UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004 Commission File No. 333-96119
WRC MEDIA INC. WEEKLY READER CORPORATION
(Exact name of Registrant as specified in its charter) (Exact name of Registrant as specified in its charter)
DELAWARE DELAWARE
(State or other jurisdiction of incorporation (State or other jurisdiction of
or organization) incorporation or organization)
2731 2721
(Primary Standard Industrial Classification Number) (Primary Standard Industrial Classification Number)
13-4066536 13-3603780
(I.R.S. Employer Identification Number) (I.R.S. Employer Identification Number)
COMPASSLEARNING, INC.
(Exact name of Registrant as specified in its charter)
2731
DELAWARE
(State or other jurisdiction of incorporation or organization)
7372
(Primary Standard Industrial Classification Number)
7372
13-4066535
(I.R.S. Employer Identification Number)
WRC MEDIA INC. WEEKLY READER CORPORATION COMPASSLEARNING, INC.
512 7th AVENUE, 22nd FLOOR 512 7th AVENUE, 22nd FLOOR 512 7th AVENUE, 22nd FLOOR
NEW YORK, NY 10018 NEW YORK, NY 10018 NEW YORK, NY 10018
(212) 768-1150 (212) 768-1150 (212) 768-1150
(Address, including zip code, and telephone number,
including area code, of each Registrant's
principal executive offices)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12-months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes [ ] No
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act.
[ ] Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
- ------------------------------------------------------------------------------------------------
TITLE OF CLASS | NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------------------------------------------------------------------------------------
12 3/4% Senior Subordinated Notes due 2009 | OVER-THE-COUNTER MARKET
- ------------------------------------------------------------------------------------------------
2
PART 1 FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
3
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
(Unaudited)
December 31, September 30,
2003 2004
------------------ -------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,432 $ 8,207
Accounts receivable (net of allowance for doubtful accounts
and sales returns of $2,519 and $2,601, respectively) 30,027 52,928
Inventories 16,652 15,959
Prepaid expenses 3,367 2,264
Other current assets (including restricted assets of $1,006
and $802, respectively) 1,889 1,757
------------ ------------
Total current assets 53,367 81,115
Property and equipment, net 5,792 5,138
Capitalized software, net 7,293 8,560
Goodwill 241,324 241,324
Other intangible assets, net 76,860 69,229
Deferred financing costs, net 5,675 9,008
Other assets 29,896 33,091
------------ ------------
Total assets $ 420,207 $ 447,465
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 16,963 $ 18,079
Accrued payroll, commissions and benefits 9,356 10,425
Current portion of deferred revenue 35,900 47,580
Other accrued liabilities 17,166 22,357
Current portion of long-term debt 8,477 --
------------ ------------
Total current liabilities 87,862 98,441
Deferred revenue, net of current portion 959 1,144
Deferred tax liabilities 10,800 12,975
15% senior preferred stock, including accrued dividends and
accretion of warrant value (6,192,960 shares outstanding),
(Liquidation preference of $154,824) -- 147,606
Long-term debt 262,925 293,103
------------ ------------
Total liabilities 362,546 553,269
------------ ------------
Commitments and contingencies
15% senior preferred stock,
including accrued dividends and accretion of warrant value
(5,508,080 shares outstanding) 130,701 --
Warrants on common stock of subsidiaries 11,751 11,751
Common stock subject to redemption 940 950
------------ ------------
Stockholders' deficit:
Common stock, ($.01 par value, 20,000,000 shares authorized;
7,008,406 shares outstanding in 2003 and 2004) 70 70
18% convertible preferred stock, ($.01 par value, 750,000 shares
authorized, 547,980 and 625,336 shares outstanding, respectively) 21,919 25,013
Additional paid-in capital 131,753 131,753
Accumulated other comprehensive loss (1,899) (1,899)
Accumulated deficit (237,574) (273,442)
------------ ------------
Total stockholders' deficit (85,731) (118,505)
------------ ------------
Total liabilities and stockholders' deficit $ 420,207 $ 447,465
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
(Amounts in thousands)
2003 2004
----------------- -----------------
(As Restated
See Note 17)
Revenue, net $ 55,389 $ 61,012
Cost of goods sold 14,804 16,075
------------ ------------
Gross profit 40,585 44,937
------------ ------------
Costs and expenses:
Sales and marketing 11,749 14,423
Research and development 634 97
Distribution, circulation and fulfillment 3,697 3,565
Editorial 2,266 2,926
General and administrative 5,777 7,598
Restructuring costs and other non-recurring expenses (576) 338
Depreciation 549 479
Amortization of intangible assets 4,473 4,033
------------ ------------
Total operating costs and expenses 28,569 33,459
------------ ------------
Income from operations 12,016 11,478
Interest expense, including amortization
of deferred financing costs (7,460) (13,718)
Other expense, net (250) (247)
------------ ------------
Income (loss) before income tax provision 4,306 (2,487)
Income tax provision 764 776
------------ ------------
Net income (loss) $ 3,542 $ (3,263)
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
(Amounts in thousands)
2003 2004
----------------- -----------------
(As Restated
See Note 17)
Revenue, net $ 146,568 $ 149,621
Cost of goods sold 41,161 42,910
--------------- ---------------
Gross profit 105,407 106,711
--------------- ---------------
Costs and expenses:
Sales and marketing 33,531 37,148
Research and development 1,558 1,828
Distribution, circulation and fulfillment 10,112 9,886
Editorial 7,410 8,273
General and administrative 16,790 22,047
Restructuring costs and other non-recurring expenses 905 1,035
Depreciation 1,769 1,405
Amortization of intangible assets 13,164 12,328
--------------- ---------------
Total operating costs and expenses 85,239 93,950
--------------- ---------------
Income from operations 20,168 12,761
Interest expense, including amortization
of deferred financing costs (21,828) (41,628)
Other expense, net (1,169) (771)
--------------- ---------------
Loss before income tax provision (2,829) (29,638)
Income tax provision 2,256 2,418
--------------- ---------------
Net loss $ (5,085) $ (32,056)
=============== ===============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
(Amounts in thousands)
2003 2004
----------------- -----------------
(As Restated
See Note 17)
Cash flows from operating activities:
Net loss $ (5,085) $ (32,056)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income tax provision 2,175 2,175
Depreciation and amortization 16,929 15,598
Management fees forgiven by principal shareholder 300 --
(Gain) loss on disposition of property and equipment (1) 14
Impairment of pre-publication costs -- 76
Accrual of manditorily redeemable preferred stock dividends -- 16,188
Amortization of debt discount 333 379
Amortization of deferred financing costs 1,081 3,295
Changes in operating assets and liabilities:
Accounts receivable (12,885) (22,901)
Inventories (1,325) 693
Prepaid expenses and other current assets (60) 1,235
Other noncurrent assets (10,503) (7,971)
Accounts payable (2,926) 1,116
Deferred revenue 10,563 11,865
Accrued liabilities 1,018 6,262
------------ ------------
Net cash used in operating activities (386) (4,032)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (1,045) (1,186)
Capitalized software (3,087) (3,132)
Landlord reimbursement for leasehold improvements -- 421
Proceeds from the disposition of property and equipment 4 --
------------ ------------
Net cash used in investing activities (4,128) (3,897)
------------ ------------
Cash flows from financing activities:
Proceeds from revolving line of credit 27,000 35,000
Repayments of revolving line of credit (21,000) (40,000)
Repayment of senior bank debt (5,773) (118,678)
Deferred financing fees (20) (6,628)
Proceeds from issuance of long-term debt -- 145,000
Purchase and issuance of common stock subject to redemption (25) 10
------------ ------------
Net cash provided by financing activities 182 14,704
------------ ------------
(Decrease) increase in cash and cash equivalents (4,332) 6,775
Cash and cash equivalents, beginning of period 9,095 1,432
------------ ------------
Cash and cash equivalents, end of period $ 4,763 $ 8,207
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
7
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS
The accompanying condensed 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.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of the Company
as of September 30, 2004 and for the three- and nine-month periods ended
September 30, 2003 and 2004 have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") for
interim financial information and the instructions for Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments, consisting of only normal recurring adjustments
(except as described in Note 17) necessary to present fairly the financial
position, the results of operations and cash flows for the periods presented,
have been made.
These condensed consolidated financial statements should be read in conjunction
with the Company's annual financial statements and related notes thereto as
reported in the Company's Annual Report on Form 10-K dated June 15, 2004. The
operating results for the three- and nine-month periods ended September 30, 2003
and 2004 are not necessarily indicative of the results that may be expected for
a full year.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("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, effective March 31, 2004, did not
have any effect on the Company's consolidated financial position or results of
operations.
In April 2003, the FASB issued Statements of Financial Accounting Standards
("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 any effect on the Company's consolidated financial
position or results of operations.
8
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 was effective for the
Company beginning January 1, 2004. 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 required the Company to
reclassify its 15% Senior Preferred Stock from the mezzanine section of the
balance sheet to long-term liabilities at March 31, 2004. Effective January 1,
2004 dividend payments for the 15% Senior Preferred Stock ("15% Senior
Preferred") are recorded as interest expense in the consolidated statement of
operations. The adoption of this statement did not result in any adjustment to
the book value of its 15% Senior Preferred as of January 1, 2004 as book value
approximated fair value at January 1, 2004. For the three- and nine-month
periods ended September 30, 2004 the Company recognized $5,596 and $16,188,
respectively, of accrued dividends on the 15% Senior Preferred as interest
expense.
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. The
Company has adopted such disclosure provisions (See Note 15).
On March 17, 2004, the Emerging Issues Task Force of the FASB reached a
consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments" ("Issue 03-1"). Issue 03-1 provides
guidance for determining when an investment is other-than-temporarily impaired
specifically, whether an investor has the ability and intent to hold an
investment until recovery. In addition, Issue 03-1 contains disclosure
requirements about impairments that have not been recognized as other than
temporary for investments. Issue 03-1 also requires the investor to disclose
investments with unrealized losses that have not been recognized as
other-than-temporary impairments. The disclosures are effective in annual
financial statements for fiscal years ending after December 15, 2003, for
investments accounted for under Statements 115 and 124. For all other
investments within the scope of this Issue, the disclosures are effective in
annual financial statements for fiscal years ending after June 15, 2004.
The additional disclosures for cost method investments are effective for fiscal
years ending after June 15, 2004. In September 2004, the FASB delayed the
effective date of the measurement and recognition guidance of Issue 03-1 until
the FASB issues FASB Staff Position 03-1a. The adoption of this consensus is not
expected to have any impact on the Company's consolidated results of operations
or financial position.
4. SEGMENT INFORMATION
The Company has four reporting segments: Weekly Reader, excluding World Almanac
and American Guidance Services, World Almanac, American Guidance Service
("AGS"), and CompassLearning and ChildU ("Compass/ChildU"). This classification
reflects the nature of the Company's organizational structure by which the chief
operating decision-maker reviews and assesses the operating performance of the
reporting segment and allocates corporate resources.
o Weekly Reader is a publisher of classroom periodicals, grade-specific
workbooks and a custom publisher of instructional materials paid for by
various sponsors.
o World Almanac publishes print reference materials sold into the trade
channel; publishes nonfiction and fiction children's books under three
imprints for K-12 students; publishes print and electronic reference
materials sold into the library channel; and distributes third-party
books targeted for K-12 students through its catalogs.
o AGS is a publisher of testing and assessment products and supplemental
instructional materials. AGS products are sold into the school channel.
Testing and assessment products are primarily for K-12 students and
supplemental instructional materials are primarily for low-performing
students in middle and secondary schools.
9
o Compass/ChildU produces research-based technology learning solutions,
including web-based e-learning solutions that provide educational
assessment, curriculum and management tools for grades Pre-K through
12, all of which are aligned to local, state and national standards.
Information regarding the operations of the Company's reporting segments is set
forth below. WRC Media Inc. related expenses and assets that are not allocable
to the other operating segments are included in Corporate. WRC Media evaluates
segment performance based on several factors, of which the primary financial
measure is operating income (loss).
Weekly World Compass /
Reader Almanac AGS ChildU
-------- --------- -------- -----------
Three-months ended September 30, 2004
Revenue, net $ 13,376 $ 9,313 $ 24,897 $ 13,426
Income (loss) from operations 2,442 75 10,031 (17)
Depreciation and amortization 102 562 1,735 1,173
Restructuring costs and other non-recurring expenses - - - 385
Assets 65,951 100,873 205,674 57,197
Capital expenditures 19 561 27 1,923
Three-months ended September 30, 2003
Revenue, net 12,194 11,432 20,644 11,119
Income (loss) from operations 2,467 1,764 8,790 (925)
Depreciation and amortization 177 576 2,109 1,221
Restructuring costs and other non-recurring expenses - - - 71
Assets 68,283 96,727 184,131 55,264
Capital expenditures 115 38 152 1,149
Weekly World Compass /
Reader Almanac AGS ChildU
-------- --------- -------- -----------
Nine-months ended September 30, 2004
Revenue, net $ 27,628 $ 31,700 $ 55,197 $ 35,096
Income (loss) from operations 2,270 2,414 17,385 (6,342)
Depreciation and amortization 352 1,578 5,530 3,450
Restructuring costs and other non-recurring expenses - - - 1,052
Capital expenditures 179 606 209 3,299
Nine-months ended September 30, 2003
Revenue, net 28,279 34,691 45,830 37,768
Income (loss) from operations 4,062 4,937 14,765 (1,385)
Depreciation and amortization 541 1,675 5,757 4,137
Restructuring costs and other non-recurring expenses - 21 - 946
Capital expenditures 219 92 175 3,642
Corporate Eliminations Total
---------- -------------- ---------
Three-months ended September 30, 2004
Revenue, net $ - $ - $ 61,012
Income (loss) from operations (1,053) - 11,478
Depreciation and amortization 940 - 4,512
Restructuring costs and other non-recurring expenses (47) - 338
Assets 268,799 (251,029) 447,465
Capital expenditures 10 - 2,540
Three-months ended September 30, 2003
Revenue, net - - 55,389
Income (loss) from operations (80) - 12,016
Depreciation and amortization 939 - 5,022
Restructuring costs and other non-recurring expenses (647) - (576)
Assets 252,796 (211,987) 445,214
Capital expenditures 2 - 1,456
Corporate Eliminations Total
---------- -------------- ---------
Nine-months ended September 30, 2004
Revenue, net $ - $ - $ 149,621
Income (loss) from operations (2,966) - 12,761
Depreciation and amortization 2,823 - 13,733
Restructuring costs and other non-recurring expenses (17) - 1,035
Capital expenditures 25 - 4,318
Nine-months ended September 30, 2003
Revenue, net - - 146,568
Income (loss) from operations (2,211) - 20,168
Depreciation and amortization 2,823 - 14,933
Restructuring costs and other non-recurring expenses (62) - 905
Capital expenditures 4 - 4,132
5. RESTRUCTURING COSTS AND OTHER NON-RECURRING EXPENSES
During the nine-months ended September 30, 2004, the Company reviewed its
restructuring reserve established in 2002 and increased the reserve $1,035 for
lease terminations primarily resulting from the updating of the sublease
assumptions used in determining the fair value of the remaining lease
obligations associated with facilities vacated during 2002.
Components of the Company's restructuring plan initiated in the fourth quarter
of 2002 are shown in the following table.
Balance at Additional Balance at
December 31, 2003 Charges Amounts Paid September 30, 2004
------------------ ------------- ------------ ------------------
Severance and other benefits $ 32 $ - $ (32) $ -
Lease terminations 3,243 1,035 (1,163) 3,115
--------- --------- ---------- ----------
Total $ 3,275 $ 1,035 $ (1,195) $ 3,115
========= ========= ========== ==========
The restructuring reserve totaled approximately $3,115 at September 30, 2004 and
is expected to be paid as follows: remaining three months of 2004 - $376, 2005
and beyond - $2,739. These charges are included in other accrued liabilities on
the condensed consolidated balance sheets.
10
6. 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 No. 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.
The following table details the effect on net loss if compensation expense for
stock-based compensation arrangements with employees had been recorded based on
the fair value method under SFAS 123, as amended.
