (1,899)
Accumulated deficit (290,302) (321,415)
--------- ---------
Total stockholders' deficit (143,755) (169,572)
--------- ---------
Total liabilities and stockholders' deficit $ 356,864 $ 337,332
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 62 of 150
WRC MEDIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31, 2002 AND 2003
(amounts in thousands)
2002 2003
--------- ---------
(As Restated
See Note 23)
REVENUE, net $ 207,831 $ 202,704
COST OF GOODS SOLD 59,922 56,401
--------- ---------
Gross profit 147,909 146,303
--------- ---------
COSTS AND EXPENSES:
Sales and marketing 48,754 47,201
Research and development 1,728 1,424
Distribution, circulation and fulfillment 14,012 14,626
Editorial 10,847 10,365
General and administrative 25,344 25,679
Restructuring costs and other non-recurring expenses 8,594 1,018
Depreciation 3,041 2,256
Amortization of intangible assets 18,958 19,045
--------- ---------
Total operating costs and expenses 131,278 121,614
--------- ---------
Income from operations 16,631 24,689
INTEREST EXPENSE, INCLUDING AMORTIZATION OF DEFERRED FINANCING COSTS (29,844) (29,159)
LOSS ON INVESTMENT (3,064) --
OTHER EXPENSE (INCOME), net 721 (1,153)
--------- ---------
Loss before income tax provision and cumulative effect of change in (15,556) (5,623)
accounting principle
INCOME TAX PROVISION 10,980 2,151
--------- ---------
Loss before cumulative effect of change in accounting principle, net
of tax (26,536) (7,774)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (72,022) --
--------- ---------
Net loss $ (98,558) $ (7,774)
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 63 of 150
WRC MEDIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED DECEMBER
31, 2002 and 2003 (amounts in thousands, except per share data)
Accumulated
Common Stock Additional Other
------------------------- Paid-In Comprehensive Accumulated
Shares Value Capital Income (Loss) Deficit
--------- --------- --------- ------------- ---------
Balance, January 1, 2002 (as restated, see Note 23) 7,013 $ 70 $ 131,303 $ (316) $(171,570)
Other comprehensive income (loss):
Net loss (as restated, see Note 23) -- -- -- -- (98,558)
Minimum pension liability -- -- -- (3,041) --
Total comprehensive loss
Series B preferred stock dividends -- -- -- -- (16,274)
Accretion of Series B preferred stock -- -- -- -- (932)
Dividends on convertible preferred stock -- -- -- -- (2,968)
Issuance of common stock for services-8,064
shares at $18.60 per share 8 -- 150 -- --
Acquisition of common stock subject to
redemption-11,559 shares at $40.00 per share
(as restated, see Note 23) (12) -- -- -- --
--------- --------- --------- --------- ---------
Balance, December 31, 2002 (as restated, see 7,010 $ 70 $ 131,453 $ (3,357) $(290,302)
Note 23)
Other comprehensive income loss:
Net loss -- -- -- -- (7,774)
Minimum pension liability -- -- -- 1,458 --
Total comprehensive loss
Series B preferred stock dividends -- -- -- -- (18,854)
Accretion of Series B preferred stock -- -- -- -- (947)
Dividends on convertible preferred stock -- -- -- -- (3,538)
Management fees forgiven by principal
shareholder -- -- 300 -- --
Acquisition of common stock subject to
redemption-1,344 shares at $18.60 per share (2) -- -- -- --
--------- --------- --------- --------- ---------
Balance, December 31, 2003 7,008 $ 70 $ 131,753 $ (1,899) $(321,415)
========= ========= ========= ========= =========
Junior Preferred Stock Total
------------------------ Stockholders'
Shares Value Deficit
--------- --------- ---------
Balance, January 1, 2002 (as restated, see Note 23) 386 $ 15,413 $ (25,100)
Other comprehensive income (loss):
Net loss (as restated, see Note 23) -- --
Minimum pension liability -- --
Total comprehensive loss (101,599)
Series B preferred stock dividends -- -- (16,274)
Accretion of Series B preferred stock -- -- (932)
Dividends on convertible preferred stock 74 2,968 --
Issuance of common stock for services-8,064
shares at $18.60 per share -- -- 150
Acquisition of common stock subject to
redemption-11,559 shares at $40.00 per share
(as restated, see Note 23) -- -- --
--------- --------- ---------
Balance, December 31, 2002 (as restated, see 460 $ 18,381 $(143,755)
Note 23)
Other comprehensive income loss:
Net loss -- -- --
Minimum pension liability -- -- --
Total comprehensive loss (6,316)
Series B preferred stock dividends -- -- (18,854)
Accretion of Series B preferred stock -- -- (947)
Dividends on convertible preferred stock 88 3,538 --
Management fees forgiven by principal
shareholder -- -- 300
Acquisition of common stock subject to
redemption-1,344 shares at $18.60 per share -- -- --
--------- --------- ---------
Balance, December 31, 2003 548 $ 21,919 $(169,572)
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 64 of 150
WRC MEDIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2003
(amounts in thousands)
2002 2003
-------- --------
(As Restated
See Note 23)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(98,558) $ (7,774)
Adjustments to reconcile net loss to net cash provided by operating activities:
Cumulative effect of change in accounting principle 72,022 --
Write-off of acquisition costs 49 --
Deferred income tax provision 10,700 2,000
Depreciation and amortization 24,213 23,770
Loss on investment 3,064 --
Loss on disposition and write-off of property and equipment 710 105
Accretion of debt discount 396 451
Issuance of common stock for services 150 --
Management fees forgiven by principal shareholder -- 300
Amortization of deferred financing costs 1,165 1,246
Changes in operating assets and liabilities:
Accounts receivable 6,867 6,120
Inventories (404) (1,207)
Prepaid expenses and other current assets 12,010 (524)
Other non-current assets (11,157) (11,242)
Accounts payable 2,689 (3,906)
Deferred revenue (684) (3,564)
Accrued liabilities (10,816) (4,025)
-------- --------
Net cash provided by operating activities 12,416 1,750
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,414) (1,592)
Capitalized software (4,333) (4,791)
Proceeds from the disposition of property and equipment 578 4
-------- --------
Net cash used in investing activities (5,169) (6,379)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit 33,000 34,000
Repayments of borrowings under revolving line of credit (33,000) (29,000)
Retirement of senior bank debt (6,171) (7,989)
Deferred financing fees (685) (20)
Purchase of common stock subject to redemption (215) (25)
-------- --------
Net cash used in financing activities (7,071) (3,034)
-------- --------
Increase (decrease) in cash and cash equivalents 176 (7,663)
CASH AND CASH EQUIVALENTS, beginning of period 8,919 9,095
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 9,095 $ 1,432
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 65 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
1. DESCRIPTION OF BUSINESS
The consolidated financial statements include the accounts of WRC Media Inc.
("WRC Media") and its subsidiaries Weekly Reader Corporation ("Weekly Reader"),
CompassLearning, Inc. ("CompassLearning") and ChildU, Inc. ("ChildU"). WRC Media
was incorporated on May 14, 1999. The term "Company" refers to WRC Media and its
subsidiaries.
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 100 years. The
Company's customers are primarily within the United States.
On July 14, 1999, WRC Media acquired CompassLearning in a business combination
accounted for as a purchase.
On November 17, 1999, WRC Media completed the recapitalization and purchase of
Weekly Reader and its subsidiaries. As a result of these transactions, WRC Media
owns 94.9% and PRIMEDIA Inc. owns 5.1% of the common stock of Weekly Reader.
On May 9, 2001, WRC Media entered into an Agreement and Plan of Merger with
ChildU. Contemporaneously, the Company issued $13.75 million of 18% Junior
Participating Cumulative Convertible Preferred Stock. The proceeds funded the
operating losses of ChildU and WRC Media's investment in ThinkBox, Inc.,
described below.
Concurrent with the ChildU acquisition, on May 9, 2001, a subsidiary of the
Company acquired the assets of Lindy Enterprises, Inc. ("Lindy").
On May 18, 2001, WRC Media made a strategic investment in ThinkBox Inc., a
creator of Internet-delivered education programs for the school and home
markets. This investment is accounted for under the equity method of accounting.
The Company recorded equity losses equal to the carrying value of its investment
of ThinkBox during the year ended December 31, 2002.
2. BASIS OF PRESENTATION
Under the terms of the indenture relating to the Company's 12 3/4% Senior
Subordinated Notes due 2009 (the "Notes"), the Company is required to furnish
"all quarterly and annual financial information that would be required to be
contained in a filing with the Securities and Exchange Commission (the `SEC') on
Forms 10-Q and 10-K if the Company were required to file such forms, including a
`Management's Discussion and Analysis of Financial Condition and Results of
Operations' and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants. . ." in each case within the
time periods specified in the SEC's rules and regulations.
The Company has restated its previously issued financial statements as of and
for the year ended December 31, 2001. Because the originally issued 2001
financial statements were audited by Arthur Andersen LLP, an audit firm that has
ceased operations, the restated financial statements for 2001 are unaudited at
this time pending a reaudit which is not yet complete. The Company believes that
upon furnishing its audited 2003 financial statements to the noteholders and
filing such statements with the SEC, it will be in compliance with the
indenture's information requirements. There is no assurance, however, that the
trustee or noteholders will not claim that the Company is in breach of the
indenture's information requirements, or that after any such claim is made and
the applicable cure period has expired, the trustee or the noteholders will not
send a notice to accelerate repayment of the Notes.
Page 66 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
If the reaudit of the Company's 2001 financial statements is completed and a
report thereon issued by its independent auditors as required by the indenture
prior to any claim of breach being made, the potential for such a claim would be
eliminated. If a breach of the information requirements of the indenture were to
be claimed and the trustee or holders of at least 25% of the aggregate principal
amount of the Notes were to provide written notice of such breach, the Company
would vigorously defend against any such claim. Even if the claim of breach were
to prevail, the Company would have 60 days from the date of written notice of
such claim of breach to cure the breach and avoid an event of default under the
indenture. If the reaudit of the Company's 2001 financial statements is
completed and a report thereon issued by its independent auditors as required by
the indenture prior to the end of the 60 day cure period, the right to
accelerate the Notes or indebtedness under the credit facility as a result of
the alleged breach of the indenture's information requirements would be
eliminated. The Company has engaged its independent auditors to perform a
reaudit of the 2001 financial statements and expects to be able to provide its
auditors with the information necessary for them to complete their audit prior
to the end of the cure period, if any claim of breach of the indenture's
information requirements is made.
While the Company is diligently working to provide such information, there is no
assurance that the Company will be able to provide the information necessary to
complete the reaudit or that the reaudit of the 2001 financial statements will
be completed and a report thereon issued by the Company's certified independent
accountants as required by the indenture. If the trustee or holders representing
at least 25% of the aggregate principal amount of the Notes claim that the
Company will be in breach of the indenture, the Company is not successful in
defending against such claim of breach and such breach is not cured within the
cure period, there would be an event of default under the indenture, and the
trustee or holders of at least 25% of the aggregate principal amount of the
Notes would have the right to accelerate payment of the Notes, and the holders
of indebtedness under the Company's credit facility also would have the right to
accelerate payment thereunder. If any such acceleration occurred, the Company
would not be able to repay the amounts due and such acceleration would have a
material adverse effect on the Company's consolidated financial condition and
liquidity. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly- and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") 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.
Significant accounting estimates used in the preparation of the Company's
consolidated financial statements include the fair value of derivative
instruments, the fair value of equity securities underlying stock-based
compensation, estimates used in calculating the allowance for doubtful accounts
and sales returns the realizability of deferred tax assets, the carrying values
of goodwill, intangible assets and long-lived assets and depreciation and
amortization.
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 the carrying value as necessary.
Page 67 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
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, 2003 are as follows:
Fair Value Carrying Amount Face Value
---------- --------------- ----------
12 3/4 % Senior Subordinated Notes $149,720 $147,724 $152,000
There is no market value information available for the Company's Series B and
18% convertible preferred stock and the warrants to purchase shares of the
Company's subsidiaries and a reasonable estimate could not be made without
incurring excessive costs.
The fair value at December 31, 2003 of the Company's outstanding interest rate
cap agreement was de-minimus (Note 13).
Derivative Financial Instruments
Derivative financial instruments are held for purposes other than trading. The
Company uses derivative financial instruments to reduce its exposure to interest
rate volatility. All derivative instruments are recorded at fair value. For
those instruments that do not qualify for hedge accounting, changes in fair
value are recognized in income.
Cash and Cash Equivalents
Management considers all highly liquid instruments purchased with an original
maturity of 90 days or less to be cash equivalents.
Software Development Costs
The Company capitalizes software development costs under the provisions of
either Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1") or Statement of
Financial Accounting Standards ("SFAS") 86, "Computer Software to be Sold,
Leased, or Otherwise Marketed" ("SFAS 86"), based on the intended use of the
software.
Research and development costs are charged to expense when incurred.
Additionally, the Company capitalizes acquired and developed technologies that
meet the provisions of SFAS 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. Software amortization is included in
Cost of Goods Sold on the accompanying consolidated statements of operations.
Amortization included in Cost of Goods Sold for the years ended December 31,
2002 and 2003 was $2,214, and $2,468, respectively.
Page 68 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
The Company capitalizes the costs of acquiring, developing and testing software
to meet the Company's internal needs. Under the provisions of SOP 98-1, the
Company capitalizes costs associated with software developed or obtained for
internal use when both the preliminary project stage is completed and management
has authorized further funding for the project which it deems probable will be
completed and used to perform the function intended. Capitalized cots include
only (1) external direct costs of materials and services consumed in developing
or obtaining internal-use software, (2) payroll and payroll-related costs for
employees who are directly associated with and devote time to the internal -use
software project and (3) interest costs incurred while developing internal-use
software. Capitalization of such costs ceases no later than the point at which
the project is substantially complete and ready for its intended use. Software
development costs are amortized using a straight-line method over a five-year
period. Amortization of software development costs for internal use software
amounted to $436 and $440 for the years ended December 31, 2002 and 2003,
respectively. Costs associated with the purchase and developments of software
for internal use have been capitalized in the amounts of $382 and $127 during
the years ended December 31, 2002 and 2003, respectively.
Goodwill and Indefinite Lived Intangible
Goodwill represents the excess of the purchase price of companies acquired over
the fair value of their net assets at the acquisition date. On January 1, 2002,
the Company adopted SFAS 142, "Goodwill and Other Intangible Assets." Under SFAS
142, goodwill and intangible assets deemed to have indefinite lived intangible
assets (primarily trademarks) are no longer amortized but are subject to annual
impairment tests. Upon adoption of SFAS No. 142, the Company ceased amortizing
goodwill and indefinite lived intangible assets.
The Company tests goodwill for impairment, at least annually in the fourth
quarter, and uses a fair value approach at the reporting unit level. A reporting
unit is an operating segment or one level below an operating segment for which
discrete financial information is available and reviewed regularly by
management. Assets and liabilities of the Company have been assigned to the
reporting units to the extent that they are employed in or are a liability
related to the operations of the reporting unit and were considered in
determining the fair value of the reporting unit. Indefinite lived intangible
assets will also be tested at least annually for impairment using a fair value
approach.
Long-Lived Assets
Long-lived assets of the Company, including amortizable intangibles, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Management also
reevaluates the periods of amortization of long-lived assets to determine
whether events and circumstances warrant revised estimates of useful lives. When
such events or changes in circumstances occur, the Company tests for impairment
by comparing the carrying value of the long-lived asset to the estimated
undiscounted future cash flows expected to result from use of the asset and its
eventual disposition. If the sum of the expected undiscounted future cash flows
is less than the carrying amount of the asset, the Company would recognize an
impairment loss. The amount of the impairment loss will be determined by
comparing the carrying value of the long-lived asset to the present value of the
net future operating cash flows to be generated by the asset.
Page 69 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
Deferred Financing Fees
Deferred financing fees are related to direct costs paid by the Company in
connection with its financing agreements. These costs are deferred and are
amortized on a straight-line basis over the term of the related debt.
Amortization of deferred financing fees charged to operations for the years
ended December 31, 2002 and 2003 was $1,165 and $1,246, respectively.
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 the respective lease term.
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. Revenues on sales of books to certain distributors are recognized when
the Company's products are sold by the distributors to their customers, net of
an allowance for returns. Consigned inventory associated with sales to
distributors is not significant at December 31, 2002 and 2003.
In November 2002, the EITF reached a consensus on EITF No. 00-21, "Accounting
for Revenue Arrangements with Multiple Element Deliverables." The issue
addresses how to account for arrangements that may involve the delivery or
performance of multiple products, services and/or rights to use assets. Revenue
arrangements with multiple deliverables should be divided into separate units of
accounting if the deliverables in the arrangement meet certain criteria.
Arrangement consideration should be allocated among the separate units of
accounting based on their relative fair values. EITF 00-21 also supersedes
certain guidance set forth in Staff Accounting Bulletin Number 101 (SAB 101),
"Revenue Recognition in Financial Statements," issued by the SEC. The final
consensus is applicable to agreements entered into in quarters beginning after
June 15, 2003, with early adoption permitted. Additionally, companies are
permitted to apply the consensus guidance to all existing arrangements as a
cumulative effect of a change in accounting principle. The adoption of EITF
00-21 did not have a significant impact on the Company's consolidated financial
statements.
For contracts with multiple obligations (e.g., deliverable and undeliverable
products, and other post contract support), the Company allocates revenue to
each component of the contract based on objective evidence of its fair value or
for products not yet being sold separately, the price established by management
for the item when it will be sold separately. The Company recognizes revenue
allocated to undelivered products when the criteria for product revenue set
forth above are met.
Licensing revenue is recorded in accordance with royalty agreements at the time
licensed materials are available to the licensee and collections are reasonably
assured.
Revenue is recognized for periodical subscriptions when the issue is shipped and
available to the subscribers.
Page 70 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
The Company recognizes revenues from the sale of its software products in
accordance with the provisions of SOP 97-2, Software Revenue Recognition, as
amended by SOP 98-9, Software Revenue Recognition, with Respect to Certain
Transactions. Under SOP 97-2, the Company recognizes revenue for 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.
In addition, SOP 97-2 generally requires that revenue from software arrangements
involving multiple elements be allocated among each element of the arrangement
based on the relative fair values of the elements, such as software licenses,
post-contract customer support, installation or training. Furthermore, SOP 97-2
requires that revenue be recognized as each element is delivered and the Company
has no significant performance obligations remaining. The Company's multiple
element arrangements generally consist of a software license, training and
post-contract support. Software revenues in such multiple element arrangements
are recognized based on the residual method. The Company allocates the aggregate
revenue from multiple element arrangements to each element based on vendor
specific objective evidence. The Company has established vendor specific
objective evidence for training and post contract support as it sells both
training and post-contract customer support independent of multiple element
agreements. Customers are charged standard prices for the training and
post-contract customer support and these prices do not vary significantly from
customer to customer.
If the Company enters into a multiple element agreement where vendor specific
objective evidence of fair value for each element of the arrangement does not
exist, all revenue from the arrangement is deferred until all elements of the
arrangement are delivered.
Comprehensive Loss
SFAS 130 "Reporting Comprehensive Income," established standards for reporting
and displaying of comprehensive income and its components (revenue, expenses,
gains and losses) in a full set of general-purpose financial statements. The
components of other comprehensive loss consist primarily of minimum pension
liability adjustments.
Income Taxes
The Company accounts for income taxes in accordance with SFAS 109, Accounting
for Income Taxes, which requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences between
the carrying amounts and the tax basis of assets and liabilities. A valuation
allowance is required to offset any net deferred tax assets if, based upon the
available evidence, it is more likely than not that some or all of the deferred
tax asset will not be realized (see Note 17).
Prepublication 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 periods ranging from three
to ten years. Capitalized editorial costs are recorded as prepublication costs.
As of December 31, 2002 and 2003, other assets and investments in the
accompanying balance sheets, include prepublication costs, net of amortization
of $9,378 and $15,098, of $19,671 and $22,767, respectively. Amortization of
prepublication costs, which is included in depreciation and amortization on the
accompanying consolidated statements of operations, was $3,882 and $5,720 for
the years ended December 31, 2002 and 2003, respectively.
Page 71 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
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 thirty 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. As of December 31,
2002 and 2003, other assets and investments on the accompanying balance sheet,
include direct-response advertising costs, net of amortization of $3,641 and
$8,219, of $4,319 and $5,761, respectively. Amortization of direct-response
advertising costs, which is included in marketing and selling on the
accompanying consolidated statements of operations, was $7,596 and $6,606 for
the years ended December 31, 2002 and 2003, respectively.
Stock-Based Compensation
Stock-based compensation arrangements with employees are accounted for using the
intrinsic value method in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). The Company applies SFAS 123, "Accounting for Stock-Based
Compensation and Related Interpretations" ("SFAS 123") for stock-based
compensation arrangements with non-employees. The Company applies the additional
disclosure requirements of SFAS 123, as amended by SFAS No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure," for employee stock
arrangements.
At December 31, 2002 and 2003, the Company has one stock-based employee
compensation plan, which is described more fully in Note 18. During 2002 and
2003 the Company recorded stock-based employee compensation of $248 and $288
related to the repurchase by the Company of redeemable common stock from certain
terminated employees (see Note 16).
The following table details the effect on net loss had compensation expense for
stock-based compensation arrangements with employees been recorded based on the
fair value method under SFAS 123, as amended.
Year Ended December 31,
-----------------------
2002 2003
-------- --------
Net loss, as reported $(98,558) $ (7,774)
Add: Stock-based employee compensation 248 288
Deduct: Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects (434) (425)
-------- --------
Pro forma net loss $(98,744) $ (7,911)
======== ========
The Company has outstanding stock options issued to certain of its executives
that are required to be accounted for as variable options. During 2002 and 2003
no compensation expense was recognized for these options as the fair market
value of the Company's common stock, as estimated by the Company's Board of
Directors, was less than the exercise price of these options.
Page 72 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143 "Accounting for
Asset Retirement Obligations" ("SFAS 143") which requires entities to record the
fair value of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the entity
capitalizes a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. The standard
was effective for the Company beginning January 1, 2003. The adoption of SFAS
143 did not have any impact on the Company's consolidated financial position or
results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a
liability for the fair value of the obligations undertaken in issuing the
guarantee. The disclosure provisions of FIN 45 were effective for financial
statements of periods ending after December 15, 2002. The Company adopted the
disclosure provisions of FIN 45 effective December 31, 2002. The recognition
provisions of FIN 45 regarding a guarantor's obligation must be applied to
guarantees issued after December 31, 2002. The adoption of the recognition
provisions of FIN 45, effective January 1, 2003, did not have a significant
effect on the Company's consolidated financial position or results of
operations.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variables Interest Entities ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. In December 2003, the FASB issued FIN No. 46
(Revised) ("FIN 46R") to address certain FIN 46 implementation issues. This
interpretation requires that the assets, liabilities, and results of activities
of a Variable Interest Entity ("VIE") be consolidated into the financial
statements of the enterprise that is the primary beneficiary of the VIE. FIN 46R
also requires additional disclosures by primary beneficiaries and other
significant variable interest holders. This interpretation is effective no later
than the end of the first interim or reporting period ending after March 15,
2004, except for those VIE's that are considered to be special purpose entities,
for which the effective date is no later than the end of the first interim or
annual reporting period ending after December 15, 2003. The adoption of FIN 46R
is not expected to have a significant impact on the Company's consolidated
financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends and
clarifies accounting for derivative instruments, and for hedging activities
under SFAS 133. Specifically, SFAS 149 requires that contracts with comparable
characteristics be accounted for similarly. Additionally, SFAS 149 clarifies the
circumstances in which a contract with an initial net investment meets the
characteristics of a derivative and when a derivative contains a financing
component that requires special reporting in the statement of cash flows. This
Statement is generally effective for contracts entered into or modified after
June 30, 2003 and its adoption did not have a significant impact on the
Company's consolidated financial position or results of operations.