Three-Months Ended Nine-Months Ended
September 30, September 30,
2003 2004 2003 2004
---------------------------- ------------------------------
Net income (loss), as reported $ 3,542 $ (3,263) $ (5,085) $ (32,056)
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of related tax
effects (34) (1) (125) (9)
----------- -------- ----------- -------------
Pro forma Net income (loss) $ 3,508 $ (3,264) $ (5,210) $ (32,065)
=========== ======== =========== =============
The Company has outstanding stock options issued to certain of its executives
that are required to be accounted for as variable options. During the three- and
nine-month periods ended September 30, 2003 and 2004, 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.
7. DEBT
On March 29, 2004, the Company refinanced all of its term loans under its Senior
Bank Credit Facilities (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 is March 29, 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 a change in control
11
o annually, 50% of the Company's excess cash flow (as defined) from the
prior year.
The Second-Lien Facility provides for certain restrictions, including
restrictions on asset sales, dividend payments, additional indebtedness and
payments for restricted investments. In addition, the 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 Company. In connection with entering into the
Second-Lien Facility, the Company entered into an amendment and restatement of
its First-Lien Facility, which now consists solely of a $30,000 revolving credit
facility.
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.
Interest on revolving loan borrowings under the First-Lien Facility bear
interest at a rate per annum equal to the LIBO rate as defined in the First-Lien
Facility plus 2.25% or the alternate base rate as defined in the First-Lien
Facility plus 1.25%.
As a result of the refinancing, the Company wrote-off the remaining balances of
deferred financing costs associated with the First Lien Facility of
approximately $1,914. These costs are included in interest expense, including
amortization of deferred financing costs, on the condensed consolidated
statements of operations for the nine-months ended September 30, 2004.
In connection with the refinancing, the Company incurred costs and expenses,
primarily investment banking and legal fees, of approximately $6,600. These
amounts have been recorded as deferred financing fees at September 30, 2004 and
are being amortized over the term of the Second Lien Facility using the
effective interest method.
At September 30, 2004, there were no outstanding advances under the Company's
$30,000 revolving credit facility. The Company has stand-by letters of credit,
renewable annually, in the amount of $2,050 of which $2,000 serves as security
for a real estate lease entered into by the Company and $50 serves as security
for certain surety bonds issued on behalf of the Company. The Company's
available borrowing under the revolving credit facility is reduced by any
outstanding letters of credit. At September 30, 2004, the Company had, net of
the $2,050 in outstanding letters of credit, $27,950 of available credit
under the revolving credit facility.
8. FINANCIAL INSTRUMENTS
Pursuant to the terms of the First and Second-Lien Credit Agreements, the
Company is required to enter into or maintain interest rate protection
agreements (interest rate swaps, caps, collars or similar agreements) in a
notional amount that, when taken together with the aggregate principal amount of
Total Debt, as defined, subject to a fixed interest rate, is at least equal to
at least 50% of the aggregate principal amount of all Total Debt. On November
15, 2003, the Company entered into a one year interest rate cap agreement with a
notional principal of $61,000, 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. No amount is in the condensed consolidated balance
sheet at December 31, 2003 and September 30, 2004 as the fair value of the
interest rate cap at those dates is de-minimis. At November 15, 2004, more than
50% of the aggregate principal amount of Total Debt, as defined, is subject to a
fixed interest rate. Therefore the interest rate cap will not be renewed.
12
9. INVENTORIES
Inventories as of December 31, 2003 and September 30, 2004 are as follows:
December 31, September 30,
2003 2004
------------ -----------
Finished goods $ 16,533 $ 15,021
Raw materials 119 938
------------ -----------
$ 16,652 $ 15,959
============ ===========
10. GOODWILL AND TRADEMARKS
At December 31, 2003 and September 30, 2004, goodwill and indefinite lived
intangible assets are as follows:
December 31, September 30,
2003 2004
----------- -----------
Goodwill $ 241,324 $ 241,324
Long Lived Assets - Trademarks and
copyrights 23,772 23,772
----------- -----------
$ 265,096 $ 265,096
=========== ===========
There were no changes in goodwill and indefinite lived intangible assets during
the three- and nine-months ended September 30, 2004.
The Company recorded non-cash deferred income tax expense of $725 and $2,175
each of for the three- and nine-month periods ended September 30, 2003 and 2004,
respectively, for taxable temporary differences that will not reverse prior to
expiration of the Company's net operating loss carryforward periods. Book
amortization of tax-deductible goodwill and trademarks ceased on January 1, 2002
upon the Company's adoption of SFAS 142; however, 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.
The Company expects that it will record an additional $725 to increase deferred
tax liabilities during the remaining three-months of 2004.
11. OTHER INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization of the Company's
intangible assets other than goodwill and indefinite lived intangible assets
are as follows:
---------------------------------------------------
December 31, 2003
---------------------------------------------------
Accumulated
Useful Lives Gross Amortization Net
------------ --------------- -------------- --------------
Customer Lists 6-15 yrs $ 48,600 $ (24,948) $ 23,652
Copyrights 10-20 yrs 30,800 (6,462) 24,338
Software 3-5 yrs 14,789 (10,027) 4,762
Trademark 4-10 yrs 200 (82) 118
Distributor relationships 6 yrs 700 (482) 218
--------------- -------------- --------------
Total: $ 95,089 $ (42,001) $ 53,088
=============== ============== ==============
--------------------------------------------------
September 30, 2004
--------------------------------------------------
Accumulated
Useful Lives Gross Amortization Net
------------ -------------- -------------- --------------
Customer Lists 6-15 yrs $ 48,600 $ (29,327) $ 19,273
Copyrights 10-20 yrs 30,800 (7,641) 23,159
Software 3-5 yrs 14,789 (11,999) 2,790
Trademark 4-10 yrs 200 (97) 103
Distributor relationships 6 yrs 700 (568) 132
-------------- -------------- --------------
Total: $ 95,089 $ (49,632) $ 45,457
============== ============== ==============
Included in other intangible assets, are trademarks and copyrights not subject
to amortization, for which the total carrying amount was $23,772 at December 31,
2003 and September 30, 2004 (See note 10).
13
Amortization of intangibles for the three-months ended September 30, 2003 and
2004 was $2,829 and $2,310, respectively. Amortization of intangibles for the
nine-months ended September 30, 2003 and 2004 was $9,024 and $7,631,
respectively. Amortization of intangibles is included in amortization of
intangible assets on the condensed consolidated statements of operations. The
estimated amortization expense for intangible assets subject to amortization for
the next five years is as follows:
Remaining three months of 2004........................... $ 2,300
2005..................................................... 9,197
2006..................................................... 6,843
2007..................................................... 4,600
2008 .................................................... 3,461
2009 .................................................... 3,253
Thereafter............................................... 15,803
12. COMMITMENTS AND CONTINGENCIES
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.
The Securities and Exchange Commission ("SEC") is conducting a preliminary
inquiry concerning the Company and has requested that the Company voluntarily
provide the SEC with various documents and information, and that certain
officers and employees of the Company voluntarily give testimony or be
interviewed. The Company is cooperating fully with the SEC inquiry, and has
continued to provide all documents, information and testimony requested by the
SEC, and has arranged all interviews requested by the SEC with Company
employees. The Company cannot predict the final outcome of this inquiry at this
time.
15% Senior Preferred Stock due 2011
In 1999, the Company issued 3,000,000 shares of 15% Senior Preferred Stock due
in 2011 with a liquidation preference of $25.00 per share. The 15% Senior
Preferred Stock shall accrue dividends at a rate of 15% per annum, subject to
adjustment if the Company fails to redeem all outstanding shares of such 15%
Senior Preferred Stock in connection with a mandatory redemption or change of
control. Such accrued dividends reflect penalty dividends of 0.5% for periods
prior to November 17, 2001. While the Company believes that no penalty dividend
is due for subsequent periods, the preferred shareholders may disagree with that
conclusion.
13. NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
In connection with the recapitalization and purchase of Weekly Reader in
November 1999, the Company, Weekly Reader and CompassLearning as co-issuers,
completed an offering of $152,000 12 3/4% Senior Subordinated Notes due 2009
(the "Old Notes"). In September 2000, the Old Notes were exchanged in full for
$152.0 million of new 12 3/4% Senior Subordinated Notes due 2009 (the "Notes"),
which 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, a wholly-owned
subsidiary and Weekly Reader, a majority (94.9%) 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 three- and nine-month
periods ended September 30, 2003 and 2004 for: (1) WRC Media, (2) Weekly Reader,
a majority-owned subsidiary, (3) CompassLearning, a wholly-owned subsidiary, (4)
ChildU a wholly-owned subsidiary, and (5) the Company on a consolidated basis.
14
Subsidiary Guarantors
--------------------------------------------------------
Compass
Weekly Reader Learning
WRC Media Inc. Corporation Inc.
------------------ ---------------- ------------
(In thousands)
Balance Sheet as of September 30, 2004
Assets:
Current assets $ 1,676 $ 99,054 $ 20,544
Property and equipment, net - 4,520 496
Goodwill and other intangible assets, net 153,643 131,926 22,194
Other assets 108,933 32,906 6,045
------------ ------------ ------------
Total assets $ 264,252 $ 268,406 $ 49,279
============ ============ ============
Liabilities and stockholders' deficit:
Current liabilities $ 119,013 $ 62,434 $ 57,317
Redeemable preferred stock, plus accrued dividends 147,606 154,824 -
Long-term debt 148,103 293,103 -
Other liabilities 7,650 5,325 1,144
Warrants on common stock of subsidiaries 11,751 - -
Common stock subject to redemption 950 - -
Stockholders' deficit (170,821) (247,280) (9,182)
------------ ------------ ------------
Total liabilities and stockholders' deficit $ 264,252 $ 268,406 $ 49,279
============ ============ ============
Subsidiary Guarantors
--------------------------------------------------------
Compass
Weekly Reader Learning
WRC Media Inc. Corporation Inc.
------------------ ---------------- ------------
(In thousands)
Statements of operations for the three months
ended September 30, 2004
Revenue, net $ - $ 47,586 $ 6,588
Operating costs and expenses 929 35,162 10,069
Interest expense, net 11,082 13,207 -
Other (income) expense 237 195 13
Provision for income taxes 583 181 12
------------ ------------ ------------
Net income (loss) $ (12,831) $ (1,159) $ (3,506)
============ ============ ============
Statements of operations for the nine months
ended September 30, 2004
Revenue, net $ - $ 114,525 $ 21,528
Operating costs and expenses 2,788 92,634 31,996
Interest expense, net 33,885 38,845 -
Other (income) expense 764 591 14
Provision for income taxes 1,808 537 73
------------ ------------ ------------
Net income (loss) $ (39,245) $ (18,082) $ (10,555)
============ ============ ============
Cash flow for the nine months
ended September 30, 2004
Cash flow provided by (used in) operations $ (11,024) $ (4,799) $ (10,199)
Cash flow used in investing activities - (1,019) (2,074)
Cash flow provided by (used in) financing activities 10,924 12,714 12,273
Cash and cash equivalents at beginning of period 100 1,267 4
------------ ------------ ------------
Cash and cash equivalents at end of period $ - $ 8,163 $ 4
============ ============ ============
Subsidiary Guarantors
------------------------------------------------------
Compass
Weekly Reader Learning
WRC Media Inc. Corporation Inc.
------------------ ---------------- ------------
Statements of operations for the three months
ended September 30, 2003 (In thousands)
Revenue, net $ - $ 44,270 $ 9,684
Operating costs and expenses 929 30,400 10,746
Interest expense, net 5,271 7,148 1
Other (income) expense 256 194 -
Provision for income taxes 580 183 1
------------ ------------ ------------
Net income (loss) $ (7,036) $ 6,345 $ (1,064)
============ ============ ============
Statements of operations for the nine months
ended September 30, 2003
Revenue, net $ - $ 108,800 $ 33,427
Operating costs and expenses 3,267 83,979 35,012
Interest expense, net 15,814 20,881 1
Other (income) expense 967 502 -
Provision for income taxes 1,780 437 39
------------ ------------ ------------
Net income (loss) $ (21,828) $ 3,001 $ (1,625)
============ ============ ============
Cash flow for the nine months
ended September 30, 2003
Cash flow provided by (used in) operations $ (11,506) $ (11,628) $ 5,143
Cash flow used in investing activities - (486) (2,299)
Cash flow provided by (used in) financing activities 10,494 8,847 (2,844)
Cash and cash equivalents at beginning of period 1,154 7,819 4
------------ ------------ ------------
Cash and cash equivalents at end of period $ 142 $ 4,552 $ 4
============ ============ ============
Subsidiary Guarantors
--------------------------------------------------------
WRC
Media Inc.
ChildU Eliminations Consolidated
------------ --------------- ------------------
Balance Sheet as of September 30, 2004
Assets:
Current assets $ 6,356 $ (46,515) $ 81,115
Property and equipment, net 122 - 5,138
Goodwill and other intangible assets, net 2,790 - 310,553
Other assets 2,700 (99,925) 50,659
------------ ------------ ------------
Total assets $ 11,968 $ (146,440) $ 447,465
============ ============ ============
Liabilities and stockholders' deficit:
Current liabilities $ 7,585 $ (147,908) $ 98,441
Redeemable preferred stock, plus accrued dividends - (154,824) 147,606
Long-term debt - (148,103) 293,103
Other liabilities - - 14,119
Warrants on common stock of subsidiaries - - 11,751
Common stock subject to redemption - - 950
Stockholders' deficit 4,383 304,395 (118,505)
------------ ------------ ------------
Total liabilities and stockholders' deficit $ 11,968 $ (146,440) $ 447,465
============ ============ ============
------------------------------------
WRC
Media Inc.
ChildU Eliminations Consolidated
Statements of operations for the three months ------------ --------------- ------------------
ended September 30, 2004
Revenue, net $ 6,838 $ - $ 61,012
Operating costs and expenses 3,374 - 49,534
Interest expense, net - (10,571) 13,718
Other (income) expense 2 (200) 247
Provision for income taxes - - 776
------------ ------------ ------------
Net income (loss) $ 3,462 $ 10,771 $ (3,263)
============ ============ ============
Statements of operations for the nine months
ended September 30, 2004
Revenue, net $ 13,568 $ - $ 149,621
Operating costs and expenses 9,442 - 136,860
Interest expense, net - (31,102) 41,628
Other (income) expense 2 (600) 771
Provision for income taxes - - 2,418
------------ ------------ ------------
Net income (loss) $ 4,124 $ 31,702 $ (32,056)
============ ============ ============
Cash flow for the nine months
ended September 30, 2004
Cash flow provided by (used in) operations $ 6,480 $ 15,510 $ (4,032)
Cash flow used in investing activities (804) - (3,897)
Cash flow provided by (used in) financing activities (5,697) (15,510) 14,704
Cash and cash equivalents at beginning of period 61 - 1,432
------------ ------------ ------------
Cash and cash equivalents at end of period $ 40 $ - $ 8,207
============ ============ ============
--------------------------------------
WRC
Media Inc.
ChildU Eliminations Consolidated
------------ --------------- ------------------
Statements of operations for the three months
ended September 30, 2003
Revenue, net $ 1,435 $ - $ 55,389
Operating costs and expenses 1,298 - 43,373
Interest expense, net - (4,960) 7,460
Other (income) expense - (200) 250
Provision for income taxes - - 764
------------ ------------ ------------
Net income (loss) $ 137 $ 5,160 $ 3,542
============ ============ ============
Statements of operations for the nine months
ended September 30, 2003
Revenue, net $ 4,341 $ - $ 146,568
Operating costs and expenses 4,142 - 126,400
Interest expense, net - (14,868) 21,828
Other (income) expense - (300) 1,169
Provision for income taxes - - 2,256
------------ ------------ ------------
Net income (loss) $ 199 $ 15,168 $ (5,085)
============ ============ ============
Cash flow for the nine months
ended September 30, 2003
Cash flow provided by (used in) operations $ 2,272 $ 15,333 $ (386)
Cash flow used in investing activities (1,343) - (4,128)
Cash flow provided by (used in) financing activities (982) (15,333) 182
Cash and cash equivalents at beginning of period 118 - 9,095
------------ ------------ ------------
Cash and cash equivalents at end of period $ 65 $ - $ 4,763
============ ============ ============
14. RELATED PARTY TRANSACTIONS
Management Agreements
In connection with the acquisition of Weekly Reader and CompassLearning, the
Company entered into management agreements with its principal shareholder. In
accordance with the management agreements, the shareholder provides to Weekly
Reader and CompassLearning management consulting and advisory services. As a
result, Weekly Reader and CompassLearning are obligated to pay to the
shareholder annual aggregate management fees for services to both Weekly Reader
and CompassLearning totaling $950, which are payable quarterly.