Page 73 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. This statement will become effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
shall be effective for the Company at the beginning of the first interim period
beginning after December 15, 2003. For financial instruments created before the
issuance date of this statement and still existing at the beginning of the
interim period of adoption, transition shall be achieved by reporting the
cumulative effect of a change in an accounting principle by initially measuring
the financial instruments at fair value or other measurement attribute required
by this statement. The adoption of this statement will require the Company to
reclassify its 15% Series B Redeemable Preferred Stock from the mezzanine
section of the balance sheet to long-term liabilities. Future dividend payments
for the Series B Redeemable Preferred Stock will be recorded as interest expense
in the consolidated statement of operations.
On December 23, 2003, the FASB issued SFAS No. 132 (Revised 2003), Employers'
Disclosures about Pensions and Other Postretirement Benefits, an amendment of
FASB Statements No. 87, 88 and 106. It requires additional disclosures to those
in the original Statement 132 about the assets, obligations, cash flows and net
periodic benefit cost of defined benefit pension plans and other defined benefit
post-retirement plans. The majority of the provisions of this statement apply to
financial statements issued for fiscal years ending after December 15, 2003.
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.
Page 74 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
4. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2002 and 2003 are as follows:
2002 2003
-------- --------
Accounts receivable $ 39,445 $ 32,546
Less:
Allowance for doubtful accounts (1,467) (1,750)
Allowance for returns (1,831) (769)
-------- --------
$ 36,147 $ 30,027
======== ========
5. INVENTORIES
Inventories at December 31, 2002 and 2003 are as follows:
2002 2003
-------- --------
Finished goods $ 18,336 $ 19,932
Raw materials 181 119
Less - impaired excess and obsolete
inventory (3,072) (3,399)
-------- --------
$ 15,445 $ 16,652
======== ========
6. CAPITALIZED SOFTWARE
Capitalized software at December 31, 2002 and 2003 are as follows:
Life 2002 2003
--------- -------- --------
Capitalized software 2-4 Years $ 11,763 $ 16,554
Less - accumulated amortization (6,793) (9,261)
-------- --------
$ 4,970 $ 7,293
======== ========
7. GOODWILL
On January 1, 2002, the Company adopted SFAS 142, "Goodwill and Other Intangible
Assets." The Company completed the transitional impairment tests on its goodwill
and indefinite lived intangibles during the second quarter ended June 30, 2002.
The previous method for determining impairment prescribed by SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to
be Disposed Of," utilized an undiscounted cash flow approach for the impairment
assessment, while SFAS No. 142 utilizes a fair value approach. The Company has
five reporting units with goodwill. Goodwill was tested for impairment at the
reporting unit level. The Company's measurement of fair value was based on an
evaluation of future discounted cash flows. This evaluation utilized the best
information available in the circumstances, including reasonable and supportable
assumptions and projections. The discounted cash flow evaluation considered
several earnings scenarios and the likelihood of possible outcomes.
Collectively, this evaluation was management's best estimate of projected future
cash flows. The Company's discounted cash flow evaluation used a range of
discount rates that corresponds to the Company's weighted-average cost of
capital. This discount rate range assumed was consistent with that used for
investment decisions and takes into account the specific and detailed operating
plans and strategies of the Company's reporting units.
Page 75 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
Certain other key assumptions utilized, including changes in revenue, operating
expenses, working capital requirements and capital expenditures including
prepublication costs, are based on assumptions related to the Company's
strategic initiatives and current market conditions. Such assumptions also are
consistent with those utilized in the Company's annual planning process. As a
result, the Company recorded a transitional goodwill and indefinite lived
intangible asset impairment charge of $72,022 at American Guidance Service, Inc.
a subsidiary of Weekly Reader Corporation. This charge is reported as a
cumulative effect of accounting change, as of January 1, 2002, in the
Consolidated Statements of Operations. The Company is required to perform
impairment tests on an annual basis, or between yearly tests under certain
circumstances for goodwill and indefinite lived intangibles. There can be no
assurance that future impairment tests will not result in a charge to earnings.
The Company performed its annual impairment tests during the fourth quarters of
2002 and 2003. No further impairment of goodwill and indefinite lived
intangibles was required.
January 1, Impairment December 31,
2002 Loss 2002
---------- ---------- ------------
Goodwill $ 210,109 $ (66,960) $ 143,149
Long Lived Assets - Trademarks 47,212 (5,062) 42,150
--------- --------- ---------
$ 257,321 $ (72,022) $ 185,299
========= ========= =========
December 31, Impairment December 31,
2002 Loss 2003
------------ ---------- ------------
Goodwill $ 143,149 $ -- $ 143,149
Long Lived Assets - Trademarks 42,150 -- 42,150
--------- --------- ---------
$ 185,299 $ -- $ 185,299
========= ========= =========
The Company also recorded non-cash deferred income tax expense of approximately
$8,700 on January 1, 2002 and $2,000 during the twelve months ended December 31,
2002 and 2003, for taxable temporary differences that will not reverse prior to
expiration of the Company's net operating loss carryforward periods. The
non-cash charge of $8,700 on January 1, 2002 was recorded to increase the
valuation allowance related to the deferred tax asset associated with the
Company's net operating losses. Historically, the Company did not need a
valuation allowance for the portion of its net operating loss equal to the
excess of tax over book amortization on tax-deductible goodwill and trademarks
since the liability was expected to reverse during the carryforward period of
the net operating losses. As a result of the adoption of SFAS 142, the timing of
the reversal of this liability is indefinite and can no longer be offset by the
Company's net operating loss carryforwards. While book amortization of
tax-deductible goodwill and trademarks ceased on January 1, 2002, the Company
continues to amortize these assets for tax purposes. As a result, the Company
will have deferred tax liabilities that will arise each quarter as the taxable
temporary differences related to the amortization of these assets will not
reverse prior to the expiration period of the Company's deductible temporary
differences unless the related assets are sold or an impairment of the assets is
recorded. Accordingly, the Company also recorded an additional $2,000 to
increase the valuation allowance in each of the years ended December 31, 2002
and 2003. The Company expects that it will record an additional $2,000 to
increase the valuation allowance during 2004.
Page 76 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
8. OTHER INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization of the Company's
intangible assets other than goodwill and indefinite lived intangible are as
follows:
December 31, 2002 December 31, 2003
----------------------------------------- -----------------------------------------
Accumulated Accumulated
Useful Lives Gross Amortization Net Gross Amortization Net
------------ --------- ------------ --------- --------- ------------ ---------
Customer Lists 7-9 yrs $ 62,911 $ (21,459) $ 41,452 $ 62,911 $ (27,770) $ 35,141
Copyrights 8 yrs 21,053 (8,139) 12,914 21,053 (11,742) 9,311
Product Titles 7 yrs 13,475 (10,256) 3,219 13,475 (11,760) 1,715
Software 5 yrs 8,369 (2,648) 5,721 8,369 (4,320) 4,049
Trade name 5 yrs 3,520 (3,049) 471 3,520 (3,276) 244
Databases 4-10 yrs 560 (551) 9 560 (560) --
--------- --------- --------- --------- --------- ---------
Total: $ 109,888 $ (46,102) $ 63,786 $ 109,888 $ (59,428) $ 50,460
========= ========= ========= ========= ========= =========
Included in other intangible assets, are trademarks not subject to amortization,
for which the total carrying amount at December 31, 2002 and 2003 was $42,150.
Amortization of intangibles for the years ended December 31, 2002 and 2003 was
$15,076 and $13,325, respectively, and is included in amortization of intangible
assets on the consolidated statements of operations. The estimated amortization
expense for intangible assets subject to amortization for the next five years is
as follows:
Year ended 2004...................... $ 10,961
Year ended 2005...................... 9,459
Year ended 2006...................... 6,671
Year ended 2007...................... 4,439
Year ended 2008...................... 4,420
Thereafter .......................... $ 14,510
9. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2002 and 2003 are as follows:
Life 2002 2003
---------- -------- --------
Machinery, equipment and computer equipment 3-10 Years $ 10,810 $ 10,628
Leasehold improvements 3-15 Years 2,702 3,166
Furniture and fixtures 3-10 Years 4,408 4,112
Internal use software 5 Years 2,265 2,392
-------- --------
Total 20,185 20,298
Less- accumulated depreciation and amortization (13,886) (14,772)
-------- --------
Property and equipment, net $ 6,299 $ 5,526
======== ========
Depreciation expense for the years ended December 31, 2002 and 2003 was $3,041
and $2,256, respectively.
Page 77 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
10. OTHER ASSETS AND INVESTMENTS
Other assets and investments at December 31, 2002 and 2003 are as follows:
2002 2003
------- -------
Prepublication costs, net $19,671 $22,767
Direct response advertising costs, net 4,319 5,761
Other 936 1,920
------- -------
$24,926 $30,448
======= =======
11. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 2002 and 2003 are as follows:
2002 2003
------- -------
Rabbi Trust (Note 22) $ 1,403 $ 1,006
Royalties 1,500 1,264
Accrued acquisition costs 157 25
Accrued interest payable (Note 13) 3,869 3,113
Pension liability (Note 20) 5,056 3,988
Accrued restructuring costs 6,253 3,275
Taxes payable, other than income 573 369
Other 4,506 4,126
------- -------
$23,317 $17,166
======= =======
12. Notes offering and guarantor and non-guarantor financial information
In connection with the recapitalization and purchase of Weekly Reader during
November 1999, the Company, Weekly Reader and CompassLearning as co-issuers
completed an offering of $152,000 of 12 3/4% Senior Subordinated Notes due 2009
(the "Old Notes"). In June 2000, the Old Notes were exchanged in full for
$152,000 of new 12 3/4% Senior Subordinated Notes due 2009 (the "Notes") that
have terms that are substantially identical to the Old Notes. Interest on the
Notes is payable semi-annually, on May 15 and November 15 of each year. The
Notes are jointly, severally, fully and unconditionally guaranteed by certain
subsidiaries of the Company, including CompassLearning, Inc., a 100%
wholly-owned subsidiary and Weekly Reader Corporation, a non-wholly-owned
subsidiary of the Company (collectively, the "Subsidiary Guarantors").
The following tables present condensed consolidating financial information for
WRC Media and the subsidiary guarantors as of and for the years ended December
31, 2002 and 2003 including: (1) WRC Media, (2) Weekly Reader Corporation, a
non-wholly owned subsidiary, (3) CompassLearning, Inc., a wholly-owned
subsidiary, (4) ChildU, Inc., a wholly-owned subsidiary, and (5) the Company on
a consolidated basis.
Page 78 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
Subsidiary Guarantors
------------------------------------------
Weekly Reader CompassLearning
WRC Media Inc. Corporation Inc. ChildU Eliminations
-------------- ------------- --------------- --------- ------------
(In thousands)
Balance Sheet as of December 31, 2003
Assets:
Current assets $ 9,777 $ 54,310 $ 12,110 $ 7,950 $ (30,780)
Property and equipment, net -- 4,399 975 152 --
Goodwill and other intangible assets, net 158,171 49,395 24,144 4,049 --
Other assets 104,352 30,775 4,929 2,549 (99,925)
--------- --------- --------- --------- ---------
Total assets $ 272,300 $ 138,879 $ 42,158 $ 14,700 $(130,705)
========= ========= ========= ========= =========
Liabilities and stockholders deficit:
Current liabilities $ 106,558 $ 56,853 $ 25,740 $ 14,441 $(115,730)
Long-term debt, less current portion 147,724 262,925 13,532 -- (161,256)
Other liabilities 10,060 2,640 959 -- --
Warrants on common stock of subsidiaries 11,751 -- -- -- --
Common stock subject to redemption 940 -- -- -- --
Redeemable preferred stock, plus accrued dividends 129,767 137,702 -- -- (137,702)
Stockholders equity (deficit) (134,500) (321,241) 1,927 259 283,983
--------- --------- --------- --------- ---------
Total liabilities and stockholders equity (deficit) $ 272,300 $ 138,879 $ 42,158 $ 14,700 $(130,705)
========= ========= ========= ========= =========
Balance Sheet as of December 31, 2002 (as Restated)
Current assets: $ 9,846 $ 58,395 $ 22,803 $ 1,613 $ (27,238)
Property and equipment, net -- 5,409 657 233 --
Goodwill and other intangible assets, net 162,348 53,802 27,214 5,721 --
Other assets 105,398 25,433 3,830 1,325 (99,925)
--------- --------- --------- --------- ---------
Total assets $ 277,592 $ 143,039 $ 54,504 $ 8,892 $(127,163)
========= ========= ========= ========= =========
Current liabilities: $ 85,625 $ 66,402 $ 28,393 $ 10,331 $ (90,737)
Long-term debt, less current portion 147,273 266,219 20,150 -- (167,423)
Other liabilities 8,700 2,000 1,004 -- --
Warrants on common stock of subsidiaries 11,751 -- -- -- --
Common stock subject to redemption 965 -- -- -- --
Redeemable preferred stock, plus accrued 109,966 118,846 -- -- (118,846)
dividends
Stockholders equity (deficit) (86,688) (310,428) 4,957 (1,439) 249,843
--------- --------- --------- --------- ---------
Total liabilities and stockholders equity (deficit) $ 277,592 $ 143,039 $ 54,504 $ 8,892 $(127,163)
========= ========= ========= ========= =========
WRC Media Inc.
Consolidated
--------------
(In thousands)
Balance Sheet as of December 31, 2003
Assets:
Current assets $ 53,367
Property and equipment, net 5,526
Goodwill and other intangible assets, net 235,759
Other assets 42,680
---------
Total assets $ 337,332
=========
Liabilities and stockholders deficit:
Current liabilities $ 87,862
Long-term debt, less current portion 262,925
Other liabilities 13,659
Warrants on common stock of subsidiaries 11,751
Common stock subject to redemption 940
Redeemable preferred stock, plus accrued dividends 129,767
Stockholders equity (deficit) (169,572)
---------
Total liabilities and stockholders equity (deficit) $ 337,332
=========
Balance Sheet as of December 31, 2002 (as Restated)
Current assets: $ 65,419
Property and equipment, net 6,299
Goodwill and other intangible assets, net 249,085
Other assets 36,061
---------
Total assets $ 356,864
=========
Current liabilities: $ 100,014
Long-term debt, less current portion 266,219
Other liabilities 11,704
Warrants on common stock of subsidiaries 11,751
Common stock subject to redemption 965
Redeemable preferred stock, plus accrued 109,966
dividends
Stockholders equity (deficit) (143,755)
---------
Total liabilities and stockholders equity (deficit) $ 356,864
=========
Page 79 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
Subsidiary Guarantors
-------------------------------------------
Weekly Reader CompassLearning WRC Media Inc.
WRC Media Inc. Corporation Inc. ChildU Eliminations Consolidated
-------------- ------------- --------------- --------- ------------ --------------
(In thousands)
Statements of operations for year
ended December 31, 2003
Revenue, net $ -- $ 152,111 $ 42,742 $ 7,851 $ -- $ 202,704
Operating costs and expenses 4,957 121,230 45,695 6,133 -- 178,015
Interest expense, net 20,897 28,091 2 -- (19,831) 29,159
Other (income) expense 937 196 -- 20 -- 1,153
Provision for income taxes 1,520 552 79 -- -- 2,151
--------- --------- --------- --------- --------- ---------
Net income (loss) $ (28,311) $ 2,042 $ (3,034) $ 1,698 $ 19,831 $ (7,774)
========= ========= ========= ========= ========= =========
Cash flow for the year
ended December 31, 2003
Cash flow provided by (used in)
operations $ (21,257) $ (5,301) $ 4,573 $ 4,358 $ 19,377 $ 1,750
Cash flow used in investing
activities -- (755) (3,840) (1,784) -- (6,379)
Cash flow provided by (used in)
financing activities 20,203 (496) (733) (2,631) (19,377) (3,034)
Cash and cash equivalents at
beginning of period 1,154 7,819 4 118 -- 9,095
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents at end
of period $ 100 $ 1,267 $ 4 $ 61 $ -- $ 1,432
========= ========= ========= ========= ========= =========
Subsidiary Guarantors
------------------------------
Weekly Reader CompassLearning Non-guarantor WRC Media Inc.
WRC Media Inc. Corporation Inc. Subsidiary Elimination Consolidated
-------------- ------------- --------------- ------------- ----------- --------------
(In thousands)
Statements of operations for year
ended December 31, 2002
Revenue, net $ -- $ 155,013 $ 50,511 $ 2,307 $ -- $ 207,831
Operating costs and expenses 4,426 125,431 54,310 7,033 -- 191,200
Interest expense, net 20,760 28,849 11 -- (19,776) 29,844
Other (income) expense 4,109 (1,765) (1) -- -- 2,343
Provision for income taxes 8,822 2,101 57 -- -- 10,980
Cumulative effect of change in
accounting principle -- 72,022 -- -- -- 72,022
--------- --------- --------- --------- --------- ---------
Net income (loss) $ (38,117) $ (71,625) $ (3,866) $ (4,726) $ 19,776 $ (98,558)
========= ========= ========= ========= ========= =========
Cash flow for the year
ended December 31, 2002
Cash flow provided by (used in)
operations $ (21,050) $ 11,006 $ 5,129 $ (2,054) $ 19,385 $ 12,416
Cash flow used in investing
activities -- (524) (3,156) (1,489) -- (5,169)
Cash flow provided by (used in)
financing activities 19,561 (8,354) (2,363) 3,470 (19,385) (7,071)
Cash and cash equivalents at
beginning of period 2,643 5,691 394 191 -- 8,919
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents at end
of period $ 1,154 $ 7,819 $ 4 $ 118 $ -- $ 9,095
========= ========= ========= ========= ========= =========
13. 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.
In May 2001, the Company acquired the assets of Lindy Enterprises, Inc. In
connection with this acquisition, the Senior Bank Credit Facility was amended
and restated to include an additional term A loan commitment in the amount of
$10,000. In addition, certain other terms and conditions were amended.
Page 80 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
At December 31, 2002 and 2003, long-term debt consists of the following:
2002
--------------------------------------------------
Face Unamortized Principal Carrying
Debt Instrument Value Discount Payments Value
- ----------------------------- -------- -------- -------- --------
Senior Bank-Term A (b) $ 25,188 $ -- $ 5,038 $ 20,150
Senior Bank-Term B (b) 97,750 -- 1,000 96,750
Senior Bank-New Term A (b) 9,900 -- 133 9,767
Revolving Credit (b) -- -- -- --
Senior Subordinated Notes (a) 152,000 4,727 -- 147,273
-------- -------- -------- --------
Total debt 284,838 4,727 6,171 273,940
Less-current portion 7,721 -- -- 7,721
-------- -------- -------- --------
Long-term debt $277,117 $ 4,727 $ 6,171 $266,219
======== ======== ======== ========
2003
--------------------------------------------------
Face Unamortized Principal Carrying
Debt Instrument Value Discount Payments Value
- ----------------------------- -------- -------- -------- --------
Senior Bank-Term A (b) $ 20,150 $ -- $ 6,618 $ 13,532
Senior Bank-Term B (b) 96,750 -- 1,216 95,534
Senior Bank-New Term A (b) 9,767 -- 155 9,612
Revolving Credit (b) 5,000 -- -- 5,000
Senior Subordinated Notes (a) 152,000 4,276 -- 147,724
-------- -------- -------- --------
Total debt 283,667 4,276 7,989 271,402
Less-current portion 8,477 -- -- 8,477
-------- -------- -------- --------
Long-term debt $275,190 $ 4,276 $ 7,989 $262,925
======== ======== ======== ========
- ----------
(a) In connection with the recapitalization of the Company in 1999, the
Company, Weekly Reader and CompassLearning 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. During each year ended December 31, 2002 and
2003, $19,380 of interest was paid on the Notes (see Note 2).
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 $5,807 discount, which is being
accreted to maturity using the effective interest method.
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 restricted subsidiaries
of the Company (Weekly Reader, CompassLearning and ChildU), as defined
in the Credit Agreement, as amended.
(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, the $100,000 term loan B facility maturing
in 2006 and the $10,000 new term loan A 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, 2003
there had been no drawings against this letter of credit. As of
December 31, 2003, there was a $5,000 outstanding balance under the
revolving credit facility. The term loan A facility, the term loan B
facility and the new term loan A facility amortize in quarterly
installments.
Page 81 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per 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 3.375% or the alternate base rate as defined in the
credit agreement, plus 2.375% (subject to performance-based
step downs). As of December 31, 2002 and 2003, term loan A
loans outstanding had interest rates that ranged, from 4.99%
to 5.15% and from 4.57% to 6.38%, respectively.
2. For the term loan B facility and the new term loan A facility,
the LIBO rate plus 4.00% or the alternate base rate plus
3.00%. As of December 31, 2002 and 2003, term loan B loans
outstanding had interest rates that ranged from 5.40% to 5.84%
and from 5.19% to 7.00%, respectively. As of December 31, 2002
and 2003, the new term loan A loans outstanding has interest
rates that ranged from 5.40% to 5.83% and from 5.19% to 7.0%,
respectively.
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). Commitment fees paid for unused
revolver commitments for the year ended December 31, 2002 and
2003 were approximately $97 and $81, respectively.
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.
In 2003, the Company made an additional payment of $282 on the principal of all
Senior Bank Credit Facilities allocated on a pro-rata basis related to the 2002
excess cash flow calculation.
The Senior Bank Credit Facilities and the Senior Subordinated Notes provide for
certain restrictions, including restrictions on asset sales, dividend payments,
and additional indebtedness payments for restricted investments. In addition,
the Senior Bank Credit Facilities 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.
Each ratio became more stringent periodically during the fiscal year ended
December 31, 2003 and through March 31, 2004. With respect to the fourth quarter
ended December 31, 2003, the Company was required to have a leverage ratio no
greater than 5.00:1.0 and a fixed charge coverage ratio no less than 1.10:1.0
and thereafter beginning with the quarter ending March 31, 2004, the Company was
required to have a leverage ratio no greater than 4.00:1.0 and a fixed charge
ratio no less than 1.50:1.0. The Company was not in compliance with these
covenants as of December 31, 2003. The Company reached an agreement with its
senior lenders under which they would continue to make available to the Company
additional borrowings under the Company's revolving credit facility through
March 31, 2004. Under the agreement, the lenders waived through March 31, 2004
WRC Media's compliance with certain financial covenants as of December 31, 2003,
and WRC Media agreed to limit borrowings, including currently outstanding
borrowings and letters of credit, under its revolving credit facility to $26,000
out of the $30,000 facility. On March 29, 2004, the Company amended its existing
Senior Bank Credit Facilities (the "First-Lien Facility") and entered into a
$145,000 Second Priority Senior Credit Facility (the "Second-Lien Facility").
The Company used the proceeds of the financing to refinance in full all term
loans outstanding under the Company's First-Lien Facility, to pay fees and
expenses related to the Second-Lien Facility and for general corporate purposes
of the Company. See Note 26 for additional information.
Page 82 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
Maturities of long-term debt, including unamortized discount and after
consideration of the refinancing discussed in Note 26, are as follows:
2004 $ 13,477
2005 27,668
2006 82,533
2007 --
2008 --
Thereafter 152,000
---------
Total $ 275,678
=========
In May of 2002, the Company entered into interest rate swap, which swapped a
portion of the fixed rate 12.75% notes for a floating rate. During December of
2002, the Company unwound the interest rate swap. The Company realized a gain of
$1,720, on this swap which is included in other income/(expense) in the
consolidated statement of operations.
Pursuant to the terms of the Amended and Restated Credit Agreement, the Company
is required to enter into and maintain interest rate protection agreements
(interest rate swaps, caps, collars or similar agreements) in a notional amount
equal to at least 50% of the aggregate principal amount of the senior secured
term loans. On November 15, 2002, the Company entered into a six-month and
one-year interest rate cap agreement with a notional principle of $50,000 and
$14,800, respectively, which caps the LIBOR based rate, as defined, on those
loans at 2.5%. The interest rate protection agreement did not qualify for hedge
accounting treatment and as such the Company marks to market the contract at the
end of each period. The fair value of the interest rate cap at December 31, 2002
was de-minimus.
On November 15, 2003, the Company entered into a new one-year interest rate cap
agreement with a notional principle of $61,000, with substantially the same
terms as the 2002 agreement. The fair value of the new interest rate cap at
December 31, 2003 was de-minimus.
14. RESTRUCTURING AND OTHER NON-RECURRING EXPENSES
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supercedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred rather than the date an entity commits to an exit
plan. SFAS 146 also establishes that fair value is the objective for initial
measurement of the liability. The Company adopted SFAS 146 in December 2002.
In January 2002, the Company's Board of Directors approved a separate
restructuring plan (the "2002 Plan of Restructuring") and accordingly, the
Company incurred charges for restructuring, asset write-downs and other exit
costs totaling $8,594.
Page 83 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
The 2002 Plan of Restructuring included integration and cost reduction
initiatives comprised of closure of facilities and a reduction in work force.
Pursuant to the 2002 Plan of Restructuring, 107 positions were eliminated
throughout the Company. Severance and other benefit costs of approximately
$3,200 relate to the elimination of these employees from the workforce. This
workforce reduction primarily took place at CompassLearning but all operating
units of WRC Media were impacted. Most of the workforce reductions represented
administrative and back office related employees. The workforce reductions were
substantially completed by January of 2003. Some benefit costs extended beyond
the completion of the workforce reductions due to the Company's contractual
severance obligations to certain individuals that were paid in 2003.
Lease termination costs include future obligations under long-term
non-cancelable lease agreements at facilities that were vacated following the
workforce reductions. The majority of these costs consisted of the estimated
lease costs, net of probable sublease income, associated with the cancellation
of a portion of the Company's lease at 512 Seventh Avenue in New York, N.Y.
which expires in 2015. As a result of the facilities being vacated, certain
assets were written off. All office space was vacated prior to accrual of this
expense.
Components of the Company's restructuring plans and other non-recurring
expenses, including the plans initiated in 2002, are shown in the following
table for 2002.
Balance at Payments Balance at
January 1, 2002 Charges Incurred December 31, 2002
--------------- ------- -------- -----------------
Severance and other benefits $ -- $ 3,150 $(1,812) $ 1,338
Lease terminations -- 4,956 (41) 4,915
Asset write-downs -- 488 (488) --
------- ------- ------- -------
Total $ -- $ 8,594 $(2,341) $ 6,253
======= ======= ======= =======
During the year ended December 31, 2003, the Company reviewed its restructuring
reserve established in 2002 and increased the reserve for severance in the
amount of $221 primarily related to an executive severed in 2002 and $605 for
lease terminations resulting from the updating of the assumptions used in
determining the fair value of the remaining lease obligations associated with
facilities vacated during 2002. The $605 increase in restructuring costs related
to the vacated facilities includes $510 of interest accretion expense.
Of the restructuring reserve totaling approximately $6,253 at December 31, 2002,
approximately $3,803 was paid in the year ended December 31, 2003. The remaining
$3,275 is expected to be paid as follows: in the year 2004 - $1,653, 2005 and
beyond - $1,622. These charges are included in other accrued liabilities on the
consolidated balance sheet.
Components of the Company's 2002 restructuring plan, are shown in the following
table for 2003.
Balance at Payments Balance at
December 31, 2002 Charges Incurred December 31, 2003
----------------- ------- -------- -----------------
Severance and other benefits $ 1,338 $ 221 $(1,527) $ 32
Lease terminations 4,915 605 (2,277) 3,243
------- ------- ------- -------
Total $ 6,253 $ 826 $(3,804) $ 3,275
======= ======= ======= =======
Page 84 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
During the year ended December 31, 2003 the Company incurred $192 of due
diligence and other costs related to an acquisition that was not completed and
is not expected to be completed in the foreseeable future. These non-recurring
costs have been included in the consolidated statements of operations in
Restructuring costs and other non-recurring expenses.
15. PREFERRED STOCK
15% Series B Senior 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 1999, the
Company issued 3,000,000 shares of 15% Series B Senior Preferred Stock, due in
2011 (the "Series B Preferred Stock") with a liquidation preference of $25.00
per share. The Series B Preferred Stock has no voting rights, except under
certain circumstances, and shall accrue dividends at a rate of 15% per annum,
subject to adjustment if the Company fails to redeem all outstanding shares of
Series B in connection with a mandatory redemption or change of control.
In connection with the issuance of the Series B Preferred Stock described above,
the subsidiaries of WRC issued to the senior preferred stockholders, Preferred
Stock Warrants, which entitle the senior preferred stockholders to acquire
422,874 shares of Weekly Reader voting common stock and 1,495 shares of
CompassLearning common stock. These warrants entitle the holders to acquire 13%
of voting common stock of Weekly Reader and CompassLearning at an exercise price
of $0.01 per share and contain a cashless exercise provision. The warrants were
immediately exercisable and expire on November 17, 2011. The Company allocated
the $75,000 proceeds from the issuance of the preferred stock, based on the fair
value of the securities, as follows:
Series B Preferred Stock $ 63,249
Weekly Reader Warrants 9,133
CompassLearning Warrants 2,618
--------
$ 75,000
========
The Series B Preferred Stock is being accreted to its redemption value using the
effective interest method. Accretion for the years ended December 31, 2002 and
2003 amounted to $932 and $947, respectively.
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. Accrued Series B Preferred Stock dividends for
the years ended December 31, 2002 and 2003, amounted to $16,274 and $18,854,
respectively, and are payable in additional shares of Series B preferred stock.
The Company may redeem the Series B Preferred Stock, including unpaid dividends,
prior to November 17, 2002, or after November 17, 2004, subject to certain
conditions. The Company is required to redeem, to the extent it has funds
legally available, all outstanding shares of the Series B Preferred Stock on
November 17, 2011.
Page 85 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
18% Junior Participating Cumulative Convertible Preferred Stock
The Company has designated 750,000 shares of its 20,000,000 shares authorized of
preferred stock in the 18% Junior Participating Cumulative Convertible Preferred
Stock series (the "Junior Preferred Stock") par value $0.01 per share. In
connection with WRC's acquisition of ChildU, Inc. in 2001 and its minority
investment in ThinkBox, Inc. the Company issued 343,750 shares of the Junior
Preferred Stock $40.00 per share to finance in part the ChildU acquisition and
the investment in ThinkBox. The Junior Preferred Stock has a liquidation
preference of $40.00 per share and accrues dividends at a rate of 18% per annum,
subject to adjustment under certain conditions. Accrued Junior Preferred stock
dividends for the years ended December 31, 2002 and 2003 amounted to $2,968 and
$3,538, respectively. The Junior Preferred Stock shall, with respect to dividend
rights and rights on liquidation, dissolution and winding up, rank junior to the
15% Series B Senior Preferred Stock due 2011 but rank senior to WRC's common
stock, par value $0.01 per share. The holders of the Junior Preferred Stock
shall be entitled to vote upon any matter submitted to a vote of the holders the
Company's common stock and shall have one vote for each share of Junior
Preferred Stock held. Each share of Junior Preferred is convertible, at any time
at the option of the holder into an equal number of shares of the Company's
common stock. The Junior Preferred Stock is also subject to conversion, at the
Company's option, upon the consummation of an initial public offering by the
Company of its common stock. The shares of the Junior Preferred Stock are not
redeemable.
16. 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 years ended 2002 and 2003,
11,559 and 1,344 shares, respectively, were repurchased from former executives
for $463 and $25, respectively. The excess of the repurchase price of these
shares over the issuance price in the amounts of $248 and $0, respectively, in
2002 and 2003 were recognized as compensation expense. Under certain conditions,
the shareholders can require the Company to repurchase the shares.
17. INCOME TAXES
At December 31, 2003, the Company had available net operating loss carryforwards
(NOLs) of approximately $198,102. 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.
Page 86 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
The NOLs are scheduled to expire in the following years:
Amount
---------
2009 $ 4,995
2010 17,890
2011 14,006
2017 11,620
2018 2,944
2019 15,924
2020 53,957
2021 23,813
2022 34,217
2023 18,736
---------
$ 198,102
=========
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) net operating
loss carryforwards. The tax effects of significant items comprising the
Company's net deferred income tax assets are as follows:
2002 2003
--------- ---------
Deferred tax assets
Accrued liabilities $ 2,645 $ 1,578
Other 5,247 3,784
--------- ---------
Total current deferred tax assets 7,892 5,362
Difference between book and tax basis of other intangibles 48,070 47,900
Net operating loss carryforward 64,227 76,165
Other 2,122 1,659
--------- ---------
Total non-current deferred tax assets 114,419 125,724
--------- ---------
Total deferred tax assets 122,311 131,086
Deferred tax liabilities
Difference between book and tax basis of indefinite lived intangibles $ (10,700) $ (12,700)
Difference between book and tax basis of fixed assets (2,347) (2,087)
--------- ---------
Total deferred tax liabilities (13,047) (14,787)
--------- ---------
Total net deferred tax assets 109,264 116,299
--------- ---------
Less: Valuation allowance (119,964) (128,999)
--------- ---------
Net deferred tax liability $ (10,700) $ (12,700)
========= =========
Page 87 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
In 2002 and 2003, the Company recorded income tax expense of $280 and $151,
respectively, related to a provision for current state, local and foreign taxes.
The Company's provision for income tax differs from the amount computed by
applying the statutory U.S. federal income tax rate of 35% primarily due to
state and local taxes and changes in valuation allowances as detailed below:
2002 2003
-------- --------
Tax benefit at federal statutory rate $ (5,444) $ (1,968)
State/local taxes, net of federal impact (2,936) (2,210)
Change in valuation allowance 22,496 6,492
Other, net (3,136) (163)
-------- --------
Income Tax Expense $ 10,980 $ 2,151
======== ========
Management has determined that the Company is not likely to realize the income
tax benefit of its net deferred tax assets. To the extent the Company generates
income in future years, the tax provision will reflect the realization of such
benefits, with the exception of benefits attributable to acquired deferred tax
assets. The recognition of such amount in future years will be allocated to
reduce the excess of the purchase price over the net assets acquire and other
non-current intangible assets.
As a result of the adoption of SFAS 142 in 2002, the Company continues to record
a valuation allowance in excess of its net deferred tax assets, to the extent
the difference between the book and tax basis of indefinite lived intangible
assets is not expected to reverse during the net operating loss carryforward
period. The Company recorded non-cash deferred income tax expense of
approximately $8,700 on January 1, 2002 related to the adoption of SFAS 142.
With the adoption of SFAS 142, the Company no longer amortizes the book basis in
the indefinite lived intangibles but continues to amortize these intangibles for
tax purposes. In both 2002 and 2003, the Company recorded additional non-cash
deferred income tax expenses of $2,000, related to the increase in its net
deferred tax liability for the tax effect on the net increase in the difference
between the book and tax basis in the indefinite lived intangible assets.
18. STOCKHOLDERS' DEFICIT
Warrants
In connection with debt instruments issued to fund the acquisition of
CompassLearning in 1999, the Company issued warrants to purchase 108,003 shares
of its common stock. The warrants have an exercise price of $0.01 per share and
contain a cashless exercise provision. The fair value of the warrants in the
amount of $2,160 has been recorded as a debt discount and additional paid-in
capital. The warrants were exercisable upon issuance and expire in July 2009.
Page 88 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
Stock Options
During 1999, the Company granted options to purchase 301,724 (the "1999
Options") at $18.60 per share, which vested as follows: 33%, in 1999, 33% in
2000 and 34% in 2001. Certain of these options contain a cashless exercise
provision which require the Company to account for such options using variable
accounting. Additionally, in 2002, the Company granted certain of its
executives, options to purchase 220,000 shares of common stock at $40.00 per
share. Such options also contain a cashless exercise provision. During 2002 and
2003, no compensation expense was recognized for these options as the fair
market value of the Company's common stock, as estimated by the Company's Board
of Directors, was less than the exercise price of the options.
During 2003, a terminated employee exercised options to purchase 13,456 shares
of common stock. The Company immediately repurchased such shares at a price of
$40.00 per share pursuant to the employee's termination agreement. The
difference between the $40.00 per share repurchase price and the exercise price
of the options, in the aggregate amount of $288 was recorded as compensation
expense in the consolidated statement of operations during 2003.
In 2000, the Company adopted the WRC Media Inc. and Subsidiaries Year 2000 Stock
Option Plan (the "Plan") under which 319,463 shares of common stock have been
made available for issuance. 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 is
administered by the Board of Directors ("Board"), or by a committee of the
Board, comprised of not less than two Directors.
The exercise price per share for the common stock covered by a Stock Option is
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 common stock determined in good faith by the Board. During
2000, the Company granted options to purchase 107,523 shares at $18.60 per share
to an executive under his employment agreement that were not covered by the
Plan. Those options contain a cashless exercise provision and are subject to
variable accounting. No compensation expense was recognized for these options
during 2002 and 2003. The options covered under the Plan vest ratably over four
years from the date of grant.
In 2001, in conjunction with the acquisition of ChildU, Inc. (see Note 1), the
Company granted 35,000 options at $40.00 per share (the "2001 Options") to
certain key employees of ChildU, Inc. The 2001 Options vest ratably over four
years from the date of grant.
Page 89 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
A summary of the Company's option activity is as follows:
Year Ended Year Ended
December 31, 2002 December 31, 2003
-------------------------- --------------------------
Weighted Weighted
Average Average
Exercise Exercise
Employee Stock Options Shares Price Shares Price
- ---------------------------------------------------------------- -------- ----------- -------- -----------
Outstanding, beginning of year 643,514 $ 20.34 899,089 $ 26.55
Granted 289,500 40.00 35,000 18.60
Exercised -- 0.00 (13,456) 18.60
Forfeited (33,925) 23.43 (650) 18.60
-------- --------
Outstanding, end of year 899,089 26.55 919,983 26.37
======== ========
Options exercisable at year-end 435,867 604,701
======== ========
Options available for grant at year-end 34,933 2,756
======== ========
Options subject to variable accounting 600,202 592,496
======== ========
Weighted-average fair value of options granted during the period $ 0.00 $ 0.00
======== ========
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 3.75% and 3.3% in 2002 and 2003; no
expected dividend yield for 2002 and 2003; and expected life of 5 years with no
expected volatility for 2002 and 2003, respectively.
The following table summarizes information about employee stock options
outstanding at December 31, 2003:
Options Outstanding Options Exercisable
---------------------------------------- ------------------------------------
Number Weighted Average Number
Range of Exercise Outstanding at Remaining Exercisable at
Prices December 31, 2003 Contractual Life Exercise Price December 31, 2003 Exercise Price
- ----------------- ----------------- ---------------- -------------- ----------------- --------------
$18.60 553,695 6.3 years $18.60 475,317 $18.60
$40.00 366,288 7.8 years $40.00 129,384 $40.00
19. RELATED PARTY TRANSACTIONS
Management Agreements
In connection with the acquisition of Weekly Reader and CompassLearning, the
Company entered into management agreements with a significant shareholder.
Page 90 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
In accordance with Weekly Reader's management agreement, the shareholder
provides 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, CompassLearning and Weekly Reader
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, began paying, in quarterly installments, the
shareholder annual aggregate management fees for services to both
CompassLearning and Weekly Reader of $950. The agreements have no stated term,
but can be terminated by the shareholder upon five days notice. In June 2003,
the shareholder waived the payment of $300 in management fees for 2003. The
waived amount has been recorded as a capital contribution. During the years
ended December 31, 2002 and 2003, the Company recognized general and
administrative expenses for such management fees in each year of $950.
20. RETIREMENT PLANS
Substantially all of the Company's employees are eligible to participate in a
defined contribution plan of the Company. Pursuant to the provisions of the
Plan, the Company is obligated to match 33% of the employee's contribution to
the Plan up to the first 6% of the employee's compensation. The expense
recognized by the Company for the Company's contributions to the plan was $1,352
and $1,303 for the years ended December 31, 2002 and 2003, respectively.
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 net pension expense for the American Guidance Plan and the reconciliation of
the funded status of the Plan at December 31, 2002 and 2003 and the accrued
obligation in the consolidated balance sheets are as follows:
2002 2003
-------- --------
Change in benefit obligation:
Projected benefit obligation, beginning of year $ 11,947 $ 14,379
Service cost 742 916
Interest cost 819 883
Actuarial loss 1,332 (109)
Benefits paid (461) (570)
-------- --------
Projected benefit obligation, end of year $ 14,379 $ 15,499
======== ========
Change in plan assets:
Fair value of plan assets, beginning of year $ 7,903 $ 7,269
Actual return on plan assets (1,284) 1,928
Employer contributions 1,111 1,029
Benefits paid (461) (570)
-------- --------
Fair value of plan assets, end of year $ 7,269 $ 9,656
======== ========
Page 91 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
2002 2003
-------- --------
Funded status at December 31,
Plan assets in excess of (less than) benefit obligation $ (7,110) $ (5,842)
Unrecognized actuarial loss 5,411 3,754
-------- --------
Accrued pension cost $ (1,699) $ (2,088)
======== ========
Amounts recognized in consolidated balance sheets:
Accrued benefit liability $ (5,056) $ (3,988)
Accumulated other comprehensive loss 3,357 1,899
-------- --------
$ (1,699) $ (2,088)
======== ========
Components of net periodic benefit cost:
Service cost $ 742 $ 916
Interest cost 819 883
Expected return on plan assets (749) (675)
Amortization of unrecognized net actuarial loss 70 294
-------- --------
Net periodic benefit cost $ 882 $ 1,418
======== ========
Accumulated benefit obligation and fair value of assets:
Accumulated benefit obligation $(12,325) $(13,644)
Fair value of assets $ 7,269 $ 9,656
Weighted-average assumptions as of end of year
Discount rate 6.25% 6.25%
Expected return on plan assets 9.0% 9.0%
Rate of compensation increase 4.5% 3.5%
The Company developed the expected long-term rate of return on assets assumption
by considering the current level of expected returns on risk free investments
(primarily government bonds) the historical level of the risk premium associated
with other asset classes in which the portfolio is invested and the expectation
for future returns on each asset class. The expected return for each asset class
was weighted based on the aggregate target asset allocation to develop the
expected long-term rate of return on assets assumption for the portfolio. The
Company reviews the expected rate of return on an annual basis and revises it as
appropriate.
The American Guidance Plan investment objective is a heavily weighted equity
portfolio with an emphasis on long-term growth. Assets held include
high-quality, well-capitalized stocks of established companies and were
allocated 83% to equity securities and 17% to fixed income securities in 2002
and 87% to equity securities and 13% fixed income securities in 2003:
2002 2003
------ ------
Asset Category
Equity Securities 83.0% 87.0%
Debt Securities 14.0% 11.0%
Other 3.0% 2.0%
----- -----
Total 100.0% 100.0%
===== =====
Page 92 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
The Company expects to contribute $2,254 to the American Guidance Plan in 2004.
A minimum pension liability adjustment is required when the actuarial present
value of the accumulated plan benefits exceeds plan assets and accrued pension
liability. In 2002 and 2003, a minimum liability adjustment of ($3,041) and
$1,458 respectively, was recorded as a component of other comprehensive loss and
reported in accumulated other comprehensive loss as a component of stockholders'
deficit.
21. COMMITMENTS AND CONTINGENCIES
Leases
The Company has non-cancelable operating leases for equipment, office and
warehouse space that include future minimum rental commitments as follows:
Lease Sublease Net
Year Ending December 31, Commitments Rentals Commitments
----------- -------- -----------
2004 $ 6,338 $ (348) $ 5,990
2005 5,731 (348) 5,383
2006 5,392 (352) 5,040
2007 4,738 (359) 4,379
2008 2,938 (359) 2,579
Thereafter 10,804 (241) 10,563
------- ------- -------
Total $35,941 $(2,007) $33,934
======= ======= =======
Rent expense, net of sublease rentals, for all operating leases was
approximately $5,137 and $4,385 for the years ended December 31, 2002 and 2003,
respectively.
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.
SEC Inquiry
The SEC is conducting a preliminary inquiry concerning the Company and has
requested that the Company voluntarily provide the SEC with various documents.
The Company cannot predict the final outcome of this inquiry at this time. The
Company is cooperating fully with the SEC inquiry.
Page 93 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
22. 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
liabilities, respectively on the consolidated balance sheets. The balance of
liability as of December 31, 2002 and 2003 were approximately $1,403 and $1,006,
respectively. The marketable securities in the Rabbi Trusts have been classified
as trading securities and investment income of $156 and $55 has been offset by
compensation expense for the same amount on the accompanying consolidated
statements of operations for the years ended December 31, 2002 and 2003,
respectively. Marketable securities in the Rabbi Trust have been recorded at
fair value, based on quoted market prices, on the accompanying consolidated
balance sheets.
23. RESTATEMENT
In connection with the audit of the Company's 2003 consolidated financial
statements, management has determined to restate its financial statements
because it had incorrectly accounted for (i) the revenue recognition of a
software and services sale in December 2002; (ii) the purchase price adjustment
to goodwill in 2002 related to ChildU; (iii) restructuring reserves for
acquisitions in 1999; (iv) revenue recognition for a guaranteed minimum purchase
transaction in 2002; (v) revenue recognition for distributor sales in 2001 and
2002; (vi) rent expense in 2001 and 2002; (vii) common stock warrants and (viii)
a number of other items including various accruals such as compensation and
fringe benefit costs, deferred revenue and legal costs in 2001 and 2002.
As a result, the Company is restating its previously audited consolidated
balance sheet as of December 31, 2002, and the related statements of
stockholders' deficit and of operations for the year ended December 31, 2002.
After giving effect to the restatement described below, the Company believes it
was and is in compliance with the financial covenants in its credit facility for
all of the reporting periods affected, other than the fourth quarter of 2003,
for which the lenders under the credit agreement granted the Company a waiver
through March 31, 2004. (See Note 13.)
Described below are the matters for which the Company has restated its
consolidated financial statements for 2002.
o Software and Services Sale. In December 2002, the Company recorded a
$1,860 receivable of revenue from the sale of educational software and
services to a school district. Of this amount, $1,169 was recognized as
revenue during the fiscal quarter ended December 31, 2002, and $691 was
recorded as a deferred revenue liability as of December 31, 2002.
Accrued sales commissions of $342 also were recorded. In the first
quarter of 2003, this $1,169 of revenue previously recognized in
December 2002 was offset by recording a new bad debt reserve of $920
and by retaining an excess of $250 in the Company's allowance for
doubtful accounts, which excess amount would have otherwise been
reversed. The Company has concluded that the sale did not meet the
criteria under GAAP for revenue recognition for the year ended December
31, 2002, and that it incorrectly recorded the related bad debt reserve
and retained the excess allowance for doubtful accounts in 2003. The
Company has corrected these errors by reversing these transactions. The
net effect for the year ended December 31, 2002 was to increase net
loss by approximately $827. In addition, total assets decreased by
approximately $1,860 and total liabilities decreased by $1,033,
including a decrease in deferred revenue of $691 as of December 31,
2002.