15
In addition, the Company will reimburse the principal shareholder for reasonable
out-of-pocket costs and expenses incurred in connection with the performance of
its services. During each of the three- and nine-month periods ended September
30, 2003 and 2004, the Company recognized general and administrative expense of
$238 and $713, respectively, for management fees. 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. At September 30, 2004, other accrued
liabilities include approximately $713 of accrued management fees.
15. PENSION BENEFITS
The following table provides components of net periodic benefit cost for the
Company's defined benefit pension plan for the three- and nine-month periods
ended September 30, 2003 and 2004:
Three-Months Ended September 30, Nine-Months Ended September 30,
--------------------------------- -------------------------------
2003 2004 2003 2004
---------- ---------- ---------- ----------
Service cost $ 229 $ 225 $ 687 $ 675
Interest cost 221 238 663 714
Expected return on plan
assets (169) (242) (507) (726)
Amortization of net loss 74 42 222 126
---------- ---------- ---------- ----------
Net periodic benefit cost $ 355 $ 263 $ 1,065 $ 789
========== ========== ========== ==========
16. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Nine-Months Ended September 30,
--------------------------------------------------------
2003 2004
------------ ------------
Cash paid during the period for interest $ 16,222 $ 15,809
Cash paid during the period for income taxes $ 208 $ 280
Non-cash financing activities:
Preferred stock dividends accrued $ 13,972 $ 16,188(1)
Accretion of preferred stock $ 708 $ 718
(1) During the nine-month period ended September 30, 2004, $16,188 of such
preferred stock dividends have been recorded as interest expense in the
statement of operations, resulting from the Company's adoption of SFAS 150
effective January 1, 2004.
17. RESTATEMENT
In connection with the audit of the Company's 2003 consolidated financial
statements (the "Initial Restatement") and the reaudit of its 2001 consolidated
financial statements (the "Further Restatement), the Company has restated its
previously audited consolidated balance sheets as of December 31, 2001, 2002 and
2003 and the related statements of operations, stockholders' deficit and cash
flows for the years ended December 31, 2001, 2002 and 2003.
In connection with the Initial Restatement, management had restated its
financial statements for the three- and nine-months ended September 30, 2003
because it had incorrectly accounted for (i) the revenue recognition of a
software and services sale in December 2002; (ii) the purchase price related to
the ChildU acquisition in 2001; (iii) revenue recognition for distributor sales;
(iv) rent expense; and (v) other items including an adjustment relating to the
amortization period for certain capitalized pre-publication costs.
Described below are the matters for which the Company has restated its condensed
consolidated financial statements for the three- and nine-months ended September
30, 2003 in connection with the Initial Restatement.
16
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 bad debt reserve of $920 and by
retaining an excess of $249 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 nine-months ended September 30, 2003 was to decrease net loss
by approximately $920.
o ChildU Goodwill Reduction. The Company's subsidiary, ChildU, 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 net loss by $418 and $1,255, respectively
in the three- and nine-months ended September 30, 2003.
Following the determination to restate the Company's financial statements for
matters described above, the Company also determined that it would correct the
financial statement 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 condensed 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 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. The Company has restated its financial
statements which decreased its net loss by $61 and $319 respectively
for the three- and nine-months ended September 30, 2003.
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, which had the net effect of decreasing its net
loss by $194 and $546, respectively for the three- and nine-months
ended September 30, 2003.
o Other. The Company also made an adjustment relating to the amortization
period for certain capitalized pre-publication costs which had the
effect of increasing net loss by $93 and $303 respectively for the
three- and nine-months ended September 30, 2003 and it reclassified $67
and $994, respectively of software development amortization from
amortization of intangibles to cost of goods sold in the condensed
consolidated statement of operations for the three- and nine-months
ended September 30, 2003. An adjustment was also made related to the
waiver, by the Company's principal shareholder, of certain management
fees owed to it. The adjustment increased operating expenses and
additional paid in capital by $300 for the nine-months ended September
30, 2003.
17
In connection with the re-audit of the Company's 2001 consolidated financial
statements, management determined that it had incorrectly accounted for the
following items, which comprise the Further Restatement: (i) intangible assets
acquired in 1999 in connection with the Company's acquisition of Weekly Reader;
(ii) acquisition reserves for acquisitions in 1999; (iii) its adoption of SFAS
142 and the preparation of its transitional impairment analysis; (iv) deferred
tax liabilities recognized upon the adoption of SFAS 142; (v) 15% Senior
Preferred Stock dividends; and (vi) a number of other items which had been
previously identified and collectively determined to be immaterial but which the
Company decided to correct. In addition, the Company corrected certain errors in
its disclosures regarding stock options granted to its employees.
Described below are the matters for which the Company has restated its condensed
consolidated financial statements for the three- and nine-months ended September
30, 2003 in connection with the Further Restatement.
o WRC Media Goodwill and Intangible Assets. In connection with the
reaudit of the Company's 2001 consolidated financial statements, the
Company reconsidered the assumptions used to determine the estimated
fair value and economic lives of the intangible assets acquired in
connection with the 1999 acquisition and recapitalization of Weekly
Reader by WRC Media (the "1999 Intangible Assets"). The Company has
determined that the original basis for estimating the fair value and
economic lives of the intangible assets was a valuation report that the
former owners of Weekly Reader had provided to WRC Media at the time of
the 1999 acquisition. Accordingly, in 2004, the Company engaged a
valuation consulting firm to assist management in assessing the fair
values and economic lives of the 1999 Intangible Assets as of the
acquisition date. As a result, certain estimated fair values and
economic lives of the 1999 Intangible Assets have been revised.
Accordingly, the Company has restated its financial statements to
correctly state the estimated fair value and economic lives of the 1999
Intangible Assets acquired as of November 17, 1999. This had the effect
of increasing goodwill by $36,238 and decreasing other intangibles in
the aggregate by the same amount. Other intangible assets include
Copyrights, Customer lists and Trademarks. Copyrights increased by
$4,733 and their estimated useful life was amended from 10 years to
approximately 20 years, Customer lists decreased by $13,680 and their
estimated useful life decreased from 10 years to approximately 8.5
years and Trademarks decreased by $27,291 and their estimated useful
life decreased from 40 years to approximately 39 years. In addition,
the Company has restated its financial statements to correct
amortization expense for other intangible assets, which had the effect
of reducing amortization expense of intangible assets for the three-
and nine-months ended September 30, 2003 by $374 and $1,124,
respectively.
o CompassLearning/Weekly Reader Additional Goodwill Reduction. As
discussed above the Company recorded certain reserves for a planned
restructuring in connection with the acquisitions of CompassLearning
and Weekly Reader. In connection with the reaudit of its 2001
consolidated financial statements the Company determined that it had
incorrectly recorded reserves of $3,106 related to estimated
liabilities it believed it had assumed at the date of such
acquisitions. The Company concluded that the acquisition reserves
associated with these liabilities should have been reversed in 1999.
The estimated liabilities associated with the excess reserves included
$1,522 of debt issuance costs, $1,157 of severance and consulting fees,
primarily attributable to employees or consultants hired subsequent to
the acquisition date, $362 of leasehold improvements for space to be
occupied by employees of World Almanac Group and other administrative
costs of $65. The Company determined that goodwill and the related
acquisition reserves should be reduced by $3,106. The Company has
restated its financial statements to correct for these errors. The net
effect of such adjustments was to increase net loss for the three- and
nine-months ended September 30, 2003 by $53 and $163, respectively.
o Goodwill and Long-lived Intangible Asset Impairment. On January 1,
2002, the Company adopted SFAS 142 for its goodwill and intangible
assets. Upon adoption, the Company ceased amortization of goodwill and
other indefinite lived intangible assets, which primarily consist of
trademarks. As required by SFAS 142, the Company reviewed its
indefinite lived intangibles (goodwill and trademarks) for impairment
as of January 1, 2002. The Company has four reporting units with
goodwill. Goodwill was tested for impairment at the reporting unit
level. As a result, the Company recorded a transitional goodwill and
indefinite lived intangible asset impairment charge of $72,022 at
American Guidance Service, Inc. ("AGS") a subsidiary of Weekly Reader.
This charge was reported as a cumulative effect of accounting change,
as of January 1, 2002, in the consolidated statements of operations. In
connection with the reconsideration of the assumptions used to
determine the estimated fair value and economic lives of the 1999
Intangible Assets discussed above, the Company updated its transitional
impairment analysis and determined that it had incorrectly calculated
the fair value of its reporting units. Accordingly, the impairment
charge of $72,022 at AGS was incorrect and not required. 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. Certain other key
assumptions utilized, including changes in revenue, operating expenses,
working capital requirements and capital expenditures including
pre-publication costs, are based on reasonable 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. The Company has restated its December 31, 2002
and 2003 balance sheets to correct for this error. The net effect of
such adjustment was to increase goodwill and decrease accumulated
deficit by $72,022 as of December 31, 2002 and 2003.
18
o Deferred Tax Liabilities. The Company recognized non-cash deferred
income tax expense and a deferred tax liability on January 1, 2002 in
connection with its adoption of SFAS 142. The deferred tax liability
relates to the excess of tax over book amortization of tax-deductible
goodwill and trademarks since the timing of the reversal of this
liability is indefinite, unless the related assets are sold or an
impairment of the assets is recorded, and can no longer be offset by
the Company's net operating loss carryforwards, which expire within a
statutory period. During 2003, the Company recorded additional deferred
tax expense. The non-cash income tax expense recorded during the three-
and nine-months ended September 30, 2003 increased by $225, from $539
to $764 and by $675, from $1,581 to $2,256, respectively. These
restatements are principally due to the reversal of the impairment
charges and the revision of estimated fair value and economic lives of
the 1999 Intangible Assets discussed above.
o 15% Senior Preferred Stock due 2011. In 1999, the Company issued
3,000,000 shares of 15% Senior Preferred Stock due in 2011. The 15%
Senior Preferred Stock accrued dividends at a rate of 15% per annum.
The Certificate of Designation provides that the 15% Senior Preferred
Stock was subject to a default or penalty dividend of 0.5% in the event
of certain registration defaults. A penalty dividend was applicable
from mid-August of 2000 through November 17, 2001. While the Company
believes that no penalty dividend is due for subsequent periods, the
preferred shareholders may disagree with that conclusion. The Company
had not previously recorded this penalty dividend. The recording of the
penalty dividends (and required compounding in subsequent periods)
resulted in the Company increasing accrued dividends on 15% Senior
Preferred Stock by $33 and $94 during the three- and nine-months ended
September 30, 2003, respectively.
o Segment Information. The Company previously disclosed one reportable
segment. The Company now discloses four reportable segments.
o Other. In connection with the re-audit of the Company's 2001 financial
statements, the Company has made a number of other corrections to the
financial statements, which collectively were immaterial.
Summarized below are the significant effects of the Initial Restatement and the
Further Restatement.
19
Three-Months Ended September 30, 2003
-------------------------------------------------
As Previously
Reported in
November 14, 2003 Restatement
Form 10-Q Adjustments As Restated
------------------- -------------- -------------
Revenue, net $ 55,322 $ 67 $ 55,389
Cost of goods sold 14,714 90 14,804
------------- ---------- -------------
Gross profit 40,608 (23) 40,585
------------- ---------- -------------
Costs and expenses:
Sales and marketing 11,749 11,749
Research and development 634 634
Distribution, circulation and fulfillment 3,697 3,697
Editorial 2,266 2,266
General and administrative 6,113 (336) 5,777
Restructuring costs and other non-recurring (576) (576)
expenses
Depreciation 543 6 549
Amortization of intangible assets 4,401 72 4,473
------------- ---------- -------------
Total operating costs and expenses 28,827 (258) 28,569
------------- ---------- -------------
Income from operations 11,781 235 12,016
Interest expense, including amortization
of deferred financing costs (7,413) (47) (7,460)
Other expense, net (250) (250)
------------- ---------- -------------
Income before income tax provision 4,118 188 4,306
Income tax provision 539 225 764
------------- ---------- -------------
Net income $ 3,579 $ (37) $ 3,542
============= ========== =============
20
Nine Months Ended September 30, 2003
----------------------------------------------------
As Previously
Reported in
November 14, 2003 Restatement
Form 10-Q Adjustments As Restated
----------------- ------------ -----------
Revenue, net $ 145,792 $ 776 $ 146,568
Cost of goods sold 39,990 1,171 41,161
--------- --------- ---------
Gross profit 105,802 (395) 105,407
--------- --------- ---------
Costs and expenses:
Sales and marketing 33,281 250 33,531
Research and development 1,558 1,558
Distribution, circulation and fulfillment 10,112 10,112
Editorial 7,410 7,410
General and administrative 18,447 (1,657) 16,790
Restructuring costs and other non-recurring 905 905
expenses
Depreciation 1,750 19 1,769
Amortization of intangible assets 13,725 (561) 13,164
--------- --------- ---------
Total operating costs and expenses 87,188 (1,949) 85,239
--------- --------- ---------
Income from operations 18,614 1,554 20,168
Interest expense, including amortization
of deferred financing costs (21,683) (145) (21,828)
Other expense, net (869) (300) (1,169)
--------- --------- ---------
Loss before income tax provision (3,938) 1,109 (2,829)
Income tax provision 1,581 675 2,256
--------- --------- ---------
Net loss $ (5,519) $ 434 $ (5,085)
========= ========= =========
21
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
(Unaudited)
December 31, September 30,
2003 2004
---------------------- --------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,267 $ 8,163
Accounts receivable (net of allowance for doubtful accounts
and sales returns of $2,179 and $2,465, respectively) 20,880 40,063
Inventories 15,890 15,587
Due from related party 11,502 31,870
Prepaid expenses 2,882 1,614
Other current assets (including restricted assets of $1,006
and $802, respectively) 1,889 1,757
------------ ------------
Total current assets 54,310 99,054
Property and equipment, net 4,665 4,520
Goodwill 101,978 101,978
Other intangible assets, net 31,580 29,948
Deferred financing costs, net 512 -
Other assets 29,711 32,906
------------ ------------
Total assets $ 222,756 $ 268,406
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 15,446 $ 16,663
Deferred revenue 17,565 29,040
Accrued expenses and other current liabilities 15,865 16,731
Current portion of long-term debt 8,477 -
------------ ------------
Total current liabilities 57,353 62,434
Deferred tax liability 4,800 5,325
15% senior preferred stock, including accrued dividends and
accretion of warrant value (6,192,960 shares outstanding),
(Liquidation preference of $154,824) - 154,824
Long-term debt 262,925 293,103
------------ ------------
Total liabilities 325,078 515,686
------------ ------------
Commitments and contingencies
15% senior preferred stock, including accrued
dividends and accretion of warrant value
(5,508,000 shares outstanding) 138,636 -
Stockholders' deficit:
Common stock, ($.01 par value, 20,000,000 shares authorized;
2,830,000 shares outstanding in 2003 and 2004) 28 28
Additional paid-in capital 9,133 9,133
Due from parent (56,464) (44,704)
Accumulated other comprehensive loss (1,899) (1,899)
Accumulated deficit (191,756) (209,838)
------------ ------------
Total stockholders' deficit (240,958) (247,280)
------------ ------------
Total liabilities and stockholders' deficit $ 222,756 $ 268,406
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
22
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
(Amounts in thousands)
2003 2004
----------------- -----------------
(As Restated
See Note 15)
Revenue, net $ 44,270 $ 47,586
Cost of goods sold 10,351 10,819
------------ ------------
Gross profit 33,919 36,767
------------ ------------
Costs and expenses:
Sales and marketing 7,199 9,543
Distribution, circulation and fulfillment 3,697 3,565
Editorial 2,266 2,926
General and administrative 4,662 5,946
Restructuring costs (647) (47)
Depreciation 426 378
Amortization of intangible assets 2,446 2,032
------------ ------------
Total operating costs and expenses 20,049 24,343
------------ ------------
Income from operations 13,870 12,424
Other expense:
Interest expense, including amortization of
deferred financing costs (7,148) (13,207)
Other expense, net (194) (195)
------------ ------------
Income (loss) before income tax provision 6,528 (978)
Income tax provision 183 181
------------ ------------
Net income (loss) $ 6,345 $ (1,159)
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
23
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited) (Amounts
in thousands)
2003 2004
----------------- -----------------
(As Restated
See Note 15)
Revenue, net $ 108,800 $ 114,525
Cost of goods sold 26,698 27,942
------------ ------------
Gross profit 82,102 86,583
------------ ------------
Costs and expenses:
Sales and marketing 19,131 22,814
Distribution, circulation and fulfillment 10,112 9,886
Editorial 7,410 8,273
General and administrative 13,141 16,241
Restructuring costs (521) (17)
Depreciation 1,305 1,164
Amortization of intangible assets 6,703 6,331
------------ ------------
Total operating costs and expenses 57,281 64,692
------------ ------------
Income from operations 24,821 21,891
Other expense:
Interest expense, including amortization
of deferred financing costs (20,881) (38,845)
Other expense, net (502) (591)
------------ ------------
Income (loss) before income tax provision 3,438 (17,545)
Income tax provision 437 537
------------ ------------
Net income (loss) $ 3,001 $ (18,082)
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
24
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
(Amounts in thousands)
2003 2004
----------------- -----------------
(As Restated
See Note 15)
Cash flows from operating activities:
Net income (loss) $ 3,001 $ (18,082)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Deferred income tax provision 525 525
Depreciation and amortization 8,008 7,495
Accrual of manditorily redeemable preferred stock dividends - 16,188
Impairment of pre-publication costs - 76
Amortization of debt discount 135 379
Amortization of deferred financing costs 333 512
Changes in operating assets and liabilities:
Accounts receivable (17,175) (19,183)
Inventories (1,288) 303
Prepaid expenses and other current assets 114 1,400
Other non-current assets (10,503) (7,971)
Accounts payable (2,375) 1,217
Deferred revenue 10,776 11,475
Accrued liabilities (3,179) 867
------------ ------------
Net cash used in operating activities (11,628) (4,799)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (490) (1,019)
Proceeds from the disposition of property and equipment 4 -
------------ ------------
Net cash used in investing activities (486) (1,019)
------------ ------------
Cash flows from financing activities:
Proceeds from revolving line of credit 27,000 35,000
Repayments of borrowings under revolving line of credit (21,000) (40,000)
Repayment of senior bank debt (5,773) (118,678)
Proceeds from issuance of long term debt - 145,000
Due from parent, net 7,316 11,760
Due from related party 1,304 (20,368)
------------ ------------
Net cash provided by financing activities 8,847 12,714
------------ ------------
(Decrease) increase in cash and cash equivalents (3,267) 6,896
Cash and cash equivalents, beginning of period 7,819 1,267
------------ ------------
Cash and cash equivalents, end of period $ 4,552 $ 8,163
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
25
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS
The condensed 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 Service, Inc. and its subsidiaries,
AGS International Sales, Inc. and Lindy Acquisition Co., LLC (all are
collectively referred to as "Weekly Reader" or the "Company"). At December 31,
2003 and September 30, 2004, WRC Media Inc. (the "Parent") owns 94.9% and
PRIMEDIA, Inc. owns 5.1% of the common stock of Weekly Reader.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of the Company
as of September 30, 2004 and for the three and nine-month periods ended
September 30, 2003 and 2004 have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") for
interim financial information and the instructions for Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments, consisting of only normal recurring adjustments
(except as discussed in Note 15) necessary to present fairly the financial
position, the results of operations and cash flows for the periods presented,
have been made.