Page 94 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
o ChildU Goodwill Reduction. The Company's subsidiary, ChildU, Inc., was
acquired in 2001. In connection with such acquisition, the Company
issued shares of its common stock to the holders of notes issued by
ChildU. The Company has determined that the value assigned to these
shares when the Company recorded the purchase price for this
acquisition in its historical financial statements for 2001 exceeded
the fair market value of these shares. Accordingly, the Company has
restated its financial statements to record correctly the fair market
value of these shares, which had the effect of reducing the purchase
price for ChildU, goodwill and additional paid-in capital, by
approximately $3,419 as of December 31, 2001. In addition, the Company
allocated the entire purchase price to goodwill, and had assigned that
goodwill an estimated life of 40 years. The asset acquired was software
technology and not goodwill. The Company has restated its financial
statements to record the software technology and to amortize such
acquired technology over its estimated useful life of five years, which
had the effect of increasing accumulated deficit as of January 1, 2002
by $976, and increasing intangibles amortization expense by $1,672 in
2002. The Company also incorrectly charged certain severance costs
against acquisition reserves, and accordingly has restated the 2002
financial statements to correct for such errors. The net effect of such
adjustment was to increase the accumulated deficit as of January 1,
2002 by $708 and to increase net loss by $1,092 for the year ended
December 31, 2002.
Following the determination to restate the Company's financial statements for
2001 and 2002 for the matters described above, the Company also determined that
it would correct for certain errors made in the application of GAAP that had not
previously been corrected because in each such case it believed that the amount
of any such error was not material to its consolidated financial statements.
These matters are described below.
CompassLearning/Weekly Reader Goodwill Reduction. In connection with
the acquisitions of CompassLearning, Inc. and Weekly Reader Corporation
in 1999, the Company also recorded certain other reserves for a planned
restructuring related to the acquisitions. The Company recorded
reserves of $5,538 related to estimated liabilities it believed it had
assumed at the date of such acquisitions. The Company also recorded a
reserve of $1,705 related to an estimated liability associated with the
rationalization of the shipping schedule of the Weekly Reader magazine
in 2000. The Company concluded that the purchase reserves associated
with these estimated liabilities, and the elements of the restructuring
plan that had not yet been completed should be reversed in 2001. The
excess purchase reserves associated with fiscal year 2000 activity;
specifically, the $1,350 of costs incurred to evaluate
CompassLearning's software in order to determine a future growth
strategy; $2,250 of in-process R&D related to a Next-generation reading
system deemed not be technologically feasible; $1,800 of recruiting and
consulting costs incurred to transition the companies acquired to a
standalone public company and $150 for other estimated liabilities
assumed were reversed against goodwill and charged to accumulated
deficit as of January 1, 2002 as the Company determined that the
reversal of the excess purchase reserves and corresponding reduction in
goodwill should have been recorded in 2000. The Company also reversed
the $1,705 reserve, and reduced goodwill in a corresponding amount,
because the Company determined that such reserve had been incorrectly
recorded in 2000. The Company has determined that the reversal of the
excess purchase reserves and corresponding reduction of goodwill should
have been recorded in 2000 rather than 2001 and that the reversal of
the $1,705 reserve and corresponding reduction in goodwill should have
been recorded in 2000 rather than 2002. Accordingly, the Company has
restated its 2002 financial statements to correct these errors. The net
effect of the adjustments for the fiscal year ended December 31, 2001
will increase the accumulated deficit by $5,961.
Page 95 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
o CompassLearning Minimum Purchase Guarantee. In connection with the
acquisition of CompassLearning, the Company entered into a minimum
purchase guarantee agreement with the seller of CompassLearning. In
2001, the Company incorrectly recorded as revenue amounts that the
seller was required to purchase under the agreement, which the seller
did not purchase. In its historical financial statements for 2001, the
Company also recorded an intangible asset in an amount equal to the
amount of revenue incorrectly recorded. In 2002 and 2003, amortization
of $527 and $235, respectively, of this intangible was recorded against
gross sales as purchases were actually made. Recording this intangible
asset and the related amortization did not conform to GAAP. The Company
has restated its financial statements to reverse this transaction, with
the net effect being to increase accumulated by $762 for the year ended
December 31, 2001 and decrease the Company's net loss in 2002 by $527.
o Distributor Sales. Historically the Company recognized revenue under a
distribution contract between its subsidiary, World Almanac Education
Group, and a distributor at the time that the Company shipped our
products to the distributor rather than at the time those products were
resold by the distributor. The Company also recorded distribution fees
under this contract as operating costs and expenses, based on its
understanding of the distribution contract. The Company has determined
to recognize revenue only at the time the distributor ships these
products to its customer. In addition, the Company should have recorded
distributions fees as a reduction of revenue, rather than as a separate
operating cost and expense item. The Company has restated its financial
statements which increased its accumulated deficit by $449 for the
fiscal year ended December 31, 2001, decreased its net loss and
increased net assets by $168 for the year ended December 31, 2002.
o Rent. The Company has two leases that have "free rent" incentives at
the commencement of the leases and also contain rent escalation clauses
(which clauses provide for rent increases over time) for which it was
required under GAAP to record the average rent expense ratably over the
lease term. In its historical 2001 financial statements, however, the
Company recorded the rent expense from these leases as it was paid. In
its historical 2002 financial statements, the Company began correctly
recording the average rent expense for these leases, but it calculated
the average rent using the remainder of the lease term instead of the
entire lease term. The Company has restated its financial statements to
correct these errors. As a result, rent expense increased in 2001
because the average rent to be paid over the lease terms was greater
than the actual rent paid in 2001 and rent expense decreased in 2002
because of the longer lease terms used to calculate the average rent.
In 2001, the Company also incorrectly capitalized some rent expense
prior to its occupancy of a certain leased premise as a prepaid rent
asset and amortized it, rather than recording it as an expense, as
required by GAAP. The Company has restated its financial statements to
correct these errors, with the net effect being to increase its
accumulated deficit by $1,005, for the year ended December 31,
2001, to decrease its net loss by $412 and increase total assets by
$352 for the year ended December 31, 2002.
o Common Stock Warrants. During 1999, the Company issued warrants to
purchase its common stock to purchasers of certain debt securities and
a lender under a term loan facility. The Company incorrectly recorded
the fair value of the warrants, as a liability due to a related party.
The Company has restated its 2002 financial statements to correctly
record the fair value of the warrants as additional paid-in capital. As
a result of this correction liabilities decreased by $2,160 and
additional paid-in capital increased by corresponding amount.
o Other. The Company has have made a number of other corrections,
including adjustments relating to various accruals such as compensation
and fringe benefit costs, deferred revenue, legal costs and other
immaterial items.
The effect of the restatements for years prior to 2002, was to increase
accumulated deficit from $161,024 by $10,546 to $171,570 at January 1, 2002.
Page 96 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
Summarized below are the significant effects of the restatement of the Company's
2002 financial statements.
December 31, 2002
-------------------------------
As Previously
Statements of Operations, for the year ended Reported As Restated
- -------------------------------------------- ------------- -----------
Revenue, net $ 209,958 $ 207,831
Operating costs and expenses 190,213 191,200
Income from Operations $ 19,745 16,631
Interest expense, loss on investment and
other income/(expense), net (32,187) (32,187)
Net loss $ (95,444) $ (98,558)
Balance Sheets, as of
Total current assets $ 67,752 $ 65,419
Goodwill 163,349 143,149
Total assets $ 374,252 $ 356,864
Total current liabilities 100,408 100,014
Total liabilities 380,654 377,937
Additional paid-in capital 132,464 131,453
Accumulated deficit (276,642) (290,302)
Total stockholders' deficit (129,084) (143,755)
Total liabilities and stockholders' deficit $ 374,252 $ 356,864
24. QUARTERLY DATA (UNAUDITED)
The following is a summary of the unaudited selected quarterly results for which
all adjustments necessary for presentation of each period were included. As
discussed in Note 23, the results of operations for the year ended December 31,
2002 and for the quarterly periods in the years ended December 31, 2002 and 2003
have been restated.
Three Months Ended
-----------------------------------------------------------------
March 31 March 31 June 30 June 30
-------------- ------------- -------------- -------------
(as previously (as restated) (as previously (as restated)
reported) reported)
2003
Revenues $ 46,977 $ 47,220 $ 43,493 $ 43,960
Gross profit 34,243 34,163 30,951 31,133
Operating costs and expenses 30,730 29,926 27,631 28,211
Income/(loss) from operations 3,513 4,237 3,320 2,922
Net income/(loss) (4,388) (3,664) (4,710) (5,108)
2002
Revenues $ 46,787 $ 46,974 $ 43,939 $ 44,562
Gross profit 33,413 33,079 31,158 31,287
Operating costs and expenses 30,995 32,408 27,509 30,067
Income/(loss) from operations 2,418 671 3,649 1,220
Net income/(loss) (86,752) (88,499) (5,309) (7,738)
Three Months Ended
--------------------------------------------------------------
September 30 September 30 December 31 December 31
-------------- ------------ -------------- -------------
(as previously (as restated) (as previously (as restated)
reported) reported)
2003
Revenues $ 55,322 $ 55,387 $ 57,015 $ 56,137
Gross profit 40,608 40,401 41,381 40,604
Operating costs and expenses 28,827 28,754 35,452 34,721
Income/(loss) from operations 11,781 11,647 5,929 5,883
Net income/(loss) 3,579 3,445 (2,293) (2,447)
2002
Revenues $ 56,456 $ 56,549 $ 62,776 $ 59,746
Gross profit 41,081 40,681 45,295 42,860
Operating costs and expenses 28,651 29,219 44,047 39,582
Income/(loss) from operations 12,430 11,462 1,248 3,278
Net income/(loss) 4,561 3,593 (7,944) (5,914)
Page 97 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
25. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2002 2003
------- -------
Cash paid during the period for interest $27,870 $27,779
======= =======
Cash paid during the year for income taxes $ 280 $ 285
======= =======
Non-cash financing activities:
Preferred stock dividends accrued $19,241 $22,394
======= =======
Accretion of preferred stock $ 932 $ 947
======= =======
26. SUBSEQUENT EVENT
On March 29, 2004, the Company refinanced all of its term loans under the
First-Lien Facility with a $145,000 senior, second-priority lien secured
financing that was provided to the Company pursuant to a term loan facility (the
"Second-Lien Facility"). The proceeds of the Second Lien Facility were used (i)
to refinance in full all term loans outstanding under the First-Lien Facility,
(ii) to pay fees and expenses related to the Second-Lien Facility and all
transactions contemplated in connection therewith and (iii) for general
corporate purposes of the Company.
All payment obligations under the Second-Lien Facility are secured by a
second-priority lien on the collateral securing the First-Lien Facility;
provided that all obligations under the Second-Lien Facility will rank equally
in right of payment with all payment obligations under the First-Lien Facility
and will not otherwise be subordinated in any respect to the First-Lien
Facility. The final maturity of the Second-Lien Facility will be March, 2009. At
the Company's option, the loans will bear interest at either the Administrative
Agent's (i) alternate base rate ("base rate loans") or (ii) reserve-adjusted
LIBO rate ("LIBO rate loans") plus, in each case, the "Applicable Margin" (as
defined). "Applicable Margin" means, with respect to (i) Base Rate Loans, a rate
of 4.00% per annum and (ii) LIBO Rate Loans, a rate of 5.00% per annum.
The Second-Lien Facility is 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 change in control
o annually, 50% of the Company's excess cash flow (as defined)
from the prior year.
The Second-Lien Facility provide for certain restrictions, including
restrictions on asset sales, dividend payments, additional indebtedness payments
for restricted investments. In addition, Second-Lien Facility provides for the
maintenance of a financial covenant, a maximum ratio (the "Senior Leverage
Ratio") of Senior Secured Debt to trailing four quarter EBITDA (as defined
therein) not to exceed 4.25:1.00 for any fiscal quarter, except the fiscal
quarter ended June 30, 2005 for which the Senior Leverage Ratio shall not exceed
4.50:1.00, in each case to be tested on the last day of each fiscal quarter and
computed for the Parent and its consolidated subsidiaries. In connection with
entering into the Second-Lien Facility, we entered into an amendment and
restatement of our First-Lien Facility, which now consists solely of a $30,000
revolving credit facility.
Page 98 of 150
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
The First-Lien Facility, as amended and restated, has a maturity of December 29,
2008, and has one financial covenant, a Senior Leverage Ratio of senior secured
debt to trailing four quarter EBITDA (as defined therein) not to exceed
4.00:1.00 for any fiscal quarter, except the fiscal quarter ended June 30, 2005
for which the Senior Leverage Ratio may not exceed 4.25:1.00, in each case to be
tested on the last day of the fiscal quarter and computed for the Company and
its consolidated subsidiaries. Interest on revolving loan borrowings under the
First-Lien Facility will bear interest at a rate per annum equal to the LIBO
rate as defined in the First-Lien Facility plus 3.5% or the alternate base rate
as defined in the First-Lien Facility plus 2.5%.
Page 99 of 150
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders' of
Weekly Reader Corporation
New York, New York
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, 2003 and 2002, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the years
ended December 31, 2003 and 2002. Our audits also included the financial
statement schedule listed in index at Item 15. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Weekly Reader Corporation and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for the years ended December 31, 2003 and 2002,
in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects the information set forth therein.
As discussed in Notes 3 and 7 of the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting Standards No. 142 as of
January 1, 2002.
As discussed in Note 18, the consolidated financial statements for the year
ended December 31, 2002 have been restated.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, it is possible that the trustee or
noteholders of the Company's 12 3/4% Senior Subordinated Notes may assert a
breach of the requirement under the indenture for the Company to furnish audited
financial statements for 2001. The potential claim that the Company is in breach
of the indenture or a potential attempt to accelerate the payment of such notes,
together with uncertainty as to the timing or ability to complete a reaudit of
the 2001 financial statements and to furnish an auditors' report as required by
the indenture in order to obviate such a claim, raises substantial doubt about
the Company's ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
DELOITTE & TOUCHE LLP
New York, New York
March 30, 2004
Page 100 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share data)
December 31,
--------------------------
ASSETS 2002 2003
------ -------- ---------
(As Restated
See Note 18)
Current assets:
Cash $ 7,819 $ 1,267
Accounts receivable (net of allowance for doubtful accounts and sales returns of
$3,220 and $2,179, respectively) 22,265 20,880
Inventories, net 14,368 15,890
Due from related party 9,454 11,502
Prepaid expenses 2,692 2,882
Other current assets 1,797 1,889
-------- --------
Total current assets 58,395 54,310
Property and equipment, net 5,409 4,399
GOODWILL 35,018 35,018
DEFERRED FINANCING COSTS, net 692 512
OTHER INTANGIBLE ASSETS, net 18,784 14,377
OTHER ASSETS AND INVESTMENTS 24,741 30,263
-------- --------
Total assets $143,039 $138,879
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 101 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(amounts in thousands, except share and per share data)
December 31,
LIABILITIES AND STOCKHOLDERS' DEFICIT 2002 2003
------------------------------------- --------- ---------
(As Restated
See Note 18)
Current liabilities:
Accounts payable $ 18,883 $ 15,446
Accrued expenses and other current liabilities 19,322 15,365
Deferred revenue 20,476 17,565
Current portion of long-term debt 7,721 8,477
--------- ---------
Total current liabilities 66,402 56,853
DEFERRED TAX LIABILITIES 2,000 2,640
LONG-TERM DEBT 266,219 262,925
--------- ---------
TOTAL LIABILITIES 334,621 322,418
--------- ---------
Commitments and contingencies
15% SERIES B REDEEMABLE PREFERRED STOCK, including accrued dividends and
accretion of warrant value (3,000,000 and 5,508,080 shares outstanding,
respectively) (Liquidation preference of $137,702) 118,846 137,702
--------- ---------
STOCKHOLDERS' DEFICIT:
Common stock ($.01 par value, 20,000,000 shares authorized; 2,830,000 shares
outstanding in 2002 and 2003) 28 28
Additional paid-in capital 9,133 9,133
Due from parent (63,569) (59,028)
Accumulated other comprehensive loss (3,357) (1,899)
Accumulated deficit (252,663) (269,475)
--------- ---------
Total stockholders' deficit (310,428) (321,241)
--------- ---------
Total liabilities and stockholders' deficit $ 143,039 $ 138,879
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 102 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2003
(amounts in thousands)
December 31,
2002 2003
--------- ---------
(As Restated
See Note 18)
REVENUE, NET $ 155,013 $ 152,111
COST OF GOODS SOLD 38,616 37,695
--------- ---------
Gross profit 116,397 114,416
--------- ---------
COSTS AND EXPENSES:
Sales and marketing 28,345 28,241
Distribution, circulation and fulfillment 14,012 14,626
Editorial 10,847 10,365
General and administrative 18,290 19,011
Restructuring costs and other non-recurring expenses 4,280 (516)
Depreciation 1,945 1,682
Amortization of intangible assets 9,096 10,126
--------- ---------
Total operating costs and expenses 86,815 83,535
--------- ---------
Income from operations 29,582 30,881
INTEREST EXPENSE, INCLUDING AMORTIZATION OF DEFERRED FINANCING COSTS (28,849) (28,091)
OTHER INCOME (EXPENSE), net 1,765 (196)
--------- ---------
Income before income tax provision an cumulative effect of change
in accounting principle, net of tax 2,498 2,594
INCOME TAX PROVISION 2,101 552
--------- ---------
Net income before cumulative effect of change in accounting
principle, net of tax 397 2,042
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (72,022) --
--------- ---------
Net (loss) income $ (71,625) $ 2,042
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 103 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2003
(amounts in thousands)
Accumulated
Common Stock Additional Other
------------------------ Paid-In Due From Comprehensive
Shares Value Capital Parent Loss
--------- --------- ---------- ----------- -------------
Balance, January 1, 2002 (as restated, see Note 18) 2,830 $ 28 $ 9,133 $ (67,738) $ (316)
Other comprehensive loss:
Net loss (as restated, see Note 18) -- -- -- -- --
Minimum pension liability -- -- -- -- (3,041)
Total comprehensive loss --
Preferred stock dividends -- -- -- --
Change in due from parent -- -- -- 4,169 --
--------- --------- --------- --------- ---------
Balance, December 31, 2002 (as restated, see Note 18) 2,830 $ 28 9,133 $ (63,569) $ (3,357)
Other comprehensive income:
Net income -- -- -- -- --
Minimum pension liability -- -- -- -- 1,458
Total comprehensive income
Preferred stock dividends -- -- -- -- --
Change in due from parent -- -- -- 4,541 --
--------- --------- --------- --------- ---------
Balance, December 31, 2003 2,830 $ 28 $ 9,133 $ (59,028) $ (1,899)
========= ========= ========= ========= =========
Total
Accumulated Stockholders'
Deficit Deficit
----------- -------------
Balance, January 1, 2002 (as restated, see Note 18) $(164,764) (223,657)
Other comprehensive loss:
Net loss (as restated, see Note 18) (71,625)
Minimum pension liability --
Total comprehensive loss (74,666)
Preferred stock dividends (16,274) (16,274)
Change in due from parent -- 4,169
--------- ---------
Balance, December 31, 2002 (as restated, see Note 18) $(252,663) (310,428)
Other comprehensive income:
Net income 2,042
Minimum pension liability --
Total comprehensive income 3,500
Preferred stock dividends (18,854) (18,854)
Change in due from parent -- 4,541
--------- ---------
Balance, December 31, 2003 $(269,475) (321,241)
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 104 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2003
(amounts in thousands)
2002 2003
-------- --------
(As Restated
See Note 18)
CASH FLOWS FROM Operating activities:
Net (loss) income $(71,625) $ 2,042
Adjustments to reconcile net (loss) income to net cash provided by (used in)
operating activities:
Cumulative effect of change in accounting principle 72,022 --
Deferred income tax provision 2,000 640
Depreciation and amortization 11,041 11,808
Write off of acquisition costs 49 --
Loss on dispositions and impairments of property and equipment 710 84
Amortization of debt discount 396 451
Amortization of deferred financing costs 181 180
Changes in operating assets and liabilities-
Accounts receivable 1,909 1,385
Inventories (635) (1,522)
Prepaid expenses and other assets 515 (11,524)
Accounts payable 3,028 (3,437)
Deferred revenue 2,078 (2,911)
Accrued expenses and other liabilities (10,663) (2,497)
-------- --------
Net cash provided by (used in) operating activities 11,006 (5,301)
-------- --------
CASH FLOWS FROM Investing activities:
Purchases of property and equipment (1,102) (759)
Proceeds from disposition of property and equipment 578 4
-------- --------
Net cash used in investing activities (524) (755)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit 33,000 34,000
Repayments of revolving line of credit (33,000) (29,000)
Decrease in due from parent 4,169 4,541
Increase in due from related party (6,352) (2,048)
Retirement of Senior bank debt (6,171) (7,989)
-------- --------
Net cash used in financing activities (8,354) (496)
-------- --------
Increase (decrease) in cash and cash equivalents 2,128 (6,552)
Cash AND CASH EQUIVALENTS, beginning of period 5,691 7,819
-------- --------
Cash AND CASH EQUIVALENTS, end of period $ 7,819 $ 1,267
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 105 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
1. Description of Business
The consolidated financial statements of Weekly Reader Corporation ("WRC")
include the accounts of WRC and its subsidiary, Lifetime Learning System, Inc.
("Lifetime Learning"), World Almanac Education Group ("WAE") and its
subsidiaries, Funk & Wagnalls Yearbook Corporation and Gareth Stevens, Inc.
("Gareth Stevens"), and American Guidance and its subsidiary, AGS International
Sales, Inc. (all are collectively referred to as "Weekly Reader" or the
"Company"). At December 31, 2002 and 2003, WRC Media Inc. (the "Parent") owns
94.9% and PRIMEDIA, Inc. owns 5.1% of the common stock of Weekly Reader. On May
9, 2001 American Guidance acquired through a subsidiary all of the operating
assets of Lindy Enterprises, Inc. ("Lindy") for approximately $7,500. The
transaction was accounted for as an asset purchase. Lindy develops
curriculum-based skills assessment and test preparation products that correlate
to national and state curriculum.
2. BASIS OF PRESENTATION
Under the terms of the indenture relating to the Company's 12 3/4% Senior
Subordinated Notes due 2009 (the "Notes"), the Company is required to furnish
"all quarterly and annual financial information that would be required to be
contained in a filing with the Securities and Exchange Commission (the `SEC') on
Forms 10-Q and 10-K if the Company were required to file such forms, including a
`Management's Discussion and Analysis of Financial Condition and Results of
Operations' and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants. . ." in each case within the
time periods specified in the SEC's rules and regulations.
The Company has restated its previously issued financial statements as of and
for the year ended December 31, 2001. Because the originally issued 2001
financial statements were audited by Arthur Andersen LLP, an audit firm that has
ceased operations, the restated financial statements for 2001 are unaudited at
this time pending a reaudit which is not yet complete. The Company believes that
upon furnishing its audited 2003 financial statements to the noteholders and
filing such statements with the SEC, it will be in compliance with the
indenture's information requirements. There is no assurance, however, that the
trustee or noteholders will not claim that the Company is in breach of the
indenture's information requirements, or that after any such claim is made and
the applicable cure period has expired, the trustee or the noteholders will not
send a notice to accelerate repayment of the Notes.
If the reaudit of the Company's 2001 financial statements is completed and a
report thereon issued by its independent auditors as required by the indenture
prior to any claim of breach being made, the potential for such a claim would be
eliminated. If a breach of the information requirements of the indenture were to
be claimed and the trustee or holders of at least 25% of the aggregate principal
amount of the Notes were to provide written notice of such breach, the Company
would vigorously defend against any such claim. Even if the claim of breach were
to prevail, the Company would have 60 days from the date of written notice of
such claim of breach to cure the breach and avoid an event of default under the
indenture. If the reaudit of the Company's 2001 financial statements is
completed and a report thereon issued by its independent auditors as required by
the indenture prior to the end of the 60 day cure period, the right to
accelerate the Notes or indebtedness under the credit facility as a result of
the alleged breach of the indenture's information requirements would be
eliminated. The Company has engaged its independent auditors to perform a
reaudit of the 2001 financial statements and expects to be able to provide its
auditors with the information necessary for them to complete their audit prior
to the end of the cure period, if any claim of breach of the indenture's
information requirements is made.
Page 106 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
While the Company is diligently working to provide such information, there is no
assurance that the Company will be able to provide the information necessary to
complete the reaudit or that the reaudit of the 2001 financial statements will
be completed and a report thereon issued by the Company's certified independent
accountants as required by the indenture. If the trustee or holders representing
at least 25% of the aggregate principal amount of the Notes claim that the
Company will be in breach of the indenture, the Company is not successful in
defending against such claim of breach and such breach is not cured within the
cure period, there would be an event of default under the indenture, and the
trustee or holders of at least 25% of the aggregate principal amount of the
Notes would have the right to accelerate payment of the Notes, and the holders
of indebtedness under the Company's credit facility also would have the right to
accelerate payment thereunder. If any such acceleration occurred, the Company
would not be able to repay the amounts due and such acceleration would have a
material adverse effect on the Company's consolidated financial condition and
liquidity. The financials do not include any adjustments that might result from
the outcome of this uncertainty.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly- and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates and assumptions that affect the amount of assets, liabilities,
revenues and expenses reported in the consolidated financial statements. Actual
results could differ from these estimates. Significant accounting estimates used
include estimates for sales returns and allowances, bad debts, the carrying
value of goodwill, intangible assets, the realizability of deferred tax assets
depreciation and amortization.
Inventories
Inventories, including paper, are valued at the lower of cost or market on a
first-in, first-out ("FIFO") basis. The Company periodically evaluates the
realizability of inventories and adjusts the carrying value as necessary.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets.
Leasehold improvements are amortized using the straight-line method over the
shorter of the estimated useful life of the asset or the lease term.
Improvements are capitalized while maintenance and repairs are expensed as
incurred.
Deferred Financing Fees
Deferred financing fees are related to direct costs paid by the Company in
connection with the financing of the Lindy acquisition (see Note 1 above). These
costs were deferred and are being amortized on a straight-line basis over the
term of the related debt. Amortization of deferred financing costs charged to
operations for the years ended December 31, 2002 and 2003 were $181 and $180,
respectively.
Page 107 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
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. Revenues on sales of books to
certain distributors are recognized when the Company's products are sold by them
to their customers, net of an allowance for returns. Consigned inventory
associated with sales to distributors is not significant at December 31, 2002
and 2003.
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on
EITF No. 00-21, "Accounting for Revenue Arrangements with Multiple Element
Deliverables." The issue addresses how to account for arrangements that may
involve the delivery or performance of multiple products, services and/or rights
to use assets. Revenue arrangements with multiple deliverables should be divided
into separate units of accounting if the deliverables in the arrangement meet
certain criteria. Arrangement consideration should be allocated among the
separate units of accounting based on their relative fair values. EITF 00-21
also supersedes certain guidance set forth in Staff Accounting Bulletin Number
101 (SAB 101), "Revenue Recognition in Financial Statements," issued by the SEC.
The final consensus is applicable to agreements entered into in quarters
beginning after June 15, 2003, with early adoption permitted. Additionally,
companies are permitted to apply the consensus guidance to all existing
arrangements as a cumulative effect of a change in accounting principle. The
adoption of EITF 00-21 did not have a material impact on the Company's
consolidated financial statements.
For contracts with multiple obligations (e.g., deliverable and undeliverable
products, and other post contract support), the Company allocates revenue to
each component of the contract based on objective evidence of its fair value, or
for products not yet being sold separately, the price established by management
for the item when it will be sold separately. The Company recognizes revenue
allocated to undelivered products when the criteria for product revenue set
forth above are met.
Licensing revenue is recorded in accordance with royalty agreements at the time
licensed materials are available to the licensee and collections are reasonably
assured.
Revenue is recognized for periodical subscriptions when the issue is shipped and
available to the subscribers.
Comprehensive Loss
SFAS 130 "Reporting Comprehensive Income," establishes standards for reporting
and displaying of comprehensive income and its components (revenue, expenses,
gains and losses) in a full set of general-purpose financial statements. The
components of other comprehensive loss consist primarily of minimum pension
liability adjustments.
Prepublication 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 periods ranging from three
to ten years. Capitalized editorial costs are recorded as other assets. As of
December 31, 2002 and 2003, other assets and investments in the accompanying
consolidated balance sheets, include prepublication costs, net of amortization
of $9,378 and $15,098, of $19,671 and $22,767, respectively. Amortization of
prepublication costs, which is included in depreciation and amortization in the
accompanying consolidated statements of operations, was $3,882 and $5,720 for
the years ended December 31, 2002 and 2003, respectively.
Page 108 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts 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 thirty months subsequent to the promotional event. Amortization of
direct-response advertising costs is included in marketing and selling expenses
in the accompanying consolidated statements of operations. As of December 31,
2002 and 2003, other assets and investments on the accompanying balance sheet,
include direct-response advertising costs, net of amortization of $3,641 and
$8,219, of $4,319 and $5,761, respectively. Amortization of direct-response
advertising costs, which is included in marketing and selling on the
accompanying consolidated statements of operations, was $7,596 and $6,606 for
the years ended December 31, 2002 and 2003, respectively.
Capitalized Software Costs
The Company capitalizes software development costs under the provisions of
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). The Company capitalizes the
costs of acquiring, developing and testing software to meet the Company's
internal needs. Under the provisions of SOP 98-1, the Company capitalizes costs
associated with software developed or obtained for internal use when both the
preliminary project stage is completed and management has authorized further
funding for the project which it deems probable will be completed and used to
perform the function intended. Capitalized cots include only (1) external direct
costs of materials and services consumed in developing or obtaining internal-use
software, (2) payroll and payroll-related costs for employees who are directly
associated with and devote time to the internal-use software project and (3)
interest costs incurred while developing internal-use software. Capitalization
of such costs ceases no later than the point at which the project is
substantially complete and ready for its intended use. Software development
costs are amortized using a straight-line method over a five-year period.
Goodwill and Indefinite Lived Intangibles
Goodwill represents the excess of the purchase price of companies acquired over
the fair value of their net assets at the acquisition date. On January 1, 2002,
the Company adopted SFAS 142, "Goodwill and Other Intangible Assets." Under SFAS
142, goodwill and intangible assets deemed to have indefinite lived intangible
assets (primarily trademarks) are no longer amortized but are subject to annual
impairment tests. Upon adoption of SFAS No. 142, the Company ceased amortizing
goodwill and indefinite lived intangible assets.
The Company tests goodwill for impairment, at least annually, and uses a fair
value approach at the reporting unit level. A reporting unit is an operating
segment or one level below an operating segment for which discrete financial
information is available and reviewed regularly by management. Assets and
liabilities of the Company have been assigned to the reporting units to the
extent that they are employed in or are a liability related to the operations of
the reporting unit and were considered in determining the fair value of the
reporting unit. Indefinite lived intangible assets are also tested at least
annually for impairment using a fair value approach.
Page 109 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
Long-Lived Assets
Long-lived assets of the Company, including amortizable intangibles, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Management also
reevaluates the periods of amortization of long-lived assets to determine
whether events and circumstances warrant revised estimates of useful lives. When
such events or changes in circumstances occur, the Company tests for impairment
by comparing the carrying value of the long-lived asset to the estimated
undiscounted future cash flows expected to result from use of the asset and its
eventual disposition. If the sum of the expected undiscounted future cash flows
is less than the carrying amount of the asset, the Company would recognize an
impairment loss. The amount of the impairment loss will be determined by
comparing the carrying value of the long-lived asset to the present value of the
net future operating cash flows to be generated by the asset.
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 and its 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 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 (see Note 12). A valuation is required to
offset any net deferred tax assets if, based on the available evidence, it is
more likely than not that some or all of the deferred tax asset will not be
realized.
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, 2003 are as follows:
Fair Value Carrying Amount Face Value
---------- --------------- ----------
12 3/4 % Senior Subordinated Notes $149,720 $147,724 $152,000
There is no market value information available for the preferred stock and a
reasonable estimate could not be made without incurring excessive costs.
Page 110 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
The fair value at December 31, 2003 of the Company's outstanding interest rate
cap agreement was de-minimus (Note 13).
Derivative Financial Instruments
Derivative financial instruments are held for purposes other than trading. The
Company uses derivative financial instruments to reduce its exposure to interest
rate volatility. All derivative instruments are recorded at fair value. For
those instruments that do not qualify for hedge accounting, changes in fair
value are recognized in income.
Cash and Cash Equivalents
Management considers all highly liquid instruments purchased with an original
maturity of 90 days or les to be cash equivalents.
Reclassifications
Certain reclassifications have been made to the prior years consolidated
financial statements to conform them to the current year presentation.
Segment Reporting
The Company has determined that it has one reportable segment in accordance with
SFAS 131 "Disclosures About Segments of an Enterprise and Related Information"
which is educational publishing.
Recent Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
FIN 45 elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain guarantees
that it has issued. FIN 45 requires a guarantor to recognize, at the inception
of a guarantee, a liability for the fair value of the obligations undertaken in
issuing the guarantee. The disclosure provisions of FIN 45 were effective for
financial statements of periods ending after December 15, 2002. The Company
adopted the disclosure provisions of FIN 45 effective December 31, 2002.
The recognition provisions of FIN 45 regarding a guarantor's obligation must be
applied to guarantees issued after December 31, 2002. The adoption of the
recognition provisions of FIN 45, effective January 1, 2003, did not have a
significant effect on the Company's consolidated financial position or results
of operations.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variables Interest Entities ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. In December 2003, the FASB issued FIN No. 46
(Revised) ("FIN 46R") to address certain FIN 46 implementation issues. This
interpretation requires that the assets, liabilities, and results of activities
of a Variable Interest Entity ("VIE") be consolidated into the financial
statements of the enterprise that is the primary beneficiary of the VIE. FIN 46R
also requires additional disclosures by primary beneficiaries and other
significant variable interest holders. This interpretation is effective no later
than the end of the first interim or reporting period ending after March 15,
2004, except for those VIE's that are considered to be special purpose entities,
for which the effective date is no later than the end of the first interim or
annual reporting period ending after December 15, 2003. The adoption of FIN 46R
is not expected to have a significant impact on the Company's consolidated
financial position or results of operations.
Page 111 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
In August 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 143 "Accounting for Asset Retirement Obligations" ("SFAS 143")
which requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. The standard was effective for the Company beginning January 1,
2003. The adoption of SFAS 143 did not have any impact on the Company's
consolidated financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends and
clarifies accounting for derivative instruments, and for hedging activities
under SFAS 133. Specifically, SFAS 149 requires that contracts with comparable
characteristics be accounted for similarly. Additionally, SFAS 149 clarifies the
circumstances in which a contract with an initial net investment meets the
characteristics of a derivative and when a derivative contains a financing
component that requires special reporting in the statement of cash flows. This
statement is generally effective for contracts entered into or modified after
June 30, 2003 and did not have a significant impact on the Company's
consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. This statement will become effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
shall be effective for the Company at the beginning of the first interim period
beginning after December 15, 2003. For financial instruments created before the
issuance date of this statement and still existing at the beginning of the
interim period of adoption, transition shall be achieved by reporting the
cumulative effect of a change in an accounting principle by initially measuring
the financial instruments at fair value or other measurement attribute required
by this statement. The adoption of this statement will require the Company to
reclassify its 15% Series B Redeemable Preferred Stock from the mezzanine
section of the balance sheet to long-term liabilities. Future dividends payments
for the Series B Redeemable Preferred Stock will be recorded as interest expense
in the Consolidated Statement of Operations.
On December 23, 2003, the FASB issued SFAS No. 132 (Revised 2003), "Employer's
Disclosures about Pensions and Other Post-retirement Benefits, an amendment of
FASB Statements No. 87, 88 and 106." It requires additional disclosures to those
in the original Statement 132 about the assets, obligations, cash flows and net
periodic benefit cost of defined benefit pension plans and other defined benefit
post-retirement plans. The majority of the provisions of this statement apply to
financial statements issued for fiscal years ending after December 15, 2003.
Page 112 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
4. Accounts Receivable,
Accounts receivable at December 31, 2002 and 2003 are as follows:
2002 2003
-------- --------
Accounts receivable $ 25,485 $ 23,059
Less:
Allowance for doubtful accounts (1,389) (1,410)
Allowance for returns (1,831) (769)
-------- --------
$ 22,265 $ 20,880
======== ========
5. Inventories
Inventories at December 31, 2002 and 2003 are as follows:
2002 2003
-------- --------
Finished goods $ 17,344 $ 19,090
Raw materials 96 37
Less-impaired, excess and obsolete inventory (3,072) (3,237)
-------- --------
$ 14,368 $ 15,890
======== ========
6. Property and Equipment
Property and equipment at December 31, 2002 and 2003 are as follows:
Range of
Lives
(Years) 2002 2003
-------- -------- --------
Machinery, equipment and other 3-10 $ 7,523 $ 7,571
Furniture and fixtures 5-10 3,666 3,441
Leasehold improvements 3-15 2,369 2,513
Internal use software 5 2,209 2,325
-------- --------
15,767 15,850
Less- accumulated depreciation and amortization (10,358) (11,451)
-------- --------
$ 5,409 $ 4,399
======== ========
Depreciation expense was $1,945 and $1,682 for the years ended December 31, 2002
and 2003, respectively.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
On January 1, 2002, the Company adopted SFAS 142, "Goodwill and Other Intangible
Assets." WRC completed the transitional impairment tests on its goodwill and
indefinite lived intangibles during the second quarter ended June 30, 2002. The
previous method for determining impairment prescribed by SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to
be Disposed Of," utilized an undiscounted cash flow approach for the impairment
assessment, while SFAS 142 utilizes a fair value approach. WRC has three
reporting units with goodwill. Goodwill was tested for impairment at the
reporting unit level. The Company's measurement of fair value was based on an
evaluation of future discounted cash flows. This evaluation utilized the best
information available in the circumstances, including reasonable and supportable
assumptions and projections. The discounted cash flow evaluation considered
several earnings scenarios and the likelihood of possible outcomes.
Collectively, this evaluation was management's best estimate of projected future
cash flows. The Company's discounted cash flow evaluation used a range of
discount rates that corresponds to the Company's weighted-average cost of
capital. This discount rate range assumed was consistent with that used for
investment decisions and takes into account the specific and detailed operating
plans and strategies of the WRC Media's reporting units.
Page 113 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
Certain other key assumptions utilized, including changes in revenue, operating
expenses, working capital requirements and capital expenditures including
prepublication costs, are based on estimates related to the Company's strategic
initiatives and current market conditions. Such assumptions also are consistent
with those utilized in the Company's annual planning process. As a result, the
Company recorded a transitional goodwill and indefinite lived intangible asset
impairment charge of $72,022 at its subsidiary, American Guidance Service, Inc.
This charge is reported as a cumulative effect of accounting change, as of
January 1, 2002, in the Consolidated Statements of Operations. WRC is required
to perform impairment tests on an annual basis, or between yearly tests under
certain circumstances for goodwill and indefinite lived intangibles.
WRC performed its annual impairment tests during the fourth quarters of 2002 and
2003. No further impairment of goodwill and indefinite lived intangibles was
required:
January 1, Impairment December 31,
2002 Loss 2002
--------- ---------- -----------
Goodwill $ 101,978 $ (66,960) $ 35,018
Long Lived Assets - Trademarks 15,017 (5,062) 9,955
--------- --------- ---------
$ 116,995 $ (72,022) $ 44,973
========= ========= =========
December 31, Impairment December 31,
2002 Loss 2003
----------- ---------- -----------
Goodwill $ 35,018 $ -- $ 35,018
Long Lived Assets - Trademarks 9,955 -- 9,955
--------- --------- ---------
$ 44,973 $ -- $ 44,973
========= ========= =========
WRC also recorded non-cash deferred income tax expense of approximately $1,360
on January 1, 2002 and $640 during the year ended December 31, 2002, for taxable
temporary differences that will not reverse prior to expiration of the Company's
net operating loss carryforward periods. The non-cash charge of $1,360 on
January 1, 2002 was recorded to increase the valuation allowance related to the
deferred tax asset associated with WRC's net operating losses. Historically, WRC
did not need a valuation allowance for the portion of its net operating loss
equal to the excess of tax over book amortization on tax-deductible goodwill and
trademarks since the liability was expected to reverse during the carryforward
period of the net operating losses. As a result of the adoption of SFAS 142, the
timing of the reversal of this liability is indefinite and can no longer be
offset by WRC's net operating loss carryforwards. While book amortization of
tax-deductible goodwill and trademarks ceased on January 1, 2002, WRC will
continue to amortize these assets for tax purposes. As a result, WRC will have
deferred tax liabilities that will arise each quarter because the taxable
temporary differences related to the amortization of these assets will not
reverse prior to the expiration period of WRC's deductible temporary differences
unless the related assets are sold or an impairment of the assets is recorded.
Accordingly, WRC recorded an additional $640 to increase the valuation allowance
for each of the years ended December 31, 2002 and 2003. The Company expects that
it will record an additional $640 to increase the valuation allowance during
2004.
Page 114 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
8. OTHER INTANGIBLE ASSETS
December 31, 2002 December 31, 2003
-------------------------------------- --------------------------------------
Accumulated Accumulated
Useful Lives Gross Amortization Net Gross Amortization Net
------------ -------- ------------ -------- -------- ------------ --------
Customer Lists 7-9 yrs $ 36,748 $(34,001) $ 2,747 $ 36,748 $(34,755) $ 1,993
Copyrights 8 yrs 17,520 (14,666) 2,854 17,520 (16,806) 714
Product Titles 7 yrs 22,400 (19,181) 3,219 22,400 (20,685) 1,715
Databases 4-10 yrs 5,812 (5,803) 9 5,812 (5,812) --
-------- -------- -------- -------- -------- --------
Total: $ 82,480 $(73,651) $ 8,829 $ 82,480 $(78,058) $ 4,422
======== ======== ======== ======== ======== ========
For trademarks not subject to amortization, which are included in other
intangible assets, the total carrying amount at December 31, 2002 and 2003 was
$9,955.
Amortization of intangibles for the years ended December 31, 2002 and 2003 was
$5,214 and $4,406, respectively, and is included in amortization of goodwill and
intangible assets on the consolidated statements of operations. The estimated
amortization expense for intangible assets subject to amortization for the next
five years is as follows:
2004................................. $ 2,512
2005................................. 1,009
2006................................. 398
2007................................. 261
2008................................. 242
9. OTHER ASSETS AND INVESTMENTS
Other assets and investments at December 31, 2002 and 2003 are as follows:
2002 2003
------- -------
Prepublication costs, net $19,671 $22,767
Direct response advertising costs, net 4,319 5,761
Other 751 1,735
------- -------
$24,741 $30,263
======= =======
Page 115 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
10. Accrued Expenses and Other CURRENT LIABILITIES
Accrued expenses and other current liabilities at December 31, 2002 and 2003 are
as follows:
2002 2003
------- -------
Rabbi Trust (Note 16) $ 1,403 $ 1,006
Payroll and related employee benefits 4,818 5,784
Acquisition costs 157 25
Pension liability (Note 15) 5,056 3,988
Accrued restructuring costs (Note 11) 2,771 1,008
Royalties 1,397 1,222
Accrued interest 1,447 691
Taxes payable, other than income 507 312
Other 1,766 1,329
------- -------
$19,322 $15,365
======= =======
11. RESTRUCTURING AND OTHER NON-RECURRING EXPENSES
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred rather than the date an entity commits to an exit
plan. SFAS 146 establishes that fair value is the objective for initial
measurement of the liability. The Company adopted SFAS 146 in December 2002.
In January 2002, the Company's Board of Directors approved a restructuring plan
(the "2002 Plan of Restructuring") and accordingly, the Company incurred charges
for restructuring, asset write-downs and other exit costs totaling approximately
$4,300.
The 2002 Plan of Restructuring included integration and cost reduction
initiatives comprised of closure of facilities and reduction in work force.
Pursuant to the 2002 Plan of Restructuring, 51 positions were eliminated
throughout the Weekly Reader Corporation. Severance and other benefit costs of
approximately $1,600 relate to the reduction of these employees from the
workforce. This workforce reduction involved each of the three operating units
of Weekly Reader Corporation. Most of the workforce reductions represented
administrative and back office related employees. The workforce reductions were
completed by December 31, 2002.
Lease termination costs include future obligations under long-term
non-cancelable lease agreements at facilities that were vacated following the
workforce reductions. The majority of these costs consisted of the estimated
lease costs, net of probable sublease income, associated with a portion of the
Company's WAEG office lease at 512 Seventh Avenue in New York, N.Y. which
expires in 2015. As a result of the facilities being vacated, certain assets
were written off. All office space was vacated prior to accrual of this expense.
Page 116 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
Components of the Company's restructuring plans and other non-recurring
expenses, including the plans initiated in 2002, are shown in the following
table for 2002:
Balance at Amounts Balance at
January 1, 2002 Charges Paid December 31, 2002
--------------- ------- ------- -----------------
Severance and other benefits $ -- $ 1,630 $ (981) $ 649
Lease terminations -- 2,162 (40) 2,122
Asset write-downs -- 488 (488) --
-------- ------- ------- -------
Total $ -- $ 4,280 $(1,509) $ 2,771
======== ======= ======= =======
During the year ended December 31, 2003, the Company reviewed its restructuring
reserve established in 2002 and reduced the reserve by $516. The adjustment
primarily resulted from a decrease of $514 resulting from updating the
assumptions used in determining the fair value of the remaining lease
obligations associated with facilities vacated during 2002. The $514 adjustment
related to the vacated facilities includes $259 of interest accretion expense.
Components of the Company's 2002 restructuring plan are shown in the following
table for 2003:
Balance at Balance at
December 31, 2002 Adjustments Amounts Paid December 31, 2003
----------------- ----------- ------------ -----------------
Severance and other benefits $ 649 $ (2) $ (627) $ 20
Lease terminations 2,122 (514) (620) 988
------- ------- ------- -------
Total $ 2,771 $ (516) $(1,247) $ 1,008
======= ======= ======= =======
The restructuring reserve totaling approximately $1,008 at December 31, 2003 is
expected to be paid as follows: $205 for the year ending December 31, 2004, 2005
and beyond - $803. These charges are included in accrued expenses and other
current liabilities in the consolidated balance sheet.
12. INCOME TAXES
At December 31, 2003, the Company had available net operating loss carryforwards
(NOLs) of approximately $95,241. 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.
The NOLs are scheduled to expire in the following years:
Amount
---------
2019 $ 2,236
2020 39,955
2021 17,552
2022 20,830
2023 14,668
---------
$ 95,241
=========
Page 117 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
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 assets include the Company's net operating loss
carryforwards and adjusted tax basis in excess of the historical net book value
of intangible assets.