These condensed consolidated financial statements should be read in conjunction
with Weekly Reader Corporation and Subsidiaries annual financial statements and
related notes thereto for the year ended December 31, 2003 included in the
Company's Annual Report on Form 10-K dated June 15, 2004. The operating results
for the three- and nine-month periods ended September 30, 2003 and 2004 are not
necessarily indicative of the results that may be expected for a full year.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("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 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 effective March 31, 2004 did not have
a significant impact on the Company's consolidated financial position or results
of operations.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("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.
26
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 was effective for the
Company beginning January 1, 2004. 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 required the Company to
reclassify its 15% Senior Preferred Stock ("15% Senior Preferred") from the
mezzanine section of the balance sheet to long-term liabilities at March 31,
2004. Effective January 1, 2004 dividend payments for the 15% Senior Preferred
are recorded as interest expense in the consolidated statement of operations.
The adoption of this statement did not result in any adjustment to the book
value of its 15% Senior Preferred as of January 1, 2004 as book value
approximated fair value at January 1, 2004. For the three- and nine-month
periods ended September 30, 2004 the Company recognized $5,596 and $16,188,
respectively, of accrued dividends on 15% Senior Preferred as interest expense.
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. The
Company has adopted such disclosure provisions (see Note 13).
On March 17, 2004, the Emerging Issues Task Force of the FASB reached a
consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments" ("Issue 03-1"). Issue 03-1 provides
guidance for determining when an investment is other-than-temporarily impaired;
specifically, whether an investor has the ability and intent to hold an
investment until recovery. In addition, Issue 03-1 contains disclosure
requirements about impairments that have not been recognized as other than
temporary for investments. Issue 03-1 also requires the investor to disclose
investments with unrealized losses that have not been recognized as
other-than-temporary impairments. The disclosures are effective in annual
financial statements for fiscal years ending after December 15, 2003, for
investments accounted for under Statements 115 and 124. For all other
investments within the scope of this Issue, the disclosures are effective in
annual financial statements for fiscal years ending after June 15, 2004.
The additional disclosures for cost method investments are effective for fiscal
years ending after June 15, 2004. In September 2004, the FASB delayed the
effective date of the measurement and recognition guidance of Issue 03-1 until
the FASB issues FASB Staff Position 03-1a. The adoption of this consensus is not
expected to have any impact on the Company's consolidated results of operations
or financial position.
4. SEGMENT INFORMATION
The Company has three reporting segments: Weekly Reader, World Almanac, and
American Guidance Service ("AGS"). This classification reflects the nature of
the Company's organizational structure by which the chief operating
decision-maker reviews and assesses the operating performance of the reporting
segment and allocates corporate resources.
o Weekly Reader is a publisher of classroom periodicals, grade-specific
workbooks and a custom publisher of instructional materials paid for by
various sponsors.
o World Almanac publishes print reference materials sold into the trade
channel; publishes nonfiction and fiction children's books under three
imprints for K-12 students; publishes print and electronic reference
materials sold into the library channel; and distributes third-party
books targeted for K-12 students through its catalogs.
o AGS is a publisher of testing and assessment products and supplemental
instructional materials. AGS products are sold into the school channel.
Testing and assessment products are primarily for K-12 students and
supplemental instructional materials are primarily for low-performing
students in middle and secondary schools.
27
Information regarding the operations of the Company's reporting segments is set
forth below. Parent Company expenses and assets not allocated to reporting
segments are included in Corporate. Weekly Reader evaluates performance based on
several factors, of which the primary financial measure is operating income
(loss).
Weekly World
Reader Almanac AGS Corporate Eliminations Total
-------- ------- -------- --------- ------------ --------
Three-months ended September 30, 2004
Revenue, net $ 13,376 $ 9,313 $ 24,897 $ - $ - $ 47,586
Income (loss) from operations 2,442 75 10,031 (124) - 12,424
Depreciation and amortization 102 562 1,735 11 - 2,410
Restructuring costs - - - (47) - (47)
Assets 65,951 100,873 205,674 4,547 (108,639) 268,406
Capital expenditures 19 561 27 10 - 617
Three-months ended September 30, 2003
Revenue, net 12,194 11,432 20,644 - - 44,270
Income from operations 2,467 1,764 8,790 849 - 13,870
Depreciation and amortization 177 576 2,109 10 - 2,872
Restructuring costs - - - (647) - (647)
Assets 68,283 96,727 184,131 18,273 (124,706) 242,708
Capital expenditures 115 38 152 2 - 307
Weekly World
Reader Almanac AGS Corporate Eliminations Total
-------- ------- -------- --------- ------------ --------
Nine-months ended September 30, 2004
Revenue, net 27,628 31,700 55,197 $ - $ - $ 114,525
Income (loss) from operations 2,270 2,414 17,385 (178) - 21,891
Depreciation and amortization 352 1,578 5,530 35 - 7,495
Restructuring costs - - - (17) - (17)
Capital expenditures 179 606 209 25 - 1,019
Nine-months ended September 30, 2003
Revenue, net 28,279 34,691 45,830 - - 108,800
Income from operations 4,062 4,937 14,765 1,057 - 24,821
Depreciation and amortization 541 1,675 5,757 35 - 8,008
Restructuring costs - 21 - (542) - (521)
Capital expenditures 219 92 175 4 - 490
5. RESTRUCTURING AND OTHER NON-RECURRING EXPENSES
During the nine-months ended September 30, 2004, the Company reviewed its
restructuring reserve established in 2002 and adjusted the reserve by $(17) due
to updating the assumptions used in determining the fair value of the remaining
lease obligations associated with facilities vacated during 2002.
Components of the Company's restructuring plan initiated in the fourth quarter
of 2002 are shown in the following table:
Balance at Balance at
December 31, Additional September 30,
2003 Adjustments Amounts Paid 2004
------------- --------- ---------- ------------
Severance and other benefits $ 20 $ - $ (20) $ -
Lease terminations 988 (17) (72) 899
------------- --------- ---------- ------------
Total $ 1,008 $ (17) $ (92) $ 899
============= ========== ========== =============
28
The restructuring reserve totaling approximately $899 at September 30, 2004 is
expected to be paid as follows: remaining three months of 2004 - $38 and 2005
and beyond - $861 and is included in accrued expenses and other current
liabilities in the condensed consolidated balance sheets.
6. DEBT
On March 29, 2004, the Company refinanced all of its term loans under its Senior
Bank Credit Facilities (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 29, 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 a 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 and
payments for restricted investments. In addition, the 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 WRC Media (as defined within the agreement) and its
consolidated subsidiaries. In connection with entering into the Second-Lien
Facility, the Company entered into an amendment and restatement of its
First-Lien Facility, which now consists solely of a $30,000 revolving credit
facility.
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 bear interest at a rate per annum equal to the LIBO rate as
defined in the First-Lien Facility plus 2.25% or the alternate base rate as
defined in the First-Lien Facility plus 1.25%.
As a result of the refinancing, the Company wrote-off the remaining balances of
deferred financing costs associated with the First Lien Facility of
approximately $467. These costs are included in interest expense, including
amortization of deferred financing costs on the condensed consolidated statement
of operations for the nine-months ended September 30, 2004.
29
In connection with the refinancing WRC Media incurred costs and expenses,
primarily investment banking and legal fees, of approximately $6,600. These
amounts have been recorded as deferred financing fees by WRC Media, Inc. at
September 30, 2004 and are being amortized over the term of the Second Lien
Facility using the effective interest method.
At September 30, 2004, there were no outstanding advances under the Company's
$30,000 revolving credit facility. The Company has stand-by letters of credit,
renewable annually, in the amount of $2,050 of which $2,000 serves as security
for a real estate lease entered into by the Company and $50 serves as security
for certain surety bonds issued on behalf of the Company. The Company's
available borrowing under the revolving credit facility is reduced by any
outstanding letters of credit. At September 30, 2004, the Company had, net of
the $2,050 in outstanding letters of credit, $27,950 of available credit under
the revolving credit facility.
7. FINANCIAL INSTRUMENTS
Pursuant to the terms of the First and Second-Lien Credit Agreements, the
Company is required to enter into or maintain interest rate protection
agreements (interest rate swaps, caps, collars or similar agreements) in a
notional amount that, when taken together with the aggregate principal amount of
the Company's Total Debt subject to a fixed interest rate, is at least equal to
at least 50% of the aggregate principal amount of all Total Debt. On November
15, 2003, the Company entered into a one year interest rate cap agreement with a
notional principal of $61,000, 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 the contract to market
at the end of each period. No amount is recorded in the condensed balance sheet
at December 31, 2003 and September 30, 2004 as fair value of the interest rate
cap at those dates is de-minimis. At November 15, 2004, more than 50% of the
aggregate principal amount of Total Debt, as defined, is subject to a fixed
interest rate. Therefore the interest rate cap will not be renewed.
8. INVENTORIES
At December 31, 2003 and September 30, 2004, inventories are comprised of the
following:
December 31, 2003 September 30, 2004
----------------- ------------------
Finished goods $ 15,853 $ 14,714
Raw materials 37 873
------------ ----------
$ 15,890 $ 15,587
============ ==========
9. GOODWILL AND TRADEMARKS
At December 31, 2003 and September 30, 2004, goodwill and indefinite lived
intangible assets are as follows:
December 31, September 30,
2003 2004
----------- -----------
Goodwill $ 101,978 $ 101,978
Long Lived Assets - Trademarks and
copyrights 15,675 15,675
----------- -----------
$ 117,653 $ 117,653
=========== ===========
There were no changes to goodwill and indefinite lived intangible assets during
the three- and nine-months ended September 30, 2004.
WRC recorded non-cash deferred income tax expense of $175 and $525 during the
three- and nine-month periods ended September 30, 2003 and 2004, respectively,
for taxable temporary differences that will not reverse prior to expiration of
the Company's net operating loss carryforward periods. Book amortization of
tax-deductible goodwill and trademarks ceased on January 1, 2002 upon the
Company's adoption of SFAS 142; however, 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. The Company expects that it
will record an additional $175 to increase deferred tax liabilities during the
remaining three months of 2004.
30
10. OTHER INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization of the WRC's intangible
assets other than goodwill and indefinite lived intangible assets are as
follows:
------------------------------------------- -----------------------------------------------
December 31, 2003 September 30, 2004
------------------------------------------- -----------------------------------------------
Accumulated Accumulated
Useful Lives Gross Amortization Net Gross Amortization Net
------------ ------------ -------------- ----------- -------------- -------------- -----------
Customer Lists 6-15 yrs $ 318 $ (161) $ 157 $ 318 $ (193) $ 125
Copyrights 10-20 yrs 19,936 (4,901) 15,035 19,936 (5,788) 14,148
Software 3 yrs 6,420 (5,707) 713 6,420 (6,420) -
-------- -------- -------- -------- -------- --------
Total: $ 26,674 $(10,769) $ 15,905 $ 26,674 $(12,401) $ 14,273
======== ======== ======== ======== ======== ========
Included in other intangible assets, are trademarks and copyrights not subject
to amortization, for which the total carrying amount was $15,675 as of December
31, 2003 and September 30, 2004 (See note 9).
Amortization of intangibles for the three-months ended September 30, 2003 and
2004 was $802 and $309, respectively. Amortization of intangibles for the
nine-months ended September 30, 2003 and 2004 was $2,563 and $1,632,
respectively. Amortization is included in amortization of intangible assets on
the condensed consolidated statement of operations. The estimated amortization
expense for intangible assets still subject to amortization for the next five
years is as follows:
Remaining three months ended of 2004.....................................$ 311
2005..................................................................... 1,225
2006..................................................................... 1,184
2007..................................................................... 1,181
2008..................................................................... 1,144
2009..................................................................... 1,123
Thereafter............................................................... 8,105
11. COMMITMENTS AND CONTINGENCIES
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.
The Securities and Exchange Commission ("SEC") is conducting a preliminary
inquiry concerning the Company and has requested that the Company voluntarily
provide the SEC with various documents and information, and that certain
officers and employees of the Company voluntarily give testimony or be
interviewed. The Company is cooperating fully with the SEC inquiry, and has
continued to provide all documents, information and testimony requested by the
SEC, and has arranged all interviews requested by the SEC with Company
employees. The Company cannot predict the final outcome of this inquiry at this
time.
15% Senior Preferred Stock due 2011
In 1999, the Company issued 3,000,000 shares of 15% Senior Preferred Stock due
in 2011 with a liquidation preference of $25.00 per share. The 15% Senior
Preferred Stock shall accrue dividends at a rate of 15% per annum, subject to
adjustment if the Company fails to redeem all outstanding shares of such 15%
Senior Preferred Stock in connection with a mandatory redemption or change of
control. Such accrued dividends reflect penalty dividends of 0.5% for periods
prior to November 17, 2001. While the Company believes that no penalty dividend
is due for subsequent periods, the preferred shareholders may disagree with that
conclusion.
31
12. RELATED PARTY TRANSACTIONS
In connection with the acquisition of Weekly Reader, the Company entered into a
management agreement with the principal shareholder of WRC Media Inc. In
accordance with the management agreement, the shareholder provides Weekly Reader
management consulting and financial advisory services. As a result, the Company
is obligated to pay to the shareholder annual aggregate management fees for
services totaling $800, which are payable quarterly. At September 30, 2004,
other accrued liabilities include approximately $600 of accrued management fees.