The Company's provision for income tax differs from the amount computed by
applying the statutory U.S. federal income tax rate of 35% primarily due to
state and local taxes and changes in valuation allowances.
In 2002 and 2003, the Company recorded income tax expense of $101, and $(88),
respectively, related to a provision for current state and local taxes.
Management has determined that the Company is not likely to realize the income
tax benefit of its net deferred tax assets. To the extent the Company generates
income in future years, the tax provision will reflect the realization of such
benefits, with the exception of benefits attributable to acquired deferred tax
assets. The recognition of such amount in future years will be allocated to
reduce the excess of the purchase price over the net assets acquired and other
non-current intangible assets.
As a result of the adoption of SFAS 142 in 2002, the Company continues to record
a valuation allowance in excess of its net deferred tax assets, to the extent
the difference between the book and tax basis of indefinite lived intangible
assets is not expected to reverse during the net operating loss carryforward
period. The Company recorded non-cash deferred income tax expense of
approximately $1,360 on January 1, 2002 related to the adoption of SFAS 142.
With the adoption of SFAS 142, the Company no longer amortizes the book basis in
the indefinite lived intangibles but continues to amortize these intangibles for
tax purposes. In both 2002 and 2003, the Company recorded additional non-cash
deferred income tax expenses of $640 related to the increase in its net deferred
tax liability for the tax effect on the net increase in the difference between
the book and tax basis in the indefinite lived intangible assets.
13. 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 balance sheet has been
recorded as Due from Parent.
In May 2001, the Company acquired the assets of Lindy Enterprises, Inc. In
connection with this acquisition, the Senior Bank Credit Facility was amended
and restated to include an additional term A loan commitment in the amount of
$10,000. In addition, certain other terms and conditions were amended.
Page 118 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
At December 31 2002 and 2003, long-term debt consisted of the following:
2002 2003
--------------------------------------------- ---------------------------------------------
Face Unamortized Principal Carrying Face Unamortized Principal Carrying
Debt Instrument Value Discount Payments Value Value Discount Payments Value
- --------------- -------- ----------- --------- -------- -------- ----------- --------- --------
Senior Bank-Term A (b) $ 25,188 $ -- $ 5,038 $ 20,150 $ 20,150 $ -- $ 6,618 $ 13,532
Senior Bank-Term B (b) 97,750 -- 1,000 96,750 96,750 -- 1,216 95,534
Senior Bank- New Term A (b) 9,900 -- 133 9,767 9,767 -- 155 9,612
Revolving Credit (b) -- -- -- -- 5,000 -- -- 5,000
Senior Subordinated Notes (a) 152,000 4,727 -- 147,273 152,000 4,276 -- 147,724
-------- -------- -------- -------- -------- -------- -------- --------
Total debt 284,838 4,727 6,171 273,940 283,667 4,276 7,989 271,402
Less-current portion 7,721 -- -- 7,721 8,477 -- -- 8,477
-------- -------- -------- -------- -------- -------- -------- --------
Long-term debt $277,117 $ 4,727 $ 6,171 $266,219 $275,190 $ 4,276 $ 7,989 $262,925
======== ======== ======== ======== ======== ======== ======== ========
(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. During the years ended December 31, 2002 and
2003 $19,380 of interest was paid on the Notes (see Note 2).
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 $5,807 discount, which is being
accreted to maturity using the effective interest method.
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.
(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, the $100,000 term loan B facility maturing
in 2006 and the $10,000 new term loan A 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, 2003
there had been no drawings against this letter of credit. As of
December 31, 2003 and 2002, the revolving credit facility balance was
$5,000 and $0, respectively. The term loan A facility, the term loan B
facility and the new term loan A facility amortize in quarterly
installments.
Loans under the Senior Bank Credit Facilities bear interest at a rate
per annum equal to:
1. For the revolving credit facility and the term loan A facility, the
LIBO rate as defined in the credit agreement, plus 3.375% or the
alternate base rate as defined in the credit agreement, plus 2.375%
(subject to performance-based step downs). As of December 31, 2002 and
2003, term loan A loans outstanding had interest rates that ranged from
4.99% to 5.15% and from 4.57% to 6.38%, respectively.
Page 119 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
2. For the term loan B facility and the new term loan A facility, the LIBO
rate plus 4.00% or the alternate base rate plus 3.00%. As of December
31, 2002 and 2003, term loan B loans outstanding had interest rates
that ranged from 5.40% to 5.84% and from 5.19% to 7.00%, respectively.
As of December 31, 2002 and 2003, the new term loan A loans outstanding
has interest rates that ranged from 5.40% to 5.83% and from 5.19% to
7.00%, respectively.
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 there under at a rate of 0.5% per annum
(subject to performance-based step downs). Commitment fees paid for
unused revolver commitments for the year ended December 31, 2003 and
2002 were approximately $97 and $81, respectively.
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 senior bank credit facilities and the senior subordinated notes provide for
certain restrictions, including restrictions on asset sales, dividend payments,
additional indebtedness payments for restricted investments. In addition, senior
bank credit facilities provide for the maintenance of certain financial
covenants, including a limit on the consolidated leverage ratios and maintenance
of minimum fixed charged coverage ratios.
Each ratio became more stringent periodically during the fiscal year ended
December 31, 2003 and March 31, 2004. With respect to the fourth quarter ended
December 31, 2003, the Company was required to have a leverage ratio no greater
than 5.00:1.0 and a fixed charge coverage ratio no less than 1.10:1.0 and
thereafter beginning with the quarter ending March 31, 2004, the Company was
required to have a leverage ratio no greater than 4.00:1.0 and a fixed charge
ratio no less than 1.50:1.0. The Company is not in compliance with these
covenants as of December 31, 2003. The Company reached an agreement with its
senior lenders under which they would continue to make available to the Company
additional borrowings under the Company's revolving credit facility through
March 31, 2004. Under the agreement, the lenders waived through March 31, 2004
WRC Media's failure to comply with certain financial covenants as of December
31, 2003, and WRC Media agreed to limit borrowings, including currently
outstanding borrowings and letters of credit, under its revolving credit
facility to $26,000 out of the $30,000 facility. On March 29, 2004 the Company
amended its existing Credit Agreement ("First-Lien Facility") and entered into
a $145,000 Second Priority Senior Credit Facility (the "Second-Lien Facility").
The Company used the proceeds of the financing to refinance in full all term
loans outstanding under the Company's First-Lien Facility, to pay fees and
expenses related to the Second-Lien Facility and for general corporate purposes
of the Company. See Note 21 for additional information.
Page 120 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
Maturities of long-term debt, including unamortized discount and, after
consideration of the refinancing discussed in Note 21, are as follows:
2004 $ 13,477
2005 27,668
2006 82,533
2007 --
2008 and thereafter 152,000
Total ----------
$ 275,678
==========
Pursuant to the terms of the Amended and Restated Credit Agreement, the Company
is required to enter into and maintain interest rate protection agreements
(interest rate swaps, caps, collars or similar agreements) in a notional amount
equal to at least 50% of the aggregate principal amount of the senior secured
term loans. On November 15, 2002, the Company entered into a six-month and
one-year interest rate cap agreement with a national principle of $50,000 and
$14,800, respectively, which caps the LIBOR based rate, as defined, on those
loans at 2.5%. The interest rate protection agreement did not qualify for hedge
accounting treatment and as such the Company marks to market the contract at the
end of each period. The fair value of the interest rate cap at December 31, 2002
was de-minimus.
On November 15, 2003, the Company entered into a new one-year interest rate cap
agreement with a notional principle of $61,000, with substantially the same
terms as the 2002 agreements. The fair value of the new interest rate cap at
December 31, 2003 was de-minimus.
14. PREFERRED STOCK
15% Series B Redeemable 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. The Company has issued its Parent 3,000,000
shares of 15% Preferred Stock 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, 2002 and 2003, accrued preferred stock
dividends amounted to $16,274 and $18,854, 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.
In connection with the issuance of WRC Media Inc.'s 15% Series B Preferred Stock
in 1999, 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 common stock. These warrants entitle the holders
to acquire 13% of common stock of Weekly Reader at an exercise price of $0.01
per share and contain a cashless exercise provision. The warrants were
immediately exercisable and expire on November 17, 2011.
15. Retirement Plans
Substantially all of the Company's employees are eligible to participate in a
defined contribution plan of the Parent. Pursuant to the provisions of the Plan,
the Company is obligated to match 33% of the employee's contribution to the Plan
up to the first 6% of the employee's compensation. The expense recognized by the
Company for the plan during the years ended December 31, 2002 and 2003, was $977
and $991, respectively.
Page 121 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
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 net pension expense for the American Guidance Plan and the reconciliation of
the funded status of the Plan at December 31, 2002 and 2003 and the accrued
obligation in the consolidated balance sheets are as follows:
2002 2003
-------- --------
Change in benefit obligation:
Projected benefit obligation, beginning of year $ 11,947 $ 14,379
Service cost 742 916
Interest cost 819 883
Actuarial loss 1,332 (109)
Benefits paid (461) (570)
-------- --------
Projected benefit obligation, end of year $ 14,379 $ 15,499
======== ========
Change in plan assets:
Fair value of plan assets, beginning of year $ 7,903 $ 7,269
Actual return on plan assets (1,284) 1,928
Employer contributions 1,111 1,029
Benefits paid (461) (570)
-------- --------
Fair value of plan assets, end of year $ 7,269 $ 9,656
======== ========
Funded status at December 31,
Plan assets in excess of (less than) benefit obligation $ (7,110) $ (5,842)
Unrecognized actuarial loss 5,411 3,754
-------- --------
Accrued pension cost $ (1,699) $ (2,088)
======== ========
Amounts recognized in consolidated balance sheets:
Accrued benefit liability $ (5,056) $ (3,988)
Accumulated other comprehensive loss 3,357 1,899
-------- --------
$ (1,699) $ (2,088)
======== ========
Components of net periodic benefit cost:
Service cost $ 742 $ 916
Interest cost 819 883
Expected return on plan assets (749) (675)
Amortization of unrecognized net actuarial loss 70 294
-------- --------
Net periodic benefit cost $ 882 $ 1,418
======== ========
Page 122 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
2002 2003
---------- ----------
Accumulated benefit obligation and fair value of assets:
Accumulated benefit obligation $ (12,325) $ (13,644)
Fair value of assets $ 7,269 $ 9,656
Weighted-average assumptions as of end of year
Discount rate 6.25% 6.25%
Expected return on plan assets 9.0% 9.0%
Rate of compensation increase 4.5% 3.5%
The Company developed the expected long-term rate of return on assets assumption
by considering the current level of expected returns on risk free investments
(primarily government bonds), the historical level of the risk premium
associated with other asset classes in which the portfolio is invested and the
expectation for future returns on each asset class. The expected return for each
asset class was the weighted based on the aggregate target asset allocation to
develop the expected long-term rate of return on assets assumption for the
portfolio. The Company reviews the expected rate of return on an annual basis
and revises it as appropriate.
The American Guidance Plan investment objective is a heavily weighted equity
portfolio with an emphasis on long-term growth. Assets held include
high-quality, well-capitalized stocks of established companies and were
allocated 83% to equity securities and 17% to fixed income securities in 2002
and 87% to equity securities and 13% to fixed income securities in 2003:
2002 2003
----- -----
Asset Category
Equity Securities 83.0% 87.0%
Debt Securities 14.0% 11.0%
Other 3.0% 2.0%
----- -----
Total 100.0% 100.0%
===== =====
The Company expects to contribute $2,254 to the American Guidance Plan in 2004.
A minimum pension liability adjustment is required when the actuarial present
value of the accumulated plan benefits exceeds plan assets and accrued pension
liability. In 2002 and 2003, a minimum liability adjustment of ($3,041) and
$1,458 respectively, was recorded as a component of other comprehensive loss and
reported in accumulated other comprehensive loss as a component of stockholders'
deficit.
16. 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, respectively on the consolidated balance sheets. The balance of the
liability as of December 31, 2002 and 2003 was approximately $1,403 and $1,006,
respectively. The marketable securities in the Rabbi Trusts have been classified
as trading securities and investment income of $156 and $55 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, 2002 and
2003, respectively. Marketable securities in the Rabbi Trust have been recorded
at fair value, based on quoted market prices, in the accompanying consolidated
balance sheets.
Page 123 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
17. Commitments and Contingencies
Leases
The Company has non-cancelable operating leases for office, warehouse space and
equipment that include future minimum rental commitments as follows:
Lease Sublease Net
Year Ending December 31, Commitments Rentals Commitments
----------- -------- -----------
2004 $ 3,502 $ (348) $ 3,154
2005 3,159 (348) 2,811
2006 2,972 (352) 2,620
2007 2,286 (359) 1,927
2008 1,735 (359) 1,376
Thereafter 10,732 (241) 10,491
------- ------- -------
Total $24,386 $(2,007) $22,379
======= ======= =======
Total rent expense under operating leases was $3,422 and $2,997 for the years
ended December 31, 2002 and 2003, 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.
SEC Inquiry
The SEC is conducting a preliminary inquiry concerning the Company and has
requested that the Company voluntarily provide the SEC with documents. The
Company cannot predict the final outcome of this inquiry at this time. The
Company is cooperating fully with the SEC inquiry.
Page 124 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
18. RESTATEMENT
In connection with the audit of the Company's 2003 consolidated financial
statements, management has determined to restate its financial statements
because it had incorrectly accounted for (i) revenue recognition for distributor
sales in 2002; (ii) rent expense in 2001 and 2002 and (iii) a number of other
items including various accruals such as compensation and fringe benefit costs,
deferred revenue and legal costs in 2001 and 2002. As a result, the Company has
decided to restate its balance sheet as of December 31, 2002, and the related
statements of stockholders' deficit and operations for the year ended December
31, 2002. After giving effect to the restatement and amendments described below,
the Company believes that it is in compliance with the financial covenants in
its credit facility for all of the reporting periods affected, other than the
fourth quarter of 2003, for which the lenders under the credit agreement have
granted a waiver through March 31, 2004. See Note 13.
Described below are the matters for which the Company has restated its audited
consolidated financial statements for 2002 to correct for certain errors made in
the application of GAAP that had not previously been corrected because in each
such case the Company believed that the amount of any such error was not
material to its consolidated financial statements. These matters are described
below.
o Distributor Sales. Historically the Company recognized revenue under a
distribution contract between its subsidiary, World Almanac Education
Group, and a distributor at the time that the Company shipped its
products to the distributor rather than at the time those products were
resold by the distributor. The Company also recorded distribution fees
under this contract as operating costs and expenses, based on our
understanding of the distribution contract. The Company has determined
to recognize revenue only at the time the distributor ships these
products to its customer. In addition, the Company should have recorded
distributions fees as a reduction of revenue, rather than as a separate
operating cost and expense item. The Company has restated its financial
statements to reflect this view, with the net effect being to increase
its accumulated deficit by $449 for the year ended December 31, 2001,
to decrease its net loss and increase net assets by $168 for the year
ended December 31, 2002.
o Rent. The Company has two leases that have "free rent" incentives at
the commencement of the leases and also contain rent escalation clauses
(which clauses provide for rent increases over time) for which it was
required under GAAP to record the average rent expense ratably over the
lease term. In the Company's historical 2001 financial statements,
however, the Company recorded the rent expense from these leases as it
was paid. In the Company is historical 2002 financial statements, the
Company began correctly recording the average rent expense for these
leases, but the Company calculated the average rent using the remainder
of the lease term instead of the entire lease term. The Company is
restating its financial statements to correct these errors. As a
result, rent expense increased in 2001 because the average rent to be
paid over the lease terms was greater than the actual rent paid in 2001
and rent expense decreased in 2002 and 2003 because of the longer lease
terms used to calculate the average rent. In 2001, the Company also
incorrectly capitalized some rent expense prior to its occupancy of a
certain leased premise as a prepaid rent asset and amortized it, rather
than recording it as an expense, as required by GAAP. The Company is
restated its financial statements to correct these errors, with the net
effect being to increase its accumulated deficit by $1,005, for the
year ended December 31, 2001, to decrease its net loss by $412 and
increase total assets by $352 for the year ended December 31, 2002.
o Other. The Company has made a number of other corrections, including
adjustments relating to various accruals such as compensation and
fringe benefit costs, deferred revenue, legal costs and other
immaterial items.
The effect of the restatements for years prior to 2002, was to increase
accumulated deficit from $163,482 by $1,282 to $164,764 at January 1, 2002.
Page 125 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
Summarized below are the significant effects of the restatement of the Company's
2002 financial statements.
December 31, 2002
------------------------------
As Previously
Statements of Operations, for the year ended Reported As Restated
- -------------------------------------------- ------------- -----------
Revenue, net $ 156,498 $ 155,013
Operating costs and expenses 126,532 125,431
Income from Operations 29,966 29,582
Interest expense and other income/(expense), net (27,084) (27,084)
Net loss $ (71,241) $ (71,625)
Balance Sheets, as of
Total current assets $ 59,102 $ 58,395
Total assets $ 144,087 $ 143,039
Total current liabilities $ 65,679 $ 66,402
Total liabilities 333,898 334,621
Additional paid-in capital 9,133 9,133
Accumulated deficit (250,997) (252,663)
Total stockholders' deficit (308,657) (310,428)
Total liabilities and stockholders' deficit $ 144,087 $ 143,039
19. QUARTERLY DATA (UNAUDITED)
The following is a summary of the unaudited selected quarterly results for which
all adjustments necessary for a fair presentation of each period were included.
As discussed in Note 18, the results of operations for the year ended December
31, 2002 and for the quarterly periods in the years ended December 31, 2002 and
2003 have been restated.
Three Months Ended
------------------------------------------------------------------------------------------------
March 31 March 31 June 30 June 30 September 30 September 30
-------------- ------------- -------------- ------------- -------------- -------------
(as previously (as restated) (as previously (as restated) (as previously (as restated)
reported) reported) reported)
2003
Revenues $ 34,758 $ 35,001 $ 29,296 $ 29,530 $ 44,205 $ 44,270
Gross profit 26,393 26,562 21,468 21,666 33,877 33,919
Operating costs and expenses 19,706 19,653 18,225 18,086 20,544 20,302
Income/(loss) from operations 6,687 6,909 3,243 3,580 13,333 13,617
Net income/(loss) (304) (82) (3,931) (3,594) 6,023 6,307
2002
Revenues $ 34,008 $ 34,195 $ 30,595 $ 30,693 $ 44,458 $ 44,549
Gross profit 25,628 25,759 22,073 22,142 34,211 34,274
Operating costs and expenses 19,708 20,643 17,846 19,383 19,837 20,180
Income/(loss) from operations 5,920 5,116 4,227 2,759 14,374 14,094
Net income/(loss) (74,796) (75,600) (2,969) (4,437) 8,311 8,031
Three Months Ended
-----------------------------
December 31 December 31
-------------- -------------
(as previously (as restated)
reported)
2003
Revenues $ 44,086 $ 43,310
Gross profit 32,695 32,269
Operating costs and expenses 26,702 25,494
Income/(loss) from operations 5,993 6,775
Net income/(loss) (1,263) (589)
2002
Revenues $ 46,633 $ 45,576
Gross profit 35,026 34,222
Operating costs and expenses 29,581 26,609
Income/(loss) from operations 5,445 7,613
Net income/(loss) (1,787) 381
Page 126 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
20. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2002 2003
------- -------
Cash paid during the period for interest $27,870 $27,779
======= =======
Cash paid during the period for income taxes $ 203 $ 45
======= =======
Non-cash financing activities:
Preferred stock dividends accrued $16,274 $18,854
======= =======
21. SUBSEQUENT EVENT
On March 29, 2004, we refinanced all of its borrowings under the First-Lien
Facility with a $145,000 million senior, second-priority lien secured financing
that was provided to the Company pursuant to a term loan facility (the
"Second-Lien Facility"). The proceeds of the Second Lien Facility were used (i)
to refinance in full all term loans outstanding under the First-Lien Facility,
(ii) to pay fees and expenses related to the Second-Lien Facility and all
transactions contemplated in connection therewith and (iii) for general
corporate purposes of the Company.
All payment obligations under the Second-Lien Facility are secured by a
second-priority lien on the collateral securing the First-Lien Facility;
provided that all obligations under the Second-Lien Facility will rank equally
in right of payment with all payment obligations under the First-Lien Facility
and will not otherwise be subordinated in any respect to the First-Lien
Facility. The final maturity of the Second-Lien Facility will be March, 2009. At
the Company's option, the loans will bear interest at either the Administrative
Agent's (i) alternate base rate ("base rate loans") or (ii) reserve-adjusted
LIBO rate ("LIBO rate loans") plus, in each case, the "Applicable Margin" (as
defined). ). Applicable Margin" means, with respect to (i) Base Rate Loans, a
rate of 4.00% per annum and (ii) LIBO Rate Loans, a rate of 5.00% per annum.
The Second-Lien Facility is 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 change in control
o annually, 50% of the Company's excess cash flow (as defined)
from the prior year.
The Second-Lien Facility provide for certain restrictions, including
restrictions on asset sales, dividend payments, additional indebtedness payments
for restricted investments. In addition, Second-Lien Facility provide for the
maintenance of a financial covenant,, a maximum ratio (the "Senior Leverage
Ratio") of Senior Secured Debt to trailing four quarter EBITDA not to exceed
4.25:1.00 for any fiscal quarter, except the fiscal quarter ended June 30, 2005
for which the Senior Leverage Ratio shall not exceed 4.50:1.00, in each case to
be tested on the last day of each fiscal quarter and computed for the Parent and
its consolidated subsidiaries.
In connection with entering into the Second-Lien Facility, we entered into an
amendment and restatement of our First-Lien Facility, which now consists solely
of a $30.0 million revolving credit facility.
Page 127 of 150
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
The First-Lien Facility, as amended and restated, has a maturity of December 29,
2008, and has one financial covenant, a Senior Leverage Ratio of senior secured
debt to trailing four quarter EBITDA not to exceed 4.00:1.00 for any fiscal
quarter, except the fiscal quarter ended June 30, 2005 for which the Senior
Leverage Ratio may not exceed 4.25:1.00, in each case to be tested on the last
day of the fiscal quarter and computed for the Company and its consolidated
subsidiaries. Interest on revolving loan borrowings under the First-Lien
Facility will bear interest at a rate per annum equal to the LIBO rate as
defined in the First-Lien Facility plus 3.5% or the alternate base rate as
defined in the First-Lien Facility plus 2.5%.
Page 128 of 150
PART II
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Today, March 30, 2004, our independent auditors communicated to us and
our Audit Committee that, in connection with their audit of the consolidated
financial statements for the year ended December 31, 2003, they have identified
two "material weaknesses" (as defined under standards established by the
American Institute of Certified Public Accountants). The material weaknesses
identified were that (1) numerous adjusting entries proposed as a result of our
2003 audit were recorded by the Company to correct the underlying books and
records, including previously reported results for 2002 and 2001, and (2) there
were an insufficient number of qualified accounting personnel appropriate for
their positions, specifically within the external financial reporting area.
We will evaluate the material weaknesses identified by our independent
auditors as part of the ongoing evaluation of our disclosure controls and
procedures. We will disclose the conclusion of our evaluation when we file our
Form 10-K for the year ended December 31, 2003.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to the persons who, as
of the date of this current report, were serving or are expected to serve in the
near future as directors and executive officers of each of WRC Media, Weekly
Reader and CompassLearning, as well as those executive officers and employees of
American Guidance and World Almanac. Each director holds office until the next
annual meeting of shareholders or until his successor has been elected and
qualified.
NAME AGE POSITION
- ---- --- --------
Timothy C. Collins.................. 47 Director, WRC Media, Weekly Reader and CompassLearning
D. Ronald Daniel.................... 74 Non-Executive Chairman, WRC Media, Weekly Reader and CompassLearning
Ralph D. Caulo...................... 63 Non-Executive Vice-Chairman, WRC Media, and Group President,
Assessment, Curriculum and Educational Technology Group
Charles L. Laurey................... 33 Director, WRC Media, Weekly Reader and CompassLearning; and
Secretary, WRC Media, Weekly Reader and CompassLearning
Peter E. Berger..................... 53 Director, WRC Media, Weekly Reader and CompassLearning
Martin E. Kenney, Jr................ 56 Director, WRC Media, Weekly Reader and CompassLearning; Chief
Executive Officer, WRC Media and CompassLearning; Executive Vice
President, Weekly Reader
David M. Malcolm.................... 56 Director, WRC Media, Weekly Reader and CompassLearning
David F. Burgstahler................ 35 Director, WRC Media, Weekly Reader and CompassLearning
Richard Nota........................ 43 Senior Vice President, Finance, WRC Media
Emily Swenson....................... 50 President of Weekly Reader Corporation
TIMOTHY C. COLLINS, DIRECTOR, WRC MEDIA, WEEKLY READER AND COMPASSLEARNING.
Since June 2, 1999, Timothy C. Collins has served as a Director of WRC Media and
CompassLearning. Mr. Collins was named a Director of Weekly Reader as of
November 17, 1999. Mr. Collins founded Ripplewood Holdings L.L.C. in 1995 and
currently serves as its Senior Managing Director and Chief Executive Officer.
From 1991 to 1995, Mr. Collins managed the New York office of Onex Corporation,
a leveraged buy-out group headquartered in Canada. Previously, Mr. Collins was a
Vice President at Lazard Freres & Company and held various positions at Booz,
Allen & Hamilton and Cummins Engine Company. He also currently serves on the
Board of Directors of Ripplewood Holdings L.L.C., Shinsei Bank, Ltd. (formerly
The Long-Term Credit Bank of Japan, Limited), Asbury Automotive Group Inc.,
Niles Parts Co., Ltd, Columbia Music Entertainment Inc., D&M Holdings, Inc., WRC
Media Inc. and various other privately held Ripplewood portfolio companies. Mr.
Collins received a master's in Business Administration from Yale University's
School of Management and Organization and a Bachelor's Degree in Philosophy from
DePauw University.
Page 129 of 150
D. RONALD DANIEL, NON-EXECUTIVE CHAIRMAN, WRC MEDIA, WEEKLY READER AND
COMPASSLEARNING. As of November 17, 1999, Mr. Daniel was named Non-Executive
Chairman of WRC Media, Weekly Reader and CompassLearning. Mr. Daniel is a
Director of McKinsey & Company, Inc., having served as Managing Director from
1976 to 1988. He has been a management consultant for 47 years. He serves as the
non-executive chairman of Ripplewood Holdings L.L.C., which specializes in
private equity investments and is the general partner of Ripplewood Partners,
L.P., which controls EAC III, the majority owner of WRC Media. Since September
1998, he has served as an advisory board member of IMG Chase Sports Capital,
LLC. In addition, he serves as Treasurer of Harvard University, as a member of
Harvard University's seven-person Corporation, a member of the Harvard
University Board of Overseers, Chairman of the Harvard Management Company and
Chairman of the Board of Fellows of the Harvard Medical School.
RALPH D. CAULO, NON-EXECUTIVE VICE-CHAIRMAN, WRC MEDIA. Mr. Ralph D. Caulo is
Non-Executive Vice-Chairman of WRC Media. Since 1998, Mr. Caulo has served as an
outside consultant at Ripplewood Holdings L.L.C., which specializes in private
equity investments and is the general partner of Ripplewood Partners, L.P. which
controls EAC III, the majority owner of WRC Media. From 1991 to 1998, Mr. Caulo
held the dual position of Executive Vice President of Simon & Schuster and
President of its Educational Publishing Group. In this position, Mr. Caulo
oversaw one of the world's largest educational publishers and its Allyn & Bacon,
Prentice Hall, Silver Burdett Ginn, Modern Curriculum, Computer Curriculum
Corporation (CCC) and Educational Management Group (EMG) imprints. From 1989
until 1991, Mr. Caulo was President and Chief Executive Officer of Harcourt
Brace Jovanovich. He began his career at Harcourt Brace Jovanovich in sales in
1974, and then moved through marketing, editorial, development and senior
management to become President and CEO in 1988.
CHARLES L. LAUREY, DIRECTOR, WRC MEDIA, WEEKLY READER AND COMPASSLEARNING AND
SECRETARY, WRC MEDIA, WEEKLY READER AND COMPASSLEARNING. Since June 2, 1999,
Charles L. Laurey has served as a Director of WRC Media and CompassLearning. As
of November 17, 1999, Mr. Laurey was named a Director of Weekly Reader and
Secretary of CompassLearning and Weekly Reader. In October 1997, he joined
Ripplewood Holdings L.L.C. which is an affiliate of Ripplewood Partners, L.P.
which controls EAC III, the majority owner of WRC Media. Prior to joining
Ripplewood Holdings L.L.C., Mr. Laurey worked from August 1994 until September
1997 in Morgan Stanley & Co.'s Corporate Finance Department in New York and in
the Mergers, Acquisitions and Restructurings Department in London, most recently
as an associate. He started his career as a strategy consultant in The Hague,
The Netherlands.
Page 130 of 150
PETER E. BERGER, DIRECTOR, WRC MEDIA, WEEKLY READER AND COMPASSLEARNING. Since
2000 Mr. Berger has been a Managing Director at Ripplewood Holdings L.L.C. from
1998 to September 2000, Mr. Berger through a private investment/advisory entity,
Mediacom Ventures L.L.C. advised and facilitated acquisition opportunities and
operational improvements for media and telecommunications businesses. From
1996-1998, Mr. Berger was a Managing Director and Chief Financial Officer of
Ripplewood Holding L.L.C. Prior to that Mr. Berger was a partner with Arthur
Andersen L.L.P .and was the managing partner of their Corporate Finance practice
in the Americas. Mr. Berger was also a Managing Director in Bear, Stearns &
Co.'s Merger and Acquisition department. Mr. Berger is a Director of
Kepner-Tregoe Inc. and is a member of the boards of various Ripplewood portfolio
companies. Mr. Berger graduated with honors from Boston University and has an
M.B.A. from Columbia University.
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. Since July 14,
1999 Martin E. Kenney, Jr. has served as a Director of WRC Media and
CompassLearning. As of November 17, 1999, Mr. Kenney was named Chief Executive
Officer of WRC Media, a Director of Weekly Reader and Executive Vice President
of Weekly Reader. He has held several executive and management positions,
including serving as Executive Vice President of the Education Publishing Group
and President of the Education Technology Group both from May 1995 to December
1998 at Simon & Schuster. From May 1994 to May 1995, he held the dual positions
of President of the Business, Training and Healthcare Group and Senior Vice
President of Marketing at Simon & Schuster. Mr. Kenney also serves as a director
of Prism eSolutions, LLC.
DAVID M. MALCOLM, DIRECTOR, WRC MEDIA, WEEKLY READER AND COMPASSLEARNING. David
M. Malcolm has served as a Director of WRC Media, Weekly Reader and
CompassLearning since 2002. Since January of 2001 Mr. Malcolm has served as Head
of Investment Banking and a member of Executive Committee SG Cowen. Mr. Malcolm
is also President of SG Capital Partners L.L.C., the merchant banking affiliate
of Societe Generale. From 1996 to 2001 he headed the Global Leveraged Finance
Group for Societe Generale. He serves on the Board of Five Star Food Services,
Inc., the fifth largest vending food service operation in the U.S. Additionally
he serves on the Boards of American Rivers and the Eastern Chapter of The Nature
Conservancy of New York. He is a graduate of Wesleyan University and the Harvard
Graduate School of Business Administration.
DAVID F. BURGSTAHLER, DIRECTOR, WRC MEDIA, WEEKLY READER AND COMPASSLEARNING. As
of May 31, 2000, David F. Burgstahler has been a director of WRC Media, Weekly
Reader and CompassLearning. He is a Director of Credit Suisse First Boston and a
Principal of DLJ Merchant Banking Partners. Mr. Burgstahler joined Credit Suisse
First Boston in 2000 when it merged with Donaldson, Lufkin & Jenrette, where he
was a Vice President of DLJ Merchant Banking Partners. From 1999 to 2001, he
served as a Vice President of DLJ Merchant Banking Partners. From 1997 to 1999,
he was an associate with DLJ Merchant Banking Partners. Mr. Burgstahler also
serves as a director of Von Hoffmann Corporation, Jostens Inc. and Focus
Technologies Inc.
Page 131 of 150
RICHARD NOTA, SENIOR VICE PRESIDENT, FINANCE, WRC MEDIA. Richard Nota has over
18 years experience in finance. In October 2003, Mr. Nota was promoted to Senior
Vice President, Finance of WRC Media having overall financial management
responsibilities including finance and accounting, strategic planning, treasury
and risk management and investor relations. From 2000 to October 2003, he served
as Vice President, Finance of WRC Media. Mr. Nota has held several executive and
management positions, including serving as Vice President, Accounting and
Taxation from 1989 to 1995 at Pergament Home Centers, Inc., a retail company.
From 1995 until joining WRC Media, Mr. Nota served as Controller at Heating Oil
Partners, L.P., a retail distributor of petroleum products. Prior to that Mr.
Nota was with Arthur Andersen LLP. At Andersen, Mr. Nota was a supervisor in the
Audit Division.
EMILY SWENSON, PRESIDENT, WEEKLY READER. Since October 2003, Emily Swenson has
been President of Weekly Reader Corporation, responsible for the magazine
publishing and supplementary publishing business at Weekly Reader. Emily Swenson
has over 20 years of education and media experience. Ms Swenson was formerly EVP
and Chief Operating Officer of Children's Television Workshop, with
responsibilities for the TV, Home video and film production as well as book and
magazine publishing businesses. At Children's Television Workshop, Ms. Swenson
was responsible for other divisions including finance, human resources, legal,
strategic planning and research and marketing.
PART III
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes, for the fiscal year ended the last day of
December 2003, all compensation paid to (i) the chief executive officer of each
registrant for fiscal year 2003, (ii) up to the five most highly compensated
executive officers serving at the end of December 2003 in all capacities in
which they served, including those executive officers of WRC Media Inc., Weekly
Reader Corporation and CompassLearning Inc., who performed policy making
functions for those entities and were serving as such at the end of December
2003 in all capacities in which they served, and (iii) up to two additional
individuals employed by each registrant who were not serving as executive
officers at the end of December 2003 but received at least as much compensation
as the fourth most highly compensated executive officer of the registrant for
whom they were employed:
Page 132 of 150
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
--------------------------------------------------
OTHER
ANNUAL
COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(a) 401 k ($)(b) ($) (e)
- --------------------------- ---- ---------- ------------ ------------ ------------
Martin E. Kenney, Jr 2003 611,785 200,000 12,000 12,000
Director, Chief Executive Officer 2002 537,404 350,000 12,500 12,000
WRC Media 2001 480,000 350,000 11,375 12,000
Richard Nota 2003 215,455 130,000 10,935 12,000
Senior Vice President, Finance 2002 189,260 155,000 12,124 12,000
WRC Media 2001 175,000 60,000 4,813 12,000
Ralph Caulo 2003 414,950 -- -- --
Non-Executive Vice Chairman 2002 336,231 100,000 -- --
WRC Media 2001 350,000 -- -- --
Robert S. Lynch 2003 445,500 215,500 12,000 12,000
Former Director, Chief Operating Officer, WRC Media (g) 2002 462,635 400,000 12,500 12,000
2001 400,000 8,500 12,000 107,523
Robert J. Jackson 2003 304,279 -- 12,000 --
President, World Almanac Educaton Group 2002 250,885 -- 12,500 92,285(e,f)
WRC Media 2001 -- -- -- 241,806(f)
Emily Swenson 2003 41,156(d) -- -- 2,500
President, Weekly Reader Corporation
LONG-TERM OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
COMPENSATION --------------------------------------------------------
AWARDS % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE GRANT DATE
OPTIONS/ INDIVIDUAL EMPLOYEES PRICE FAIR VALUE
NAME AND PRINCIPAL POSITION SARS (#)(c) GRANTS IN FISCAL YEAR ($/Sh) ($/Sh)
- --------------------------- ----------- ---------- -------------- -------- ----------
Martin E. Kenney, Jr 324,294
Director, Chief Executive Officer 324,294
WRC Media 202,294
Richard Nota 27,500 5,000 14% 18.60 8.96
Senior Vice President, Finance 22,500
WRC Media 15,000
Ralph Caulo 93,762
Non-Executive Vice Chairman 93,762
WRC Media 53,762
Robert S. Lynch 167,523
Former Director, Chief Operating Officer, WRC Media (g) 167,523
425,000
Robert J. Jackson 17,168
President, World Almanac Educaton Group 17,168
WRC Media 7,168
Emily Swenson 5,000 5,000 14% 18.60 8.96
President, Weekly Reader Corporation
- ----------
(a) Represents bonuses paid in 2001, 2002 and 2003.
(b) Represents the company contribution to the 401 (k) retirement savings
plan.
(c) Represents 2000 - 2003 stock option awards issued.
(d) Represents partial year from October 15 through December 31, 2003
(e) Represents vehicle allowance paid.
(f) Represents consulting fees paid.
(g) Mr. Lynch resigned from WRC Media in 2003.
(h) Mr. Jackson resigned from World Almanac Educaton Group in 2004.
Page 133 of 150
DIRECTOR COMPENSATION
Our directors do not receive compensation, except as officers or employees.
PART III
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF STOCK
As used in the three sections below describing the beneficial ownership of WRC
Media, Weekly Reader and CompassLearning, "beneficial ownership" means the sole
or shared power to vote, or direct the voting of, a security, or the sole or
shared investment power with respect to a security. An example is the power to
dispose of, or direct the disposition of, a security. A person is deemed as of
any date to have "beneficial ownership" of any security that the person has the
right to acquire within 60 days after that date. For purposes of computing the
percentages of outstanding shares held by each person named in the three
sections below, any security that the person has the right to acquire within 60
days of the date of calculation is deemed to be outstanding, although this
security is not deemed to be outstanding for purposes of calculating the
percentage ownership of any other person.
BENEFICIAL OWNERSHIP OF WRC MEDIA
The following tables list, as of the date of this current report, information
known to us regarding the beneficial ownership of WRC Media common stock by:
o each person known by WRC Media to be the beneficial owner of more than
5% of the outstanding WRC Media common stock;
o each of the directors and the executive officers listed under
"Executive Compensation;" and
o all directors and the executive officers listed under
"Management--Executive Compensation," as a group.
As of the date of this current report, the total number of outstanding shares of
WRC Media common stock was 7,008,406. In addition there were 798,621 exercisable
options to purchase shares of WRC Media common stock outstanding on that date.
Except as otherwise noted, the persons named in the tables have sole voting and
investment power with respect to all shares shown as beneficially owned by them.
The information concerning beneficial ownership is based on statements furnished
to us by the beneficial owners and assumes that 7,008,406 shares of common stock
have been issued and are outstanding.
Page 134 of 150
WRC MEDIA COMMON STOCK
Amount and Nature of
Common Stock Name and Address of Beneficial Owner Beneficial Ownership(a) Percent of Class (a)
- ------------ ------------------------------------ ----------------------- --------------------
EAC III
c/o Ripplewood Holdings L.L.C.
1 Rockefeller Plaza
32nd Floor
New York, NY 10020....................................... 5,669,115 (b) 72.6%
SGC Partners II LLC
1221 Avenue of the Americas
New York, NY 10020....................................... 1,694,039 21.7%
EAC IV, L.L.C.
c/o Ripplewood Holdings L.L.C.
1 Rockefeller Plaza
32nd Floor
New York, NY 10020....................................... 5,669,115 (c) 72.6%
Timothy C. Collins....................................... 5,669,115 (d) 72.6%
Charles L. Laurey........................................ 5,670,751 (e) 72.6
D. Ronald Daniel......................................... 5,669,115 (f) 72.6%
David M. Malcolm......................................... 1,694,039 (g) 21.7%
WRC MEDIA INC.
512 Seventh Avenue
22nd Floor
New York, NY 10018
Martin E. Kenney, Jr..................................... 340,422 (h) 4.4%
Ralph D. Caulo........................................... 101,826 (i) 1.3%
Richard Nota............................................. 32,876 (j) *
Weekly Reader Corporation
512 Seventh Avenue
22nd Floor
New York, NY 10018
Emily Swenson............................................ 5,000 (k) *
All directors of WRC Media and the executive officers
listed under "Management" as a group..................... 7,807,027 (d)-(k) 100.0%
- ----------
* Represents holdings of less than 1%.
(a) Calculated excluding all shares issuable pursuant to options except, as
to each person, the shares issuable to that person pursuant to options
immediately exercisable or exercisable within 60 days from the date of
this current report.
(b) Represents 4,870,494 shares held directly and 798,621 shares held
indirectly through its rights granted to it under the management
shareholder agreements entered into by some executives of WRC Media,
Weekly Reader and CompassLearning. For a description of these
agreements, see "Certain Relationships and Related
Transactions--Management Shareholder Agreements." Each of EAC IV
L.L.C., Co-Investment Partners, L.P., The Northwestern Mutual Life
Insurance Company, Jackson National Life Insurance Company and Blue
Ridge Investments, L.L.C., an affiliate of Bank of America, N.A. owns
41.4%, 10.3%, 6.8%, 3.4% and 0.4%, respectively, of the beneficial
ownership in WRC Media EAC III.
(c) Represents the beneficial ownership of shares through its ownership of
66.4% of the membership interests of EAC III and the rights granted to
EAC III under the management shareholder agreements entered into by
some executives of WRC Media, Weekly Reader and CompassLearning and the
limited liability company agreement of EAC III. EAC IV L.L.C. is
controlled by Ripplewood Partners, L.P., an affiliate of Ripplewood
Holdings L.L.C.
Page 135 of 150
(d) Represents 5,669,115 shares beneficially owned through Mr. Collins'
position as Senior Managing Director and Chief Executive Officer of
Ripplewood Holdings L.L.C. which is the general partner of Ripplewood
Partners, L.P. which controls EAC III.
(e) Represents 1,636 shares held directly and 5,669,115 shares beneficially
owned through Mr. Laurey's position as Managing Director of Ripplewood
Holdings L.L.C. which is the general partner of Ripplewood Partners,
L.P. which controls EAC III.
(f) Represents beneficial ownership of 5,669,115shares through Mr. Daniel's
position as the Non-executive chairman of Ripplewood Holdings L.L.C.,
which is the general partner of Ripplewood Partners, L.P., which
controls EAC III.
(g) Represents beneficial ownership of 1,694,039 shares through Mr.
Malcolm's position as President and Chief Executive Officer of SG
Capital partners LLC, which is the general partner of SG Merchant
Banking Fund L.P., which controls SGC Partners II LLC.
(h) Represents 16,128 shares held directly and 324,294shares issuable upon
exercise of options granted under a management share and his employment
agreement.
(i) Represents 8,064 shares held directly and 93,762 shares issuable upon
exercise of options to be granted under Mr. Caulo's consulting
agreements and employment with WRC Media.
(j) Represents 5,376 shares held directly and 27,500 shares issuable upon
exercise of options granted under a management shareholder agreement.
(k) Represents 5,000 shares issuable upon exercise of options granted under
an employment agreement.
BENEFICIAL OWNERSHIP OF WEEKLY READER COMMON STOCK
The following table lists, as of the date of this current report common stock,
which consists of Weekly Reader's Class A and Class B non-voting common stock
and Weekly Reader voting common stock, by:
o each person known by Weekly Reader to be the beneficial owner of more
than 5% of the outstanding Weekly Reader common stock;
o each of the directors and the executive officers listed under
"Management--Executive Compensation;" and
o all directors and the executive officers listed under "Management" as a
group.
As of the date of this report, no shares of Weekly Reader's class A and
class B non-voting common stock are outstanding.
As of the date of this report, the total number of outstanding shares of Weekly
Reader voting common stock was 2,830,000. Except as otherwise noted, the persons
named in the table have sole voting and investment power with respect to all
shares shown as beneficially owned by them. The information concerning
beneficial ownership is based on statements furnished to us by the beneficial
owners and assumes that 2,830,000 shares of voting common stock have been issued
and are outstanding.
Page 136 of 150
WEEKLY READER VOTING COMMON STOCK
Amount and Nature of Percent
Common Stock Name and Address Beneficial Ownership of Class
------------ ---------------- -------------------- --------
WRC Media
c/o Ripplewood Holdings L.L.C.
1 Rockefeller Plaza, 32nd Floor 2,685,670 82.6%**
New York, NY 10020.....................................
PRIMEDIA, Inc.
745 Fifth Avenue 144,330 4.4%**
New York, NY 10151.....................................
DLJ Merchant Banking Partners II, L.P.
and affiliates
c/o DLJ Merchant Banking Partners
277 Park Avenue
New York, NY 10172..................................... 310,109 (a) 9.5%
TCW/Crescent Mezzanine Funds and affiliates
11100 Santa Monica Blvd., Suite 2000
Los Angeles, CA 90025.................................. 56,383 (b) 1.7%
All directors and the executive officers listed under
"Management" as a group................................ 0 *
- ----------
* Represents holdings of less than 1%.
** Percent of class calculated on a fully-diluted basis including
warrants.
(a) Represents ownership by DLJ Merchant Banking Partners II, L.P. of
159,828 warrants to purchase Weekly Reader common stock; ownership by
DLJ Merchant Banking Partners II-A, L.P. of 6,365 warrants to purchase
Weekly Reader common stock; ownership by DLJ Offshore Partners II, C.V.
of 7,860 warrants to purchase Weekly Reader common stock; ownership by
DLJ Diversified Partners, L.P. of 9,344 warrants to purchase Weekly
Reader common stock; ownership by DLJ Diversified Partners-A, L.P. of
3,470 warrants to purchase Weekly Reader common stock; ownership by
DLJMB Funding II, Inc. of 32,605 warrants to purchase Weekly Reader
common stock; ownership by DLJ Millennium Partners, L.P. of 2,584
warrants to purchase Weekly Reader common stock; ownership by DLJ
Millennium Partners-A, L.P. of 504 warrants to purchase Weekly Reader
common stock; ownership by DLJ EAB Partners, L.P. of 718 warrants to
purchase Weekly Reader common stock; ownership by DLJ ESC II, L.P. of
34,182 warrants to purchase Weekly Reader common stock; ownership by
DLJ First ESC, L.P. of 308 warrants to purchase Weekly Reader common
stock; ownership by DLJ Investment Partners II, L.P. of 32,041 warrants
to purchase Weekly Reader common stock; ownership by DLJ Investment
Partners, L.P. of 14,238 warrants to purchase Weekly Reader common
stock; and ownership by DLJIP Investment Partners II Holdings, L.P. of
6,062 warrants to purchase Weekly Reader common stock. Because these
funds are under common control, each fund may be deemed to, for Federal
securities law purposes, beneficially own the shares underlying the
warrants held by all the other funds.