In addition, the Company will reimburse the principal shareholder for reasonable
out-of-pocket costs and expenses incurred in connection with the performance of
its services. During each of the three- and nine-month periods ended September
30, 2003 and 2004, the Company recognized general and administrative expense of
$200 and $600, respectively, for management fees.
13. PENSION BENEFITS
The following table provides components of net periodic benefit cost for the
Company's defined benefit pension plan for the three- and nine-months ended
September 30, 2003 and 2004:
Three-Months Ended September 30, Nine-Months Ended September 30,
--------------------------------- -------------------------------
2003 2004 2003 2004
-------- -------- -------- -------
Service cost $ 229 $ 225 $ 687 $ 675
Interest cost 221 238 663 714
Expected return on plan (726)
assets (169) (242) (507)
Amortization of net loss 74 42 222 126
-------- -------- -------- -------
Net periodic benefit cost $ 355 $ 263 $ 1,065 $ 789
======== ======== ======== =======
14. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Nine-Months Ended September 30,
---------------------------- ---------------------------
2003 2004
-------- ---------
Cash paid during the period for interest $ 16,222 $ 15,809
Cash paid during the period for income taxes $ 39 $ 49
Non-cash financing activity:
Preferred stock dividends accrued $ 13,972 $ 16,188(1)
(1) During the nine-month period ended September 30, 2004, $16,188 of such
preferred stock dividends have been recorded as interest expense in the
statement of operations, resulting from the Company's adoption of SFAS 150
effective January 1, 2004.
15. RESTATEMENT
In connection with the audit of the Company's 2003 consolidated financial
statements (the "Initial Restatement") and the reaudit of its 2001 consolidated
financial statements (the "Further Restatement"), the Company has restated its
previously audited consolidated balance sheets as of December 31, 2001, 2002 and
2003 and the related statements of operations, stockholders' deficit and cash
flows for the years ended December 31, 2001, 2002 and 2003.
32
In connection with the Initial Restatement, management had restated its
financial statements for the three- and nine-months ended September 30, 2003
because it had incorrectly accounted for (i) revenue recognition for distributor
sales; (ii) rent expense; and (iii) other items including an adjustment relating
the amortization period for certain capitalized pre-publication costs.
Described below are the matters for which the Company had restated its condensed
consolidated financial statements for the three- and nine-months ended September
30, 2003 in connection with the Initial Restatement.
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 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. The Company has restated its financial
statements which decreased its net loss by $61 and $319, respectively
for the three- and nine-months ended September 30, 2003.
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, which had the net effect of decreasing its net
loss by $194 and $546, respectively for the three- and nine-months
ended September 30, 2003.
o Other. The Company also made an adjustment relating to the amortization
period for certain capitalized pre-publication costs which had the
effect of increasing net loss by $93 and $303 for the three- and
nine-months ended September 30, 2003.
In connection with the reaudit of the Company's 2001 consolidated financial
statements, management determined that it had incorrectly accounted for the
following items, which comprise the Further Restatement: (i) intangible assets
acquired in 1999 in connection with the Parent's acquisition of Weekly Reader;
(ii) acquisition reserves for acquisitions in 1999; (iii) its adoption of SFAS
142 and the preparation of its transitional impairment analysis; (iv) deferred
tax liabilities recognized upon adoption of SFAS 142; (v) 15% Senior Preferred
Stock dividends; and (vi) a number of other items which had been previously
identified and collectively determined to be immaterial.
Described below are the matters for which the Company has restated its condensed
consolidated financial statements for the three- and nine-months ended September
30, 2003 in connection with the Further Restatement.
o Weekly Reader Intangible Assets. In connection with the reaudit of the
Company's 2001 consolidated financial statements, the Company
reconsidered the assumptions used to determine the estimated fair value
and economic lives of the intangible assets acquired in connection with
the 1999 acquisition and recapitalization of Weekly Reader by its
Parent (the "1999 Intangible Assets"). The Company has determined that
the original basis for estimating the fair value and economic lives of
the intangible assets was a valuation report that the former owners of
Weekly Reader had provided to the Parent at the time of the 1999
acquisition. Accordingly, in 2004, the Parent engaged a valuation
consulting firm to assist management in assessing the fair values and
economic lives of the 1999 Intangible Assets as of the acquisition
date. As a result, certain economic lives of the 1999 Intangible Assets
have been revised. Accordingly, the Company has restated its financial
statements to correctly state the estimated economic lives of the 1999
Intangible Assets acquired as of November 17, 1999. Other intangible
assets include copyrights, customer lists and trademarks. Copyrights
estimated useful life was amended from 10 years to approximately 20
years; Customer lists estimated useful life decreased from 10 years to
approximately 8.5 years and Trademarks estimated useful life decreased
from 40 years to approximately 39 years. The Company has restated its
financial statements to correct the amortization expense for these
intangible assets which had the effect of decreasing amortization
expense of intangible assets for the three- and nine-months ended
September 30, 2003 by $259 and $778, respectively.
33
o Goodwill and Long-lived Intangible Asset Impairment. On January 1,
2002, the Company adopted SFAS 142 for its goodwill and intangible
assets. Upon adoption, the Company ceased amortization of goodwill and
indefinite lived intangible assets, which consist primarily of
trademarks. As required by SFAS 142, the Company reviewed its
indefinite lived intangibles (goodwill and trademarks) for impairment
as of January 1, 2002. The Company has three reporting units with
goodwill. Goodwill was tested for impairment at the reporting unit
level. As a result, the Company recorded a transitional goodwill and
indefinite lived intangible asset impairment charge of $72,022 at AGS.
This charge was reported as a cumulative effect of accounting change,
as of January 1, 2002, in the consolidated statements of operations. In
connection with the reconsideration of the assumptions used to
determine the estimated fair value and economic lives of 1999
Intangible Assets discussed above, the Company updated its transitional
impairment analysis and determined that it incorrectly calculated the
fair value of its reporting units. Accordingly, the impairment charge
of $72,022 at AGS was incorrect and not required. 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's reporting units. Certain other key assumptions
utilized, including changes in revenue, operating expenses, working
capital requirements and capital expenditures including pre-publication
costs, are based on reasonable 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. The Company has restated its December 31, 2002 and
2003 balance sheets to correct for this error. The net effect of such
adjustment was to increase goodwill and decrease accumulated deficit by
$72,022 at December 31, 2002 and 2003.
o Weekly Reader Goodwill Reduction. The Company recorded certain reserves
for a planned restructuring in connection with its acquisition by WRC
Media in 1999. In connection with the reaudit of its 2001 consolidated
financial statements the Company determined that it had incorrectly
recorded reserves of $602 related to estimated liabilities it believed
it had assumed at the date of such acquisition. The Company concluded
that the acquisition reserves associated with these liabilities should
have been reversed in 1999. The estimated liabilities were associated
with the excess reserves for severance, primarily attributable to
employees hired subsequent to the acquisition date. The Company has
restated its financial statements to correct for these errors. The net
effect of such adjustments was to increase net loss for the three- and
nine-month period ended September, 2003 by $6 and $18, respectively.
o Deferred Tax Liabilities. The Company recognized non-cash deferred
income tax expense and a deferred tax liability on January 1, 2002 in
connection with its adoption of SFAS 142. The deferred tax liability
relates to the excess of tax over book amortization of tax-deductible
goodwill and trademarks since the timing of the reversal of this
liability is indefinite, unless the related assets are sold or an
impairment of the assets is recorded, and can no longer be offset by
the Company's net operating loss carryforwards, which expire within a
statutory period. The non-cash income tax expense recorded during the
three- and nine-months ended September 30, 2003 increased by $15 from
$168 to $183 and by $45 from $392 to $437, respectively. These
restatements are principally due to the reversal of the impairment
charges and the revision of the economic lives of the 1999 Intangible
Assets discussed above.
o 15% Senior Preferred Stock due 2011. In 1999, the Company issued
3,000,000 shares of 15% Senior Preferred Stock due in 2011. The 15%
Senior Preferred Stock accrues dividends at a rate of 15% per annum.
The Certificate of Designation provides that the 15% Senior Preferred
Stock was subject to a default or penalty dividend of 0.5% in the event
of certain registration defaults. A penalty dividend was applicable
from mid-August of 2000 through November 17, 2001. While the Company
believes that no penalty dividend is due for subsequent periods, the
preferred shareholders may disagree with that conclusion. The Company
had not previously recorded this penalty dividend. The recording of the
penalty dividends (and required compounding in subsequent periods)
resulted in the Company increasing accrued dividends on 15% Senior
Preferred Stock by $33 and $94 during the three- and nine-months ended
September 30, 2003, respectively.
34
o Segment Information. The Company previously disclosed one reportable
segment. The Company now discloses three reportable segments.
o Other. In connection with the re-audit of the Company's 2001 financial
statements, the Company has made a number of other corrections to the
financial statements, which collectively were immaterial.
Summarized below are the significant effects of the Initial Restatement and the
further Restatement.
Three-Months Ended September 30, 2003
----------------------------------------------------------
As Previously
Reported in
November 14, 2003 Restatement
Form 10-Q Adjustments As Restated
----------------- ----------- -------------
Revenue, net $ 44,205 $ 65 $ 44,270
Cost of goods sold 10,328 23 10,351
-------- ------- -----------
Gross profit 33,877 42 33,919
-------- ------- -----------
Costs and expenses:
Sales and marketing 7,199 7,199
Distribution, circulation and fulfillment 3,697 3,697
Editorial 2,266 2,266
General and administrative 4,997 (335) 4,662
Restructuring costs (647) (647)
Depreciation 420 6 426
Amortization of intangible assets 2,612 (166) 2,446
-------- ------- -----------
Total operating costs and expenses 20,544 (495) 20,049
-------- ------- -----------
Income from operations 13,333 537 13,870
Interest expense, including amortization
of deferred financing costs (7,148) (7,148)
Other expense, net 6 (200) (194)
-------- ------- -----------
Income before income tax provision 6,191 337 6,528
Income tax provision 168 15 183
-------- ------- -----------
Net income $ 6,023 $ 322 $ 6,345
======== ======= ==========
35
Nine-Months Ended September 30, 2003
--------------------------------------
As Previously
Reported in
November 14, 2003 Restatement
Form 10-Q Adjustments As Restated
--------------- --------------- ---------------
Revenue, net $ 108,259 $ 541 $ 108,800
Cost of goods sold 26,521 177 26,698
--------------- --------------- ---------------
Gross profit 81,738 364 82,102
--------------- --------------- ---------------
Costs and expenses:
Sales and marketing 19,131 19,131
Distribution, circulation and fulfillment 10,112 10,112
Editorial 7,410 7,410
General and administrative 13,878 (737) 13,141
Restructuring costs (521) (521)
Depreciation 1,287 18 1,305
Amortization of intangible assets 7,178 (475) 6,703
--------------- --------------- ---------------
Total operating costs and expenses 58,475 (1,194) 57,281
--------------- --------------- ---------------
Income from operations 23,263 1,558 24,821
Interest expense, including amortization
of deferred financing costs (20,881) (20,881)
Other expense, net (202) (300) (502)
--------------- --------------- ---------------
Income before income tax provision 2,180 1,258 3,438
Income tax provision 392 45 437
--------------- --------------- ---------------
Net income $ 1,788 $ 1,213 $ 3,001
=============== =============== ===============
36
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results of
Operation set forth in this Item 2 has been revised to reflect the restatement
of the Company's condensed consolidated financial statements for the three- and
nine-months ended September 30, 2003. For a discussion of the restatement
adjustments, see "Item 1. Consolidated Financial Statements -WRC Media Inc. and
Subsidiaries--Note 17. Restatement" and "Item 1. Consolidated Financial
Statements - Weekly Reader Corporation and Subsidiaries - Note 15. Restatement."
The following discussion is intended to assist in understanding the financial
condition, as of September 30, 2004, of WRC Media Inc. ("WRC Media") and its
subsidiaries, and Weekly Reader Corporation and its subsidiaries, and their
results of operations for the three- and nine-months ended September 30, 2003
and 2004. You should read the following discussion in conjunction with the
Condensed Consolidated Financial Statements of WRC Media and its subsidiaries
and Weekly Reader Corporation and its subsidiaries ("Weekly Reader") attached to
this discussion and analysis. Unless the context otherwise requires, the terms
"we," "our," and "us" refer to WRC Media and its subsidiaries and their
predecessor companies. This discussion and analysis contains forward-looking
statements. These forward-looking statements are subject to certain risks and
uncertainties, including 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; and other risks
and factors identified in this report and in the Company's Annual Report on Form
10-K for the year ended December 31, 2003. 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.
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. 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.
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. American
Guidance Service, Inc. ("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.
37
The education market has been impacted by the overall U.S. economy. The economy,
which has been sluggish since early 2002, has significantly impacted state
budgets in recent years. In addition, the No Child Left Behind Act ("NCLB"),
which was passed in 2002, has resulted in an increase in federal funding; but
most of this increased funding has been offset by reduced state and local
education funding. In addition, the new guidelines to qualify for federal
funding under NCLB have contributed to delayed purchase decisions. Under these
new guidelines:
o More federal funds will now flow through states;
o There is a change in the mix for formula-based grants and competitive
grants which will require school districts to change the way they seek
and receive funding from states;
o The federal government has given states guidelines for distributing
funds and in turn, each state is defining the rules to satisfy these
guidelines;
o The federal government's new requirements, like the need for
professionals with a minimum two-year degree and the emphasis on
scientifically based programs, caused some confusion at the school
level in 2002 and 2003; and
o All these changes have caused delays in the movement of funds from the
federal and state sources to the school district level
As a result, conditions remain challenging for the education marketplace in
terms of both funding and spending. However, coinciding with the 2004-2005
school year, the operating environment has shown signs of a recovery in the
third quarter of 2004. State budgets are improving as school districts gain a
better understanding of the requirements for funding under the "No Child Left
Behind Act". Federal funds associated with the "No Child Left Behind Act" are
now being disbursed and flowing to school districts. Nevertheless, the markets
for library publishers and for electronic curriculum remain under pressure.
38
WRC Media's business strategy is to drive growth by leveraging our new product
offerings in 2004 with investments in sales and marketing programs to drive
expansion into our core markets, while expanding into new distribution channels.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE-MONTHS ENDED SEPTEMBER 30,
2004 -- 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 three-months ended September 30, 2003
and 2004, 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.
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.
Three months ended September 30,
2003 2004
-------------------------- -----------------------------
Amount % of Net Revenue Amount % of Net Revenue
--------- ---------------- ------ ----------------
(Dollars in millions)
Revenue, net $ 55.4 100.0% $ 61.0 100.0%
Cost of goods sold 14.8 26.7% 16.1 26.4%
--------- ----- ------ -----
Gross profit 40.6 73.3% 44.9 73.6%
Costs and expenses:
Sales and marketing 11.7 21.1% 14.4 23.6%
Research and development 0.6 1.1% 0.1 0.2%
Distribution, circulation and fulfillment 3.7 6.7% 3.6 5.9%
Editorial 2.3 4.2% 2.9 4.8%
General and administrative 5.8 10.5% 7.6 12.5%
Restructuring costs and other (0.6) (1.1%) 0.3 0.5%
non-recurring expenses
Depreciation 0.6 1.1% 0.5 0.8%
Amortization of intangible assets 4.5 8.1% 4.0 6.6%
--------- ----- ------ -----
Total costs and expenses 28.6 51.6% 33.4 54.8%
--------- ----- ------ -----
Income from operations 12.0 21.7% 11.5 18.9%
--------- ----- ------ -----
Interest expense, including amortization
of deferred financing costs (7.5) (13.5%) (13.7) (22.5%)
Other expense, net (0.2) (0.4%) (0.3) (0.5%)
--------- ----- ------ -----
Income (loss) before income tax provision 4.3 7.8% (2.5) (4.1%)
Income tax provision 0.8 1.4% 0.8 1.3%
--------- ----- ------ -----
Net income (loss) $ 3.5 6.3% $ (3.3) (5.4%)
========= ===== ====== ======
Adjusted EBITDA (a) $ 16.7 30.1% $ 16.8 27.5%
========= ===== ====== ======
39
(a) Adjusted EBITDA represents income (loss) before interest expense, taxes,
depreciation, amortization and other (income) charges including adjustments
to restructuring expenses of ($0.6) million for the three-months ended
September 30, 2003 and restructuring costs of $0.3 million for the
three-months ended September 30, 2004. 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 use it, in addition to operating income, to evaluate
and measure each business unit's performance. 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.
Three-Months Ended September 30, 2004 Compared to Three-Months Ended September
30, 2003
Revenue, net. For the three-months ended September 30, 2004, net revenue
increased $5.6 million, or 10.1%, to $61.0 million from $55.4 million for the
same period in 2003. This increase was primarily due to a increase in net
revenue at Weekly Reader of $3.3 million, or 7.4% to $47.6 million from $44.3
million for the same period in 2003 and a increase in net revenue at
CompassLearning/ChildU of $2.3 million, or 20.7% to $13.4 million from $11.1
million for the same period in 2003.
The increase in net revenue at Weekly Reader was due to (1) an increase in net
revenue at AGS of $4.2 million or 20.3% to $24.9 million from $20.7 million for
the same period in 2003 as Assessment and Curriculum revenue increased by $2.4
million and $1.8 million, respectively, over the same period in 2003 driven by
new product releases and (2) an increase in net revenue at Weekly Reader,
excluding World Almanac and AGS, of $1.2 million, or 9.8%, to $13.4 million from
$12.2 million for the same period in 2003. These increases at AGS and Weekly
Reader were partially offset by (3) a decrease in net revenue at World Almanac
of $2.1 million or 18.4% to $9.3 million from $11.4 million for the same period
in 2003. The revenue increase at CompassLearning/ChildU was primarily due to an
increase in educational software revenue of $2.1 million over the same period in
2003, which was primarily attributable to the market acceptance of our new
web-enabled product line.
Gross profit. For the three-months ended September 30, 2004, gross profit
increased by $4.3 million or 10.6%, to $44.9 million from $40.6 million from the
same period in 2003. Gross profit at Weekly Reader increased $2.9 million or
8.6% to $36.8 million from $33.9 million from the same period in 2003 primarily
as a result of (1) an increase in gross profit at AGS of $3.4 million over the
same period in 2003 driven by the AGS volume increase described above and (2) an
increase in gross profit at Weekly Reader, excluding AGS and World Almanac, of
$1.0 million from the same period in 2003 driven by the volume increase
described above. These increases at AGS and Weekly Reader were partially offset
by (3) a decrease in gross profit at World Almanac of $1.5 million from the same
period in 2003 due to the volume decrease described above. At
CompassLearning/ChildU gross profit increased $1.4 million from the same period
in 2003 driven by the volume increase described above. WRC Media's gross margin
of 73.6% was essentially unchanged from the 73.3% for the same period in 2003.
Costs and expenses. For the three-months ended September 30, 2004, operating
costs and expenses increased by $4.8 million, or 16.8%, to $33.4 million from
$28.6 million from the same period in 2003. Costs and expenses as a percentage
of net revenue increased to 54.8% from 51.6% from the same period in 2003. This
increase was primarily the result of: (i) higher sales and marketing expenses of
$2.7 million or 23.1% primarily due to an increase of $1.6 million at AGS
resulting from increases in sales commissions attributable to the increase in
revenue, increases in the number of sales representatives, and increases in the
distribution of complimentary new product samples to prospective customers over
the same period in 2003 and an increase of $0.8 million at Weekly Reader,
excluding AGS and World Almanac, in new customer acquisition charges; (ii) $1.8
million or 31.0% increase in general and administrative expenses due to
increases in legal, audit, tax and consulting professional fees of $0.9 million
primarily related to the previously disclosed SEC inquiry and the re-audit of
our 2001 financial statements and a $0.7 million increase in employment related
costs at AGS and at CompassLearning/ChildU, as a result of an increase in
performance bonuses ; (iii) restructuring cost adjustments in the third quarter
of 2003 and 2004 of ($0.6) and $0.3 million, respectively, to the restructuring
reserve, established in 2002, due to changes in sublease income assumptions;
(iv) higher editorial costs of $0.6 million, or 26.1%, due to development costs
related to sales contracts and the impairment of capitalized pre-publication
costs at AGS and an increase in periodical and skills editorial production
expenses at Weekly Reader, excluding AGS and World Almanac. These higher
expenses were partially offset by (v) lower amortization of intangible assets of
$0.5 million primarily at AGS resulting from copyrights related to the Lindy
Enterprises, Inc. acquisition in May 2001 which were fully amortized as of May
2004.
40
Interest expense, including amortization of deferred financing costs. For the
three-months ended September 30, 2004, interest expense, including amortization
of deferred financing costs, increased by $6.2 million, or 82.7%, to $13.7
million from $7.5 million for the same period in 2003 as the adoption of SFAS
150 requires dividends on the 15% Senior Preferred Stock to be recorded as
interest expense in the condensed consolidated statement of operations for all
periods starting January 1, 2004. The dividends on the 15% Senior Preferred
Stock for the three-months ended September 30, 2004 increased interest expense
by $5.6 million. Interest expense on long term-debt increased by $0.6 million
primarily due to higher interest rates in 2004 as opposed to 2003. Interest
expense as a percentage of net revenue increased to 22.5% from 13.5% for the
same period in 2003.
Adjusted EBITDA. For the three-months ended September 30, 2004, Adjusted EBITDA
increased $0.1 million, or 0.6%, to $16.8 million from $16.7 million for the
same period in 2003. This increase was primarily attributable to the factors
described above. Adjusted EBITDA represents income (loss) before interest
expense, taxes, depreciation, amortization and other (income) charges including
restructuring reserve reductions of $0.6 million for the three-months ended
September 30, 2003 and restructuring costs of $0.3 million for the three-months
ended September 30, 2004. Adjusted EBITDA 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 use it, in addition to operating income,
to evaluate and measure each business unit's performance. 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 to Net income (loss) is as
follows:
41
Three months ended September 30,
Adjusted EBITDA reconciliation to Net income (loss) 2003 2004
---------------- ------------
(Dollars in millions)
Net income (loss) $ 3.5 $ (3.3)
Depreciation and amortization of intangibles (a) 5.5 5.2
Income taxes 0.8 0.8
Interest expense 7.5 13.7
Restructuring costs (0.6) 0.3
Non-recurring expenses - -
------- -------
Adjusted EBITDA $ 16.7 $ 16.8
======= =======
(a) Amount includes amortizatin of capitalized software costs of $0.5 and $0.7
for 2003 and 2004, respectively which are included in cost of goods sold in
the condensed consolidated statements of operations.
RESULTS OF OPERATIONS FOR THE THREE-MONTHS ENDED SEPTEMBER 30, 2004 -- WRC MEDIA
INC. AND SUBSIDIARIES - SEGMENTS
WEEKLY READER
Three months ended September 30,
2003 2004
-------- ---------
(Dollars in millions)
Revenue, net $ 12.2 $ 13.4
Income from operations 2.4 2.4
Percentage of net revenue 19.7% 17.9%
Revenue, net. For the three-months ended September 30, 2004, net revenue at the
Weekly Reader segment increased by $1.2 million, or 9.8%, to $13.4 million from
$12.2 million for the same period in 2003 as a result of higher Skill Books
revenue of $1.0 million from election book sales. The election books are
published every four years in connection with the presidential election cycle.
Periodical revenue increased $0.6 million from the same period in 2003. These
gains were partially offset by a decrease in revenue of $0.4 million at Lifetime
Learning Systems, Inc., a subsidiary of Weekly Reader as a result of fewer
shipments of custom publishing projects.
Income from operations. For the three months-ended September 30, 2004, segment
income from operations was unchanged from the same period in 2003. Gross profit
increased by $1.0 million as a result of the volume increase described above.
This increase in gross profit was offset by an increase in operating expenses of
$0.9 million primarily due to an increase in sales and marketing costs of $0.8
million from the same period in 2003 due to an increase in new customer
acquisition charges.
42
WORLD ALMANAC
Three months ended September 30,
2003 2004
------------- ----------------
(Dollars in millions)
Revenue, net $ 11.4 $ 9.3
Income from operations 1.8 0.1
Percentage of net revenue 15.8% 1.1%
Revenue, net. For the three-months ended September 30, 2004, net revenue at the
World Almanac segment decreased by $2.1 million or 18.4% to $9.3 million from
$11.4 million for the same period in 2003. This decrease was due to lower net
revenue of $0.8 million at World Almanac Books ("WA Books") primarily due to the
timing of the initial shipment of the 2005 edition of the World Almanac for
Kids. Net revenues also decreased $0.6 million at World Almanac Education
Library Services ("WAE Library Services") primarily as a result lower catalog
sales partially offset by increased telemarketing sales. In addition, net
revenues decreased $0.6 million at Gareth Stevens primarily due to the timing of
telemarketing sales.
Income from operations. For the three months-ended September 30, 2004, segment
income from operations decreased by $1.7 million or 94.4% to $0.1 million from
$1.8 million for the same period in 2003. Gross profit decreased $1.5 million
from the same period in 2003 as a result of the volume decreases mentioned
above. Sales and Marketing expenses increased $0.1 million from the same period
in 2003 due to an increase in trade show spending.
AGS
Three months ended September 30,
2003 2004
----------- -------------
(Dollars in millions)
Revenue, net $ 20.7 $ 24.9
Income from operations 8.8 10.0
Percentage of net revenue 42.5% 40.2%
Revenue, net. For the three-months ended September 30, 2004, net revenue at the
AGS segment increased by $4.2 million or 20.3% to $24.9 million from $20.7
million for the same period in 2003. AGS net assessment revenue increased by
$2.4 million from the same period in 2003 as a result of the continued
acceptance of new product releases and net curriculum revenue increased by $1.8
million over the same period last year driven by sales of revised textbooks.
Income from operations. For the three-months ended September 30, 2004, segment
income from operations increased by $1.2 million or 13.6% to $10.0 million from
$8.8 million for the same period in 2003 as gross profit increased by $3.4
million as a result of the volume increases described above. The increase in
gross profit was partially offset by increases in sales and marketing expense of
$1.6 million and general and administrative expense of $0.4 million over the
same period in 2003. The increase in sales and marketing expense resulted from
increases in sales commissions attributable to the increase in revenue,
increases in the number of sales representatives, and increases in the
distribution of complimentary new product samples to prospective customers over
the same period in 2003. The increase in general and administrative expense was
due to increases in employment related costs of $0.4 million.
43
COMPASSLEARNING/CHILDU
Three months ended September 30,
2003 2004
--------------------------------
(Dollars in millions)
Revenue, net $ 11.1 $ 13.4
Income (loss) from operations (0.9) -
Percentage of net revenue (8.1%) 0.0%
Revenue, net. For the three-months ended September 30, 2004, net revenue at the
CompassLearning/ChildU segment increased by $2.3 million or 20.7% to $13.4
million from $11.1 million for the same period in 2003. The increase was
primarily due to a increase in software revenue of $2.1 million from the same
period in 2003 primarily attributable to the market acceptance of the
web-enabled product line, which was introduced in 2003. Hardware and
professional development revenues increased $0.5 million over the same period in
2003. These revenue increases were partially offset by a decrease in technical
support revenue of $0.3 million for the same period in 2003.
Income (loss) from operations. For the three-months ended September 30, 2004,
segment income (loss) from operations increased by $0.9 million or 100.0% to
breakeven from a loss of $0.9 million for the same period in 2003 as gross
profit increased by $1.4 million as a result of the volume increase described
above. The increase in gross profit was partially offset by an increase in
general and administrative expense of $0.3 million over the same period in 2003
due to an increase in compensation expense for benefits and bonuses and an
increase in restructuring costs of $0.3 million based on updated sub-lease
assumptions in the third quarter of 2004.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE-MONTHS ENDED SEPTEMBER 30,
2004 -- WRC MEDIA INC. AND SUBSIDIARIES
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.
44
Nine months ended September 30,
2003 2004
------------ ------------
Amount % of Net Revenue Amount % of Net Revenue
-------- ---------------- ------ ----------------
(Dollars in millions)
Revenue, net $ 146.6 100.0% $ 149.6 100.0%
Cost of goods sold 41.2 28.1% 42.9 28.7%
-------- ----- -------- -----
Gross profit 105.4 71.9% 106.7 71.3%
Costs and expenses:
Sales and marketing 33.5 22.9% 37.1 24.8%
Research and development 1.5 1.0% 1.8 1.2%
Distribution, circulation and fulfillment 10.1 6.9% 9.9 6.6%
Editorial 7.4 5.0% 8.3 5.5%
General and administrative 16.8 11.5% 22.1 14.8%
Restructuring costs and other non-recurring
expenses 0.9 0.6% 1.0 0.7%
Depreciation 1.8 1.2% 1.4 0.9%
Amortization of intangible assets 13.2 9.0% 12.3 8.2%
-------- ----- -------- -----
Total costs and expenses 85.2 58.1% 93.9 62.8%
-------- ----- -------- -----
Income from operations 20.2 13.8% 12.8 8.6%
-------- ----- -------- -----
Interest expense, including amortization
of deferred financing costs (21.8) (14.9%) (41.7) (27.9%)
Other expense, net (1.2) (0.8%) (0.8) (0.5%)
-------- ----- -------- -----
Loss before income tax provision (2.8) (1.9%) (29.7) (19.9%)
Income tax provision 2.3 1.6% 2.4 1.6%
-------- ----- -------- -----
Net loss $ (5.1) (3.5%) $ (32.1) (21.5%)
======== ===== ======== =====
Adjusted EBITDA (a) $ 36.8 25.1% $ 28.6 19.1%
======== ===== ======== =====
(a) Adjusted EBITDA represents (loss) before interest expense, taxes,
depreciation, amortization and other (income) charges including
restructuring costs of $0.7 million and non-recurring costs of $0.2 million
for the nine-months ended September 30, 2003 and restructuring costs of
$1.0 million for the nine-months ended September 30, 2004. 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 use it, in addition to
operating income, to evaluate and measure each business unit's performance.
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.
Nine-Months Ended September 30, 2004 Compared to Nine-Months Ended September 30,
2003
Revenue, net. For the nine-months ended September 30, 2004, net revenue
increased $3.0 million, or 2.0%, to $149.6 million from $146.6 million for the
same period in 2003. This increase was primarily due to an increase in net
revenue at Weekly Reader of $5.7 million or 5.2%, to $114.5 million from $108.8
million for the same period in 2003. This increase was partially offset by a
decrease in net revenue at CompassLearning/ChildU of $2.7 million, or 7.1% to
$35.1 million from $37.8 million for the same period in 2003.
The increase in net revenue at Weekly Reader was primarily due to (1) an
increase in net revenue at AGS of $9.4 million or 20.5% to $55.2 million from
$45.8 million from the same period in 2003 as Assessment and Curriculum revenue
increased by $6.7 million and $2.7 million, respectively, over the same period
in 2003 driven by new product releases. The increase at AGS was partially offset
by (2) a decrease in net revenue at World Almanac of $3.0 million or 8.6% to
$31.7 million from $34.7 million from the same period in 2003; (3) a decrease in
net revenue at
45
Weekly Reader, excluding World Almanac and AGS, of $0.7 million, or 2.5%, to
$27.6 million from $28.3 million from the same period in 2003.
The revenue decrease at CompassLearning/ChildU was primarily due to a decrease
in educational software revenue of $3.4 million and a decrease in technical
support revenue of $0.8 million from the same period in 2003 partially offset by
an increase in service revenue from professional development of $1.2 million
from the same period in 2003. The software decline was primarily attributable to
delayed purchasing decisions resulting from the weak education funding
environment. Even though we have seen an increase in new sales for the third
quarter of 2004, the K-12 funding environment continues to be impacted by state
budget deficits, which have been causing reductions in state and local
educational spending, including spending for teachers, training and 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 for the 2003-2004 school year was offset
by lower state and local education funding for the same period. 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 remainder of
2004. The uncertainty in the current operating environment makes it difficult to
forecast future results.
Gross profit. For the nine-months ended September 30, 2004, gross profit
increased by $1.3 million or 1.2%, to $106.7 million from $105.4 million from
the same period in 2003. Gross profit at Weekly Reader increased $4.5 million or
5.5% to $86.6 million from $82.1 million from the same period in 2003 primarily
as a result of (1) an increase in gross profit at AGS of $7.1 million from the
same period in 2003 driven by the volume increase described above. The increase
at AGS was partially offset by (2) a decrease in gross profit at Weekly Reader,
excluding AGS and World Almanac of $0.1 million, from the same period in 2003
driven by the volume decrease described above; (3) a decrease in gross profit at
World Almanac of $2.5 million from the same period in 2003 due to the volume
decrease described above, a write off of inventory at WA Books in the first
quarter of 2004 and the impact of a discount offer at WAE Library Services that
was not in effect during the same period in 2003.