Page 137 of 150
(b) Represents ownership by TCW/Crescent Mezzanine Partners II, L.P. of
27,231 warrants to purchase Weekly Reader common stock; TCW/Crescent
Mezzanine Trust II 6,600 warrants to purchase Weekly Reader common
stock; TCW Leveraged Income Trust, L.P. 5,638 warrants to purchase
Weekly Reader common stock; TCW Leveraged Income Trust II, L.P. 5,638
warrants to purchase Weekly Reader common stock; Shared Opportunity
Fund IIB, L.L.C. 1,879 warrants to purchase Weekly Reader common stock;
and TCW Shared Opportunity Fund III, L.P. 9,397 warrants to purchase
Weekly Reader common stock. Because these funds are under common
control, each fund may be deemed to for Federal securities law
purposes, beneficially own the shares underlying the warrants held by
all the other funds.
BENEFICIAL OWNERSHIP OF COMPASSLEARNING COMMON STOCK
The following table lists, as of the date of this report, information known to
us regarding the beneficial ownership of CompassLearning common stock by:
o each person known by WRC Media to be the beneficial owner of more than
5% of the outstanding CompassLearning common stock;
o each of the directors and the executive officers listed under
"Management--Executive Compensation," and
o all directors and executive officers listed under "Management" as a
group.
As of the date of this current report, the total number of outstanding shares of
CompassLearning common stock was 10,000. Except as otherwise noted, the persons
named in the table have sole voting and investment power with respect to all
shares shown as beneficially owned by them. The information concerning
beneficial ownership is based on statements furnished to us by the beneficial
owners and assumes that 10,000 shares of common stock have been issued and are
outstanding.
Page 138 of 150
COMPASSLEARNING COMMON STOCK
Amount and Nature of Percent
Common Stock Name and Address Beneficial Ownership of Class
------------ ---------------- -------------------- --------
WRC Media
512 Seventh Avenue
22nd Floor
New York, NY 10018..................................... 10,000 87.0%**
DLJ Merchant Banking Partners II, L.P.
and affiliates
c/o DLJ Merchant Banking Partners
277 Park Avenue
New York, NY 10172..................................... 1,098 (a) 9.6%**
All directors and the executive officers listed under
"Management" as a group................................ 0 *
- ----------
* Represents holdings of less than 1%.
** Percent of class calculated on a fully-diluted basis including
warrants.
(a) Represents ownership by DLJ Merchant Banking Partners II, L.P. of 566
warrants to purchase CompassLearning common stock; ownership by DLJ
Merchant Banking Partners II-A, L.P. of 23 warrants to purchase
CompassLearning common stock; ownership by DLJ Offshore Partners II,
C.V. of 28 warrants to purchase CompassLearning common stock; ownership
by DLJ Diversified Partners, L.P. of 33 warrants to purchase
CompassLearning common stock; ownership by DLJ Diversified Partners-A,
L.P. of 12 warrants to purchase CompassLearning common stock; ownership
by DLJMB Funding II, Inc. of 115 warrants to purchase CompassLearning
common stock; ownership by DLJ Millennium Partners, L.P. of 9 warrants
to purchase CompassLearning common stock; ownership by DLJ Millennium
Partners-A, L.P. of 2 warrants to purchase CompassLearning common
stock; ownership by DLJ EAB Partners, L.P. of 3 warrants to purchase
CompassLearning common stock; ownership by DLJ ESC II, L.P. of 13
warrants to purchase CompassLearning common stock; ownership by DLJIP
II Holdings, L.P. of 16 warrants to purchase CompassLearning common
stock; ownership by DLJ First ESC, L.P. of 1 warrant to purchase
CompassLearning common stock; ownership by DLJ Investment Partners II,
L.P. of 114 warrants to purchase CompassLearning common stock;
ownership by DLJ Investment Partners, L.P. of 50 warrants to purchase
CompassLearning common stock; and ownership by DLJIP II Holdings, L.P.
of 19 warrants to purchase CompassLearning common stock. Because these
funds are under common control, each fund may be deemed, for Federal
securities law purposes, to beneficially own the shares underlying the
warrants held by all the other funds.
Page 139 of 150
PART III
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENTS
In connection with the acquisition of CompassLearning, CompassLearning entered
into a management agreement with Ripplewood Holdings L.L.C., and after the
completion of the transactions (described in Note 1 to the Weekly Reader
Corporation and Subsidiaries Financial Statements) Weekly Reader entered into a
management agreement with Ripplewood Holdings L.L.C. The following summary of
the material provisions of these management agreements is qualified in its
entirety by reference to the management agreements as entered into or amended as
of the date of this current report.
Under the terms of the CompassLearning management agreement with Ripplewood
Holdings L.L.C., and since the date of the acquisition of CompassLearning,
Ripplewood Holdings L.L.C. has been providing to CompassLearning management
consulting and financial advisory services, and CompassLearning has been paying
to Ripplewood Holdings L.L.C. an annual management fee of $150,000, payable in
quarterly installments, and has reimbursed Ripplewood Holdings L.L.C. for its
reasonable out-of-pocket costs and expenses incurred in connection with the
performance of its services. On November 17, 1999, CompassLearning and
Ripplewood Holdings L.L.C. amended the terms of the CompassLearning management
agreement with Ripplewood Holdings L.L.C. to relieve CompassLearning of its
obligation to pay management fees to Ripplewood Holdings L.L.C. until 2001.
Under the terms of the Weekly Reader management agreement with Ripplewood
Holdings L.L.C., Ripplewood Holdings L.L.C. provides to Weekly Reader management
consulting and financial advisory services. As a result of the Weekly Reader
management agreement and the amendment of the CompassLearning management
agreement, CompassLearning and Weekly Reader agreed to reimburse Ripplewood
Holdings L.L.C. for its reasonable out-of-pocket costs and expenses incurred in
connection with the performance of its services and is obligated to pay to
Ripplewood Holdings L.L.C. annual aggregate management fees for services to both
CompassLearning and Weekly Reader totaling $950,000, payable quarterly.
Ripplewood Holdings L.L.C. received payments under these agreements totaling
$950,000 in 2003 for services provided in 2002. No payment has been made for the
services provided in 2003. In 2003, management fees of $300,000 were waived by
the Company's principal shareholder. The Company has accrued and unpaid
management fees for 2003 of $650,000.
Under these management agreements, Weekly Reader and CompassLearning are
obligated to indemnify, defend and hold harmless Ripplewood Holdings L.L.C., its
affiliates and each of their respective directors, stockholders, advisory
directors, officers, members, employees and agents from any damages related to
the performance by Ripplewood Holdings L.L.C. of its obligations under these
management agreements. Ripplewood Holdings L.L.C. may terminate these management
agreements at any time on five days' prior written notice to Weekly Reader or
CompassLearning, as applicable.
Page 140 of 150
MANAGEMENT SHAREHOLDER AGREEMENTS
Simultaneously with the closing of the transactions described under "The
Acquisition and Recapitalization," and under the terms of their respective
employment agreements with Weekly Reader and CompassLearning certain executives
of WRC Media, Weekly Reader, and CompassLearning purchased shares of WRC Media
common stock and entered into management shareholder agreements with WRC Media
and EAC III with respect to the WRC Media common stock held by these executives.
The following summary of the material provisions of these management shareholder
agreements is qualified in its entirety by reference to the management
shareholder agreements.
VOTING AGREEMENT. Each executive who is a party to a management shareholder
agreement with WRC Media and EAC III with respect to WRC Media common stock has
granted to EAC III an irrevocable proxy to vote the WRC Media common stock held
by the executive as well as all WRC Media common stock thereafter acquired by
the executive on all matters except for any matter that would both adversely
affect and treat the executive differently from other holders of WRC common
stock. This proxy terminates upon any transfer of these shares to a third party
after or upon completion of an initial public offering of WRC Media common stock
and the expiration of any "lock-up" period agreed upon by the executives and the
underwriters in connection with the initial public offering.
TRANSFER RESTRICTIONS. Each management shareholder agreement with WRC Media and
EAC III with respect to WRC Media common stock restricts the right of an
executive to transfer the WRC Media common stock the executive holds without the
prior written consent of EAC III to any person other than a permitted transferee
of the executive. With respect to each executive who is a party to a management
shareholder agreement, permitted transferees include EAC III, another executive,
the executive's spouse or lineal descendants or any trust the beneficiaries of
which include only the executive's spouse or lineal descendants. Each executive
may also transfer, without restriction, the WRC Media common stock that the
executive holds after the completion of an initial public offering of WRC Media
common stock.
1999 OPTIONS. Executives listed under "Ownership of Stock," - in Exhibits among
others, who are parties to a management shareholder agreement with WRC Media and
EAC III with respect to WRC Media common stock were also granted options to
purchase a specified number of shares of WRC Media common stock. With respect to
each of these executives, to the extent that the executive remains employed with
Weekly Reader or CompassLearning, as applicable, 33% of the options vested on
December 31, 1999, a further 33% on December 31, 2000 and the remaining 34% on
December 31, 2001.
TAG-ALONG RIGHTS. The management shareholder agreements with WRC Media and EAC
III with respect to WRC Media common stock provide that, if EAC III determines
to sell in excess of 5% of its WRC Media common stock to a third party other
than a permitted transferee and, after giving effect to the sale, EAC III will
have transferred in excess of 35% of its WRC Media common stock to a third party
other than a permitted transferee, the executives who are party to the
management shareholder agreements have the right to sell a proportionate amount
of their WRC Media common stock in the transaction at the same price per share
and on the same terms and conditions as apply to the sale of WRC Media common
stock by EAC III.
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DRAG-ALONG RIGHTS. In the event that EAC III determines to sell all or any
portion in excess of 35% of its WRC Media common stock to any third party, EAC
III has the right to cause the executives who are party to the management
shareholder agreements with WRC Media and EAC III to sell a proportionate amount
of their WRC Media common stock in the transaction, all at the same price per
share and on the same terms and conditions as apply to the sale of WRC Media
common stock by EAC III.
OPTION UPON TERMINATION. In the event that the employment of an executive who is
party to a management shareholder agreement with WRC Media and EAC III with
respect to WRC Media common stock is terminated for any reason, EAC III has the
option to purchase all or any portion of the WRC Media common stock held by the
executive at fair market value as determined under the terms of the management
shareholder agreement. In addition, in the event that an executive's employment
is terminated other than for good cause, as defined in the executive's
employment agreement, or because of a notice of non-renewal given by the
executive's employer, in the event of financial hardship as determined by the
Board of Directors of WRC Media or because of death, the executive or the
executive's estate has the right to require WRC Media to purchase any or all of
the executive's WRC Media common stock, subject to exceptions and customary
limitations, including but not limited to:
o our financial ability to finance the purchase with cash; or
o our ability to obtain third party financing on reasonable terms.
PART III
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents aggregate fees for professional audit services
rendered by Deloitte & Touche LLP for the audit of the Company's annual
financial statements for the years ended December 31, 2002 and 2003, and fees
billed for other services rendered by Deloitte & Touche during these periods.
2002 2003
---- ----
(in thousands)
Audit $ 440 $ 490
Audit Related $ 87 $ --
Tax $ -- $ --
Other $ -- $ --
------- -------
Total $ 527 $ 490
Audit fees for 2002 and 2003 were for professional services rendered for the
audits of the consolidated financial statements of the Company, timely reviews
of quarterly financial statements, consents, income tax provision procedures
and assistance with review of documents filed with the SEC.
Audit Related fees for 2002 and 2003 were primarily for assurance services
including employee benefit plan audits and due diligence related to
acquisitions.
There were no tax fees or other fees for 2002 or 2003.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENT SCHEDULES:
WRC Media Inc. and Subsidiaries
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(a) (2) FINANCIAL STATEMENT SCHEDULES:
Schedule II (a) - WRC Media Inc. Valuation and Qualifying Accounts for the Years
Ended December 31, 2002 and 2003
Schedule II (b) - Weekly Reader Corporation Valuation and Qualifying Accounts
for the years ended December 31, 2002 and 2003
SCHEDULE II (a)-WRC Media Inc.
Adjustments
--------------------------------------------------------
Opening Balance Ending Balance
January 1 Expense Write-offs December 31
--------------- ------- ---------- --------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
2003 $1,467 758 (475) $1,750
2002 $1,942 866 (1,341) $1,467
SALES RETURNS AND ALLOWANCES
2003 $1,831 2,057 (3,119) $ 769
2002 $2,626 2,630 (3,425) $1,831
RESERVE FOR INVENTORY OBSOLESCENCE
2003 $3,072 868 (541) $3,399
2002 $2,773 1,060 (761) $3,072
SCHEDULE II (b)-Weekly Reader Corporation
--------------------------------------------------------
Opening Balance Ending Balance
January 1 Expense Write-offs December 31
--------------- ------- ---------- --------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
2003 $1,389 488 (467) $1,410
2002 $1,543 1,187 (1,341) $1,389
SALES RETURNS AND ALLOWANCES
2003 $1,831 2,057 (3,119) $ 769
2002 $2,626 2,630 (3,425) $1,831
RESERVE FOR INVENTORY OBSOLESCENCE
2003 $3,072 706 (541) $3,237
2002 $2,773 1,060 (761) $3,072
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All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Consolidated
Financial Statements or the Notes thereto.
(a) (3) EXHIBITS
Unless indicated otherwise, information regarding EXHIBITS are incorporated by
reference from the Company's definitive registration statement filed on Form S-4
pursuant to Regulation 12B under the Securities Exchange Act of 1934,
Registration No. 333-96119.
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INDEX TO EXHIBITS
Except as otherwise indicated, the following documents are incorporated herein
by reference to the WRC Media Inc. Annual Report on Form 10-K for the year ended
December 31, 2002.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
1.1 Purchase Agreement dated November 10, 1999 among WRC Media
Inc., Weekly Reader Corporation and CompassLearning, Inc.
2.1 Redemption, Stock Purchase and Recapitalization Agreement
dated August 13, 1999 among WRC Media Inc. and Primedia Inc.
3.1 Articles of Incorporation of WRC Media Inc.
3.2 Bylaws of WRC Media Inc.
3.3 Articles of Incorporation of Weekly Reader Corporation
3.4 Bylaws of Weekly Reader Corporation
3.5 Articles of Incorporation of CompassLearning, Inc.
3.6 Bylaws of CompassLearning, Inc.
3.7 Articles of Incorporation of Lifetime Learning Systems, Inc.
3.8 Bylaws of Lifetime Learning Systems, Inc.
3.9 Articles of Incorporation of American Guidance Service, Inc.
3.10 Bylaws of American Guidance Service, Inc.
3.11 Articles of Incorporation of AGS International Sales, Inc.
3.12 Bylaws of AGS International Sales, Inc.
3.13 Articles of Incorporation of World Almanac Education Group,
Inc.
3.14 Bylaws of World Almanac Education Group, Inc.
3.15 Articles of Incorporation of Funk & Wagnalls Yearbook Corp.
3.16 Bylaws of Funk & Wagnalls Yearbook Corp.
3.17 Articles of Incorporation of Gareth Stevens, Inc.
3.18 Bylaws of Gareth Stevens, Inc.
3.18.1 Amendment to the Bylaws of Gareth Stevens, Inc.
4.1 Indenture dated November 17, among WRC Media Inc., Weekly
Reader Corporation, CompassLearning, Inc. and Bankers Trust
Company
4.2 Registration Rights Agreement dated November 17, 1999 among
WRC Media Inc., Weekly Reader Corporation, CompassLearning,
Inc., Primedia Reference Inc., Funk & Wagnalls Yearbook
Corp., Lifetime Learning Systems, Inc., Gareth Stevens, Inc.,
American Guidance Service, Inc. and AGS International Sales,
Inc.
4.3 Amended Certificate of Designations, Preferences and Rights
of 15% Senior Preferred Stock due 2011 and 15% Series B
Senior Preferred Stock due 2001 of WRC Media Inc.
4.4 WRC Media Inc. Preferred Stockholders Agreement dated
November 17, 1999 between WRC Media Inc., Weekly Reader
Corporation and CompassLearning, Inc. and the preferred
shareholders listed on the signature pages thereto
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EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
4.5 Form of Note
4.6 Certificate of Preferred Stock
4.7 Junior Preferred Stock Agreement
4.8 Exhibit A to Preferred Stock Agreement
5.1 Opinion of Cravath, Swaine & Moore regarding the legality of
the new notes
5.2 Opinion of Leonard, Street and Deinard Professional
Association regarding certain Minnesota legal matters
5.3 Opinion of Foley & Lardner regarding certain Wisconsin legal
matters
10.1 Note Agreement, dated as of July 13, 1999, among
CompassLearning, Inc. (as successor by merger to EAC I Inc.),
The Northwestern Mutual Life Insurance Company and SGC
Partners II L.L.C.
10.2 Stock Purchase Agreement, dated July 13, 1999, among Software
Systems Corp., Sylvan Learning Systems, Inc., Pyramid
Ventures, Inc., GE Capital Equity Investments, Inc. and
CompassLearning, Inc. (as successor by merger to EAC I Inc.)
10.3 Credit Agreement dated November 17, 1999 among Weekly Reader
Corporation, CompassLearning, Inc., WRC Media Inc., DLJ
Capital Funding, Inc., Bank of America, N.A. and General
Electric Capital Corporation
10.4 Security and Pledge Agreement dated November 17, 1999 among
Weekly Reader Corporation, CompassLearning, Inc., WRC Media
Inc., Primedia Reference Inc., American Guidance Service
Inc., Lifetime Learning Systems, Inc., AGS International
Sales, Inc., Funk & Wagnalls Yearbook Corp. and Gareth
Stevens, Inc.
10.5 Subsidiary Guaranty dated November 17, 1999 among Primedia
Reference Inc., American Guidance Service Inc., Lifetime
Learning Systems, Inc., AGS International Sales, Inc., Funk &
Wagnalls Yearbook Corp. and Gareth Stevens, Inc.
10.6 Stockholders Agreement dated November 17, 1999 among Weekly
Reader Corporation, CompassLearning, Inc., WRC Media Inc.,
EAC III L.L.C., Donaldson, Lufkin & Jenrette and Banc of
America Securities
10.7 Shareholders Agreement dated as of November 17, 1999 among
WRC Media, Weekly Reader Corporation and PRIMEDIA, Inc.
10.8 Employment Agreement dated as of the 17th day of November,
1999 among WRC Media Inc., EAC III L.L.C., CompassLearning,
Inc. and Martin E. Kenney, Jr.
10.9 Transitional Services Agreement dated as of November 17,
1999, among Primedia Inc., WRC Media Inc. and Weekly Reader
Corporation
10.10 Shareholder Agreement dated as of the 17th day of November,
1999 among EAC III L.L.C., Therese K. Crane and WRC Media
Inc.
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EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
10.11 Shareholder Agreement dated as of the 17th day of November,
1999 among EAC III L.L.C., Peter Bergen, Larry Rutkowski, Al
De Seta, Robert Jackson, Kenneth Slivken and WRC Media Inc.
10.11.1 Shareholder Agreement dated as of January 1, 2000 among EAC
III L.L.C., Lester Rackoff, Sandy Maccarone, Ted Kozlowski,
Eric Ecker, Terry Bromberg, Gerald Adams, Linda Hein, Janice
Bailey, David Press, Cindy Buckosh, Robert Famighetti, Ken
Park and WRC Media Inc.
10.12 Shareholder Agreement dated as of the 17th day of November,
1999 among EAC III L.L.C., Martin Kenney and WRC Media Inc.
10.13 Preferred Stock and Warrants Subscription Agreement dated
November 17 between WRC Media Inc., Weekly Reader
Corporation, CompassLearning, Inc. and the other signatories
thereto
10.14 Management Agreement dated as of November 17, 1999 among
Ripplewood Holdings L.L.C. and CompassLearning, Inc.
10.15 Management Agreement dated as of November 17, 1999 among
Ripplewood Holdings L.L.C. and Weekly Reader Corporation
10.16 ChildU Merger Agreement
10.17 Stockholder's Agreement With New WRC Media (ChildU)
shareholders
10.18 ChildU Escrow Agreement
10.19 Amended and Restated Credit Agreement
10.20 Lindy Asset Purchase Agreement
10.21 ThinkBox Agreement
12 Cash Interest Expense Calculation
12.1 Statement Regarding Ratios of Earnings to Fixed Charges
Computations
21.1 List of Subsidiaries of the Registrants
23.2 Consent of Cravath, Swaine & Moore (included in its opinion
filed as Exhibit 5.1)
23.2 Consent of Simba Information Inc.
25.1 Statement of Eligibility of Bankers Trust Corporation under
the Trust Indenture Act of 1939, as amended, on Form T-1
27.1 Financial Data Schedule--WRC Media & its subsidiaries
27.2 Financial Data Schedule--Weekly Reader Corporation &
subsidiaries
27.3 Financial Data Schedule--CompassLearning, Inc.
99.2 Letter of Transmittal for Tender of 12 3/4% Senior
Subordinated Notes Due 2009 of WRC Media Inc., Weekly Reader
Corporation, and CompassLearning, Inc.
99.3 Notice of Guaranteed Delivery for Tender of 12 3/4% Senior
Subordinated Notes Due 2009 of WRC Media Inc., Weekly Reader
Corporation, and CompassLearning, Inc.
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EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
99.5 Notice of Withdrawal of Tender of 12 3/4% Senior Subordinated
Notes Due 2009 of WRC Media Inc., Weekly Reader Corporation,
and CompassLearning, Inc.
99.7 Form of Letter to Securities Dealers, Commercial Banks, Trust
Companies and other Nominees for Tender of all Outstanding 12
3/4% Senior Subordinated Notes Due 2009 of WRC Media Inc.,
Weekly Reader Corporation and CompassLearning, Inc.
99.9 Form of Letter to Clients for 12 3/4% Senior Subordinated
Notes Due 2009 of WRC Media Inc.
99.11 Guidelines for Certification of Taxpayer Identification
Number on Substitute Form 99
- ----------
* Filed herewith.
(b) REPORTS ON FORM 8-K
1. Form 8-K, filed November 14, 2003, reporting operating results
for the quarter ended September 30, 2003.
2. Form 8-K, filed November 18, 2003, reporting the transcript of
an investor conference call held November 17, 2003.
3. Form 8-K, filed December 15, 2003, reporting the SEC inquiry
concerning relating to WRC Media's reserve for bad debt expenses in the first
quarter of 2003, revenue recognition for the fourth quarter of 2002 and certain
other of the Company's financial policies and practices.
4. Form 8-K, filed January 7, 2004, reporting received a waiver
until March 31, 2004 from the lenders under its credit agreement for its
expected non-compliance with certain financial covenants as of December 31,
2003.
5. Form 8-K, filed January 29, 2004, reporting its preliminary
and unaudited condensed consolidated financial results for its full year 2003.
6. Form 8-K, filed March 22, 2004, reporting in connection with
the audit of the Company's 2003 consolidated financial statements, that it
decided to restate its previously audited consolidated balance sheets as of
December 31, 2001 and 2002, and the related statements of stockholders' deficit
and operations for the years ended December 31, 2001 and 2002, and to amend its
2003 unaudited financial results that were previously disclosed in a Form 8-K
furnished to the SEC on January 29, 2004.
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7. Form 8-K, filed March 24, 2004, reporting that we believe that
upon furnishing our audited 2003 financial statements to the holders of our 12
3/4% Senior Subordinated Notes due 2009 and filing such statements with the SEC,
we will be in compliance with the information requirements of the indenture for
these Notes, but that our independent auditors intended to include in their
audit opinion for our 2002 and 2003 financial statements an explanatory
paragraph to the effect that the potential claim that we are in breach of the
indenture's requirements to furnish audited financial statements for 2001 or a
potential attempt to accelerate the payment of such Notes, together with
uncertainty as to the timing or ability to complete a reaudit of the 2001
financial statements and to furnish an auditors' report as required by the
indenture in order to obviate such a claim, raises substantial doubt about our
ability to continue as a going concern.
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