The increase in gross profit at Weekly Reader was partially offset by a decrease
in gross profit of $3.2 million at CompassLearning/ChildU from the same period
in 2003 resulting from fixed costs of sales components applied to a lower
revenue base and a low margin services sale to a major school district in the
first quarter of 2004. WRC Media's gross profit as a percentage of revenue
decreased slightly to 71.3% from 71.9% from the same period in 2003 due to the
factors discussed above.
Costs and expenses. For the nine-months ended September 30, 2004, operating
costs and expenses increased by $8.7 million, or 10.2%, to $93.9 million from
$85.2 million from the same period in 2003. Costs and expenses as a percentage
of net revenue increased to 62.8% from 58.1% from the same period in 2003. This
increase was primarily the result of: (i) $5.3 million or 31.5% increase in
general and administrative expenses due to increases in legal, audit, tax and
consulting professional fees of $3.4 million primarily related to the previously
disclosed SEC inquiry and the re-audit of our 2001 financial statements,
employment related costs of $0.6 million at AGS and a reversal of accruals for
an excess property tax assessment and building repairs in the second quarter of
2003 of $0.2 million; (ii) higher sales and marketing expenses of $3.6 million
or 10.7% primarily attributable to AGS of $2.6 million resulting from increases
in sales commissions attributable to the increase in revenue, increases in the
number of sales representatives, and increases in the distribution of
complimentary new product samples to prospective customers over the same period
in 2003. There was also an increase in sales and marketing costs of $1.2 million
at Weekly Reader, excluding AGS and World Almanac, primarily due to an increase
in new customer acquisition charges; (iii) higher editorial costs of $0.9
million or 12.2% due to development costs related to sales contracts, testing
expenditures associated with a high stakes test developed for a major school
district and the impairment of capitalized pre-publication costs at AGS and an
increase in periodical and skills editorial production expenses at Weekly
Reader, excluding AGS and World Almanac. These higher expenses were partially
offset by (iv) lower amortization of intangible assets of $0.9 million or 6.8%
for the same period in 2003. This was caused by a decrease of $0.3 million at
AGS resulting from copyrights related to the Lindy Enterprises, Inc. acquisition
in May 2001 becoming fully amortized as of May 2004 and a decrease at
CompassLearning/ChildU of $0.4 million as certain intangible assets became fully
amortized during 2003.
46
Interest expense, including amortization of deferred financing costs. For the
nine-months ended September 30, 2004, interest expense, including amortization
of deferred financing costs, increased by $19.8 million, or 90.8%, to $41.6
million from $21.8 million for the same period in 2003 as the adoption of SFAS
150 requires dividends on the 15% Senior Preferred Stock to be recorded as
interest expense in the statement of operations for all periods starting January
1, 2004. The dividends on the 15% Senior Preferred Stock for the nine-months
ended September 30, 2004 increased interest expense by $16.2 million. In
addition, deferred financing fees of $1.9 million attributable to the First-Lien
Credit Facility that was refinanced in part by the Second-Lien Credit Facility,
which closed on March 29, 2004 were written off in the first quarter of 2004.
Interest expense on long term-debt increased by $1.4 million primarily due to
higher interest rates in 2004 as opposed to 2003. Interest expense as a
percentage of net revenue increased to 27.8% from 14.9% for the same period in
2003.
Adjusted EBITDA. For the nine-months ended September 30, 2004, Adjusted EBITDA
decreased $8.2 million, or 22.3%, to $28.6 million from $36.8 million for the
same period in 2003. This decrease was primarily attributable to the factors
described above. Adjusted EBITDA represents (loss) before interest expense,
taxes, depreciation, amortization and other (income) charges including
restructuring costs and other non-recurring expenses of $0.9 million for the
nine-months ended September 30, 2003 and restructuring costs of $1.0 million for
the nine-months ended September 30, 2004. Adjusted EBITDA 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 use it, in addition
to operating income, to evaluate and measure each business unit's performance.
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 to Net
loss is as follows:
47
Nine months ended September 30,
Adjusted EBITDA reconciliation to Net loss 2003 2004
---------- ----------
(Dollars in millions)
Net loss $ (5.1) $ (32.1)
Depreciation and amortization of intangibles (a) 16.9 15.6
Income taxes 2.3 2.4
Interest expense 21.8 41.6
Restructuring costs and other non-recurring expenses 0.9 1.0
---------- ----------
Adjusted EBITDA $ 36.8 $ 28.6
========== ==========
(a) Amount includes amortization of capitalized software costs of $2.0 and $1.9
for 2003 and 2004, respectively which are included in costs of goods sold
in the condensed consolidated statemenet of operations.
RESULTS OF OPERATIONS FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2004 -- WRC MEDIA
INC. AND SUBSIDIARIES - SEGMENTS
WEEKLY READER
Nine months ended September 30,
2003 2004
--------------------------------
(Dollars in millions)
Revenue, net $ 28.3 $ 27.6
Income from operations 4.1 2.2
Percentage of net revenue 14.5% 8.0%
Revenue, net. For the nine-months ended September 30, 2004, net revenue at the
Weekly Reader segment decreased by $0.7 million, or 2.5%, to $27.6 million from
$28.3 million for the same period in 2003 as a result of lower licensing revenue
of $0.9 million due to the absence of a spring book club offering on the QVC
Shopping Network, and a decrease in revenue of $0.6 million at Lifetime Learning
Systems, Inc., a subsidiary of Weekly Reader as a result of fewer shipments of
custom publishing projects. These decreases were partially offset by higher
Skill Books revenue of $0.9 million from election book sales. The election books
are published every four years in connection with the presidential election
cycle.
Income (loss) from operations. For the nine months-ended September 30, 2004,
segment income from operations decreased by $1.9 million or 46.3% to $2.2
million from $4.1 million as gross profit decreased by $0.1 million as a result
of the volume decreases described above, partially offset by a favorable sales
mix. Sales and marketing costs increased by $1.2 million from the same period in
2003 primarily due to an increase in new customer acquisition charges. Editorial
costs increased by $0.4 million from the same period in 2003 due to greater
periodical and skills editorial production expenses. General and administrative
expense increased by $0.2 million from the same period in 2003 primarily due to
higher employee separation costs. These increases were partially offset by a
decrease in distribution, circulation and fulfillment expenses of $0.3 million
from the same period in 2003 as a result of the absence of a spring book club
offering on the QVC Shopping Network.
48
WORLD ALMANAC
Nine months ended September 30,
2003 2004
-------------- -----------------
(Dollars in millions)
Revenue, net $ 34.7 $ 31.7
Income from operations 4.9 2.4
Percentage of net revenue 14.1% 7.6%
Revenue, net. For the nine-months ended September 30, 2004, net revenue at the
World Almanac segment decreased by $3.0 million or 8.6% to $31.7 million from
$34.7 million for the same period in 2003. This decrease was due to lower net
revenue of $1.2 million at World Almanac Books from increased sales returns in
the second quarter of 2004 and the timing of the initial shipment of the 2005
edition of the World Almanac for Kids, lower net revenue of $1.1 million at WAE
Library Services as a result of lower catalog sales and lower net revenue at
Funk and Wagnalls of $0.4 million due to attrition in its customer base.
Income from operations. For the nine-months-ended September 30, 2004, segment
income from operations decreased by $2.5 million or 51.0% to $2.4 million from
$4.9 million primarily due to a reduction in gross profit of $2.5 million as a
result of the volume decrease described above, a write off of inventory at WA
Books in the first quarter of 2004 and the impact of a discount offer at WAE
Library Services that was not in effect during the same period in 2003. This
decrease in gross margin was partially offset by a reduction in sales and
marketing expense of $0.1 million from the same period in 2003 primarily due to
a decrease in expenses on the promotion of The World Almanac and Books of Facts.
AGS
Nine months ended September 30,
2003 2004
------------- ------------
(Dollars in millions)
Revenue, net $ 45.8 $ 55.2
Income from operations 14.7 17.4
Percentage of net revenue 32.1% 31.5%
Revenue, net. For the nine-months ended September 30, 2004, net revenue at the
AGS segment increased by $9.4 million or 20.5% to $55.2 million from $45.8
million for the same period in 2003. AGS Assessment net revenue increased by
$6.7 million from the same period in 2003 as a result of the continued
acceptance of new product releases and net curriculum revenue increased $2.7
million over the same period last year driven by sales of revised textbooks.
49
Income from operations. For the nine-months ended September 30, 2004, segment
income from operations increased by $2.7 million or 18.4% to $17.4 million from
$14.7 million for the same period in 2003 as gross profit increased by $7.1
million as a result of the volume increase described above. The increase in
gross profit was partially offset by increases in sales and marketing expense of
$2.6 million, general and administrative expense of $1.0 million and editorial
expense of $0.5 million over the same period in 2003. The increase in sales and
marketing expenses resulted from increases in sales commissions attributable to
the increase in revenue, increases in the number of sales representatives, and
increases in the distribution of complementary new product samples to
prospective customers over the same period in 2003. The increase in general and
administrative expense was due to increases in employment related costs of $0.6
million and a reversal of accruals for an excess property tax assessment and
building repairs in the second quarter of 2003 of $0.2 million. The increase in
editorial expense was due to development costs related to sales contracts,
testing expenditures associated with a high stakes test developed for a major
school district in the first quarter of 2004 and the impairment of capitalized
pre-publication costs in the third quarter.
COMPASSLEARNING/CHILDU
Nine months ended September 30,
2003 2004
-------------------------------
(Dollars in millions)
Revenue, net $ 37.8 $ 35.1
Loss from operations (1.4) (6.3)
Percentage of net revenue (3.7%) (17.9%)
Revenue, net. For the nine-months ended September 30, 2004, net revenue at the
CompassLearning/ChildU segment decreased by $2.7 million or 7.1% to $35.1
million from $37.8 million for the same period in 2003. This decrease was
primarily due to a decrease in software revenue of $3.4 million and a decrease
in technical support revenue of $0.8 million from the same period in 2003
partially offset by an increase in service revenue from professional development
of $1.2 million from the same period in 2003. The software decline was primarily
attributable to delayed purchasing decisions resulting from the weak education
funding environment. Even though we have seen an increase in new sales for the
third quarter of 2004, the K-12 funding environment continues to be impacted by
state budget deficits, which have been causing reductions in state and local
educational spending, including spending for teachers, training and supplemental
educational materials.
Loss from operations. For the nine months ended September 30, 2004, segment loss
from operations increased by $4.9 million or 350.0% to $6.3 million from $1.4
million for the same period in 2003 as gross profit decreased by $3.2 million as
a result of the volume decrease described above and as the fixed costs of sales
components were applied to a lower software revenue base and also as a result of
a low margin services sale to a major school district in the first quarter of
2004. In addition, general and administrative expense increased $1.7 million
primarily due to professional fees incurred as a result of the previously
disclosed SEC inquiry. These increases were partially offset by a decrease in
amortization of intangible assets of $0.5 million due to certain intangible
assets becoming fully amortized at the end of 2003.
50
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE-MONTHS ENDED SEPTEMBER 30, 2004
- --WEEKLY READER CORPORATION AND SUBSIDIARIES
Weekly Reader 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 Weekly Reader and its
subsidiaries expressed in millions of dollars and as a percentage of net
revenue.
Three months ended September 30,
2003 2004
----------------------------------------------------
Amount % of Net Revenue Amount % of Net Revenue
------ ---------------- ------ ----------------
(Dollars in millions)
Revenue, net $ 44.3 100.0% 47.6 100.0%
Cost of goods sold 10.4 23.5% 10.8 22.7%
------ ----- ---- -----
Gross profit 33.9 76.5% 36.8 77.3%
Costs and expenses:
Sales and marketing 7.2 16.3% 9.5 20.1%
Distribution, circulation and fulfillment 3.7 8.4% 3.6 7.6%
Editorial 2.3 5.2% 2.9 6.1%
General and administrative 4.6 10.4% 6.0 12.6%
Restructuring costs (0.6) (1.4%) - 0.0%
Depreciation 0.4 0.9% 0.4 0.8%
Amortization of intangible assets 2.4 5.4% 2.0 4.2%
------ ----- ---- -----
Total costs and expenses 20.0 45.1% 24.4 51.3%
------ ----- ---- -----
Income from operations 13.9 31.4% 12.4 26.1%
Interest expense (7.2) (16.3%) (13.2) (27.7%)
Other expense, net (0.2) (0.5%) (0.2) (0.4%)
------ ----- ---- -----
Income (loss) before income tax provision 6.5 14.7% (1.0) (2.1%)
Income tax provision 0.2 0.5% 0.2 0.4%
------ ----- ---- -----
Net income (loss) $ 6.3 14.2% (1.2) (2.5%)
====== ==== ==== ====
Adjusted EBITDA(a) $ 15.9 35.9% 14.6 30.7%
====== ==== ==== ====
(a) Adjusted EBITDA represents income (loss) before interest expense, taxes,
depreciation, amortization and other (income) charges including adjustments
to restructuring reserves of ($0.6) million for the three-months ended
September 30, 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 Weekly
Reader'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 use it, in addition to operating income, to evaluate
and measure each business unit's performance. 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.
51
Three-Months Ended September 30, 2004 Compared to Three-Months Ended September
30, 2003
Revenue, net. For the three-months ended September 30, 2004, net revenue
increased $3.3 million, or 7.4%, to $44.3 million from $47.6 million for the
same period in 2003. The increase in net revenue at Weekly Reader was due to (1)
an increase in net revenue at AGS of $4.2 million or 20.3% to $24.9 million from
$20.7 million for the same period in 2003 as assessment and curriculum revenue
increased by $2.4 million and $1.8 million, respectively, over the same period
in 2003 driven by new product releases and (2) an increase in net revenue at
Weekly Reader, excluding World Almanac and AGS, of $1.2 million, or 9.8%, to
$13.4 million from $12.2 million for the same period in 2003. These increases at
AGS and Weekly Reader were partially offset by (3) a decrease in net revenue at
World Almanac of $2.1 million or 18.4% to $9.3 million from $11.4 million for
the same period in 2003.
Gross profit. For the three-months ended September 30, 2004, gross profit
increased $2.9 million or 8.6% to $36.8 million from $33.9 million from the same
period in 2003 primarily as a result of (1) an increase in gross profit at AGS
of $3.4 million from the same period in 2003 driven by the AGS volume increase
described and (2) an increase in gross profit at Weekly Reader, excluding AGS
and World Almanac, of $1.0 million from the same period in 2003 driven by the
volume increase described above. These increases at AGS and Weekly Reader were
partially offset by (3) a decrease in gross profit at World Almanac of $1.5
million from the same period in 2003 due to the volume decrease described above.
Weekly Reader gross profit as a percentage of revenue increased to 77.3% from
76.5% from the same period in 2003.
Costs and expenses. For the three-months ended September 30, 2004, operating
costs and expenses increased by $4.4 million, or 22.0%, to $24.4 million from
$20.0 million in the same period in 2003. Costs and expenses as a percentage of
net revenue increased to 51.3% from 45.1% from the same period in 2003. This
increase was primarily the result of: (i) higher sales and marketing expenses of
$2.3 million or 31.9% primarily at AGS. $1.6 million of this increase resulted
from increases in sales commissions attributable to the increase in revenue,
increases in the number of sales representatives, and increases in the
distribution of complimentary new product samples to prospective customers over
the same period in 2003 and a $0.8 million increase in new customer acquisition
charges at Weekly Reader, excluding AGS and World Almanac; (ii) $1.4 million or
30.4% increase in general and administrative expenses due to increases in legal,
audit, tax and consulting professional fees of $0.7 million primarily related to
the previously disclosed SEC inquiry and the re-audit of our 2001 financial
statements and an increase in employment related costs at AGS of $0.4 million;
(iii) restructuring cost adjustment in the third quarter of 2003 of $0.6 million
which reduced the restructuring reserve established in 2002, due to sublease
income exceeding original assumptions; (iv) higher editorial costs of $0.6
million or 26.1% due to development costs related to sales contracts and the
impairment of capitalized pre-publication costs at AGS and an increase in
periodical and skills editorial production expenses at Weekly Reader, excluding
AGS and World Almanac. These higher expenses were partially offset by (v) lower
amortization of intangible assets of $0.4 million primarily at AGS resulting
from copyrights related to the Lindy Enterprises, Inc. acquisition in May 2001
becoming fully amortized as of May 2004.
52
Interest expense. For the three-months ended September 30, 2004, interest
expense, including amortization of deferred financing costs, increased by $6.0
million, or 83.3%, to $13.2 million from $7.2 million from the same period in
2003 as the adoption of SFAS 150 requires dividends on the 15% Senior Preferred
Stock to be recorded as interest expense in the condensed consolidated statement
of operations for all periods starting January 1, 2004. The dividends on the 15%
Senior Preferred Stock for the three-months ended September 30, 2004 increased
interest expense by $5.4 million. Interest expense on long term-debt increased
by $0.6 million primarily due to higher interest rates in 2004 as opposed to
2003. Interest expense as a percentage of net revenue increased to 27.7% from
16.3% for the same period in 2003.
Adjusted EBITDA. For the three-months ended September 30, 2004, Adjusted EBITDA
decreased $1.3 million, or 8.2%, to $14.6 million from $15.9 million for the
same period in 2003. This decrease is primarily attributable to the factors
described above. Adjusted EBITDA represents income (loss) before interest
expense, taxes, depreciation, amortization and other (income) charges including
restructuring reserve reductions of $0.6 million for the three-months ended
September 30, 2003. Adjusted EBITDA 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 Weekly Reader'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 use it, in addition to operating income,
to evaluate and measure each business unit's performance. 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 to Net income (loss) is as
follows:
Three months ended September 30,
Adjusted EBITDA reconciliation to Net income (loss) 2003 2004
------------- --------------
(Dollars in millions)
Net income (loss) $ 6.3 $ (1.2)
Depreciation and amortization of intangibles 2.9 2.4
Income taxes 0.2 0.2
Interest expense 7.1 13.2
Restructuring costs (0.6) (0.0)
-------- --------
Adjusted EBITDA $ 15.9 14.6
-------- --------
53
RESULTS OF OPERATIONS FOR THE THREE-MONTHS ENDED SEPTEMBER 30, 2004 -- WEEKLY
READER CORPORATION AND SUBSIDIARIES - SEGMENTS
WEEKLY READER
Three months ended September 30,
2003 2004
------------ -------------
(Dollars in millions)
Revenue, net $ 12.2 $ 13.4
Income from operations 2.4 2.4
Percentage of net revenue 19.7% 17.9%
Revenue, net. For the three-months ended September 30, 2004, net revenue at the
Weekly Reader segment increased by $1.2 million, or 9.8%, to $13.4 million from
$12.2 million for the same period in 2003 as a result of higher Skill Books
revenue of $1.0 million from election book sales. The election books are
published every four years in connection with the presidential election cycle.
Periodical revenue was up $0.6 million from the same period in 2003. These gains
were partially offset by a decrease in revenue of $0.4 million at Lifetime
Learning Systems, Inc., a subsidiary of Weekly Reader as a result of fewer
shipments of custom publishing projects.
Income from operations. For the three months-ended September 30, 2004, the
segment income from operations was unchanged from the same period in 2003. Gross
profit increased by $1.0 million as a result of the volume increases described
above. This increase in gross profit was offset by an increase in operating
expenses of $0.9 million primarily due to an increase in sales and marketing
costs of $0.8 million from the same period in 2003 due to an increase in new
customer acquisition charges.
WORLD ALMANAC
Three months ended September 30,
2003 2004
------------- --------------
(Dollars in millions)
Revenue, net $ 11.4 $ 9.3
Income from operations 1.8 0.1
Percentage of net revenue 15.8% 1.1%
Revenue, net. For the three-months ended September 30, 2004, net revenue at the
World Almanac segment decreased by $2.1 million or 18.4% to $9.3 million from
$11.4 million for the same period in 2003. This decrease was due to lower net
revenue of $0.8 million at World Almanac Books ("WA Books") primarily due to the
timing of the initial shipment of the 2005 edition of the World Almanac for
Kids. Net revenues also decreased $0.6 million at World Almanac Education
Library Services ("WAE Library Services") primarily as a result lower catalog
sales partially offset by increased telemarketing sales. In addition, net
revenues decreased $0.6 million at Gareth Stevens primarily due to the timing of
telemarketing sales.
54
Income from operations. For the three months-ended September 30, 2004, segment
income from operations decreased by $1.7 million or 94.4% to $0.1 million from
$1.8 million for the same period in 2003. Gross profit decreased $1.5 million
from the same period in 2003 as a result of the volume decreases mentioned
above. Sales and marketing expenses increased $0.1 million from the same period
in 2003 due to an increase in trade show spending.
AGS
Three months ended September 30,
2003 2004
----------------- -------------------
(Dollars in millions)
Revenue, net $ 20.7 $ 24.9
Income from operations 8.8 10.0
Percentage of net revenue 42.5% 40.2%
Revenue, net. For the three-months ended September 30, 2004, net revenue at the
AGS segment increased by $4.2 million or 20.3% to $24.9 million from $20.7
million for the same period in 2003. AGS net assessment revenue increased by
$2.4 million from the same period in 2003 as a result of the continued
acceptance of new product releases and net curriculum revenue increased by $1.8
million over the same period last year driven by sales of revised textbooks.
Income from operations. For the three-months ended September 30, 2004, segment
income from operations increased by $1.2 million or 13.6% to $10.0 million from
$8.8 million for the same period in 2003 as gross profit increased by $3.4
million as a result of the volume increases described above. The increase in
gross profit was partially offset by increases in sales and marketing expense of
$1.6 million and general and administrative expense of $0.4 million over the
same period in 2003. The increase in sales and marketing expense resulted from
increases in sales commissions attributable to the increase in revenue,
increases in the number of sales representatives, and increases in the
distribution of complimentary new product samples to prospective customers over
the same period in 2003. The increase in general and administrative expense was
due to increases in employment related costs of $0.4 million.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2004
- --WEEKLY READER CORPORATION AND SUBSIDIARIES
The following table sets forth, for the periods indicated, consolidated
statements of operations data for Weekly Reader and its subsidiaries expressed
in millions of dollars and as a percentage of net revenue.
55
Nine months ended September 30,
2003 2004
----------------------------- -------------------------------
Amount % of Net Revenue Amount % of Net Revenue
---------- ---------------- ----------- -----------------
(Dollars in millions)
Revenue, net $ 108.8 100.0% $ 114.5 100.0%
Cost of goods sold 26.7 24.5% 27.9 24.4%
---------- ------------- ------------- -------------
Gross profit 82.1 75.5% 86.6 75.6%
Costs and expenses:
Sales and marketing 19.1 17.6% 22.8 20.0%
Distribution, circulation and fulfillment 10.1 9.3% 9.9 8.6%
Editorial 7.4 6.8% 8.3 7.2%
General and administrative 13.2 12.1% 16.2 14.1%
Restructuring costs (0.5) (0.5%) - 0.0%
Depreciation 1.3 1.2% 1.2 1.0%
Amortization of intangible assets 6.7 6.2% 6.3 5.5%
---------- ------------- ------------- ------------
Total costs and expenses 57.3 52.7% 64.7 56.5%
---------- ------------- ------------- ------------
Income from operations 24.8 22.8% 21.9 19.1%
Interest expense (20.9) (19.2%) (38.9) (34.0%)
Other expense, net (0.5) (0.5%) (0.6) (0.5%)
---------- ------------- ------------- ------------
Loss before income tax provision 3.4 3.1% (17.6) (15.4%)
Income tax provision 0.4 0.4% 0.5 0.4%
---------- ------------- ------------- ------------
Net income (loss) $ 3.0 2.8% $ (18.1) (15.8%)
========== ============= ============= ============
Adjusted EBITDA(a) $ 31.8 29.2% $ 28.8 25.2%
========== ============= ============= ============
(a) Adjusted EBITDA represents (loss) before interest expense, taxes,
depreciation, amortization and other (income) charges including
restructuring reserve adjustments of ($0.5) million for the nine-months
ended September 30, 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
Weekly Reader'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 use it, in addition to operating income, to
evaluate and measure each business unit's performance. 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.
Nine-Months Ended September 30, 2004 Compared to Nine-Months Ended September 30,
2003
Revenue, net. For the nine-months ended September 30, 2004, net revenue
increased $5.7 million or 5.2%, to $114.5 million from $108.8 million for the
same period in 2003. The increase in net revenue at Weekly Reader was primarily
due to (1) an increase in net revenue at AGS of $9.4 million or 20.5% to $55.2
million from $45.8 million from the same period in 2003 as Assessment and
Curriculum revenue increased by $6.7 million and $2.7 million, respectively,
over the same period in 2003 driven by new product releases. The increase at AGS
was partially offset by (2) a decrease in net revenue at World Almanac of $3.0
million or 8.6% to $31.7 million from $34.7 million from the same period in
2003; and (3) a decrease in net revenue at Weekly Reader, excluding World
Almanac and AGS, of $0.7 million, or 2.5%, to $27.6 million from $28.3 million
from the same period in 2003.
56
Gross profit. For the nine-months ended September 30, 2004, gross profit at
Weekly Reader increased $4.5 million or 5.5% to $86.6 million from $82.1 million
from the same period in 2003 primarily as a result of (1) an increase in gross
profit at AGS of $7.1 million from the same period in 2003 driven by the volume
increase described above. The increase at AGS was partially offset by (2) a
decrease in gross profit at Weekly Reader, excluding AGS and World Almanac of
$0.1 million, from the same period in 2003 driven by the volume decrease
described above; (3) a decrease in gross profit at World Almanac of $2.5 million
from the same period in 2003 due to the volume decrease described above, a write
off of inventory at WA Books in the first quarter of 2004 and the impact of a
discount offer at WAE Library Services that was not in effect during the same
period in 2003. Weekly Reader gross profit as a percent of revenue increased
slightly to 75.6% from 75.5% from the same period in 2003 mainly due to the
factors discussed above.
Costs and expenses. For the nine-months ended September 30, 2004, operating
costs and expenses increased by $7.4 million, or 12.9%, to $64.7 million from
$57.3 million from the same period in 2003. Costs and expenses as a percentage
of net revenue increased to 56.5% from 52.7% from the same period in 2003. This
increase was primarily the result of: (i) a $3.0 million or 22.7% increase in
general and administrative expenses due to increases in legal, audit, tax and
consulting professional fees of $1.6 million primarily related to the previously
disclosed SEC inquiry and the re-audit of our 2001 financial statements increase
in employment related costs at AGS of $0.6 million and a reversal of accruals
for an excess property tax assessment and building repairs in the second quarter
of 2003 of $0.2 million; (ii) higher sales and marketing expenses of $3.7
million or 19.4% primarily attributable to AGS of $2.6 million resulting from
increases in sales commissions attributable to the increase in revenue,
increases in the number of sales representatives, and increases in the
distribution of complimentary new product samples to prospective customers over
the same period in 2003. There was also an increase in sales and marketing costs
of $1.2 million at Weekly Reader, excluding AGS and World Almanac, primarily due
to an increase in new customer acquisition charges; (iii) higher editorial costs
of $0.9 million or 12.2% due to development costs related to a sales contract,
testing expenditures associated with a high stakes test developed for a major
school district and the impairment of capitalized pre-publication costs at AGS
and an increase in periodical and skills editorial production expenses at Weekly
Reader, excluding AGS and World Almanac. These higher expenses were partially
offset by (iv) lower amortization of intangible assets of $0.4 million or 6.8%
for the same period in 2003. This was caused by a decrease of $0.3 million at
AGS in the third quarter of 2005 as copyrights related to the Lindy Enterprises,
Inc. acquisition in May 2001 becoming fully amortized as of May 2004.
Interest expense, including amortization of deferred financing costs. For the
nine-months ended September 30, 2004, interest expense, including amortization
of deferred financing costs, increased by $18.0 million, or 86.1%, to $38.9
million from $20.9 million for the same period in 2003 as the adoption of SFAS
150 requires dividends on the 15% Senior Preferred Stock to be recorded as
interest expense in the statement of operations for all periods starting January
1, 2004. The dividends on the 15% Senior Preferred Stock for the nine-months
ended September 30, 2004 increased interest expense by $16.1 million. In
addition, deferred financing fees of $0.4 million attributable to the First-Lien
Credit Facility that was refinanced in part by the Second-Lien Credit Facility,
which closed on March 29, 2004 were written off in the first quarter of
57
2004. Interest expense on long term-debt increased by $1.4 million primarily due
to higher interest rates in 2004 as opposed to 2003. Interest expense as a
percentage of net revenue increased to 34.0% from 19.2% for the same period in
2003.
Adjusted EBITDA. For the nine-months ended September 30, 2004, Adjusted EBITDA
decreased $3.0 million, or 9.4%, to $28.8 million from $31.8 million for the
same period in 2003. This decrease was primarily attributable to the factors
described above. Adjusted EBITDA represents income (loss) before interest
expense, taxes, depreciation, amortization and other (income) charges including
restructuring costs adjustment of ($0.5) million for the nine-months ended
September 30, 2003. Adjusted EBITDA 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 Weekly Reader'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 use it, in addition to operating income,
to evaluate and measure each business unit's performance. 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 to Net income (loss) is as
follows:
Nine months ended September 30,
Adjusted EBITDA reconciliation to Net income (loss) 2003 2004
---------- --------
(Dollars in millions)
Net income (loss) $ 3.0 $ (18.1)
Depreciation and amortization of intangibles 8.0 7.5
Income taxes 0.4 0.5
Interest expense 20.9 38.8
Restructuring costs (0.5) (0.0)
--------- ---------
Adjusted EBITDA $ 31.8 $ 28.8
--------- ---------
RESULTS OF OPERATIONS FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2004 -- WEEKLY
READER CORPORATION AND SUBSIDIARIES - SEGMENT
WEEKLY READER
Nine months ended September 30,
2003 2004
---------- --------
(Dollars in millions)
Revenue, net $ 28.3 $ 27.6
Income from operations 4.1 2.2
Percentage of net revenue 14.5% 8.0%
58
Revenue, net. For the nine-months ended September 30, 2004, net revenue at the
Weekly Reader segment decreased by $0.7 million, or 2.5%, to $27.6 million from
$28.3 million for the same period in 2003 as a result of lower licensing revenue
of $0.9 million due to the absence of a spring book club offering on the QVC
Shopping Network, and a decrease in revenue of $0.6 million at Lifetime Learning
Systems, Inc., a subsidiary of Weekly Reader as a result of fewer shipments of
custom publishing projects. These decreases were partially offset by higher
Skill Books revenue of $0.9 million from election book sales. The election books
are published every four years in connection with the presidential election
cycle.
Income (loss) from operations. For the nine months-ended September 30, 2004,
segment income from operations decreased by $1.9 million or 46.3% to $2.2
million from of $4.1 million as gross profit decreased by $0.1 million as a
result of the volume decreases described above partially offset by a favorable
sales mix. Sales and marketing costs increased by $1.2 million from the same
period in 2003 primarily due to an increase in new customer acquisition charges.
Editorial costs increased by $0.4 million from the same period in 2003 due to
greater periodical and skills editorial production expenses. General and
administrative expense increased by $0.2 million from the same period in 2003
primarily due to higher employee separation costs. These increases were
partially offset by a decrease in distribution, circulation and fulfillment
expenses of $0.3 million from the same period in 2003 as a result of the absence
of a spring book club offering on the QVC Shopping Network.
WORLD ALMANAC
Nine months ended September 30,
2003 2004
---------- --------
(Dollars in millions)
Revenue, net $ 34.7 $ 31.7
Income from operations 4.9 2.4
Percentage of net revenue 14.1% 7.6%
Revenue, net. For the nine-months ended September 30, 2004, net revenue at the
World Almanac segment decreased by $3.0 million or 8.6% to $31.7 million from
$34.7 million for the same period in 2003. This decrease was due to lower net
revenue of $1.2 million at World Almanac Books from increased sales returns in
the second quarter of 2004 and the timing of the initial shipment of the 2005
edition of the World Almanac for Kids, lower net revenue of $1.1 million at WAE
Library Services as a result of lower catalog sales and lower net revenue at
Funk and Wagnalls of $0.4 million due to attrition in its customer base.
Income from operations. For the nine-months-ended September 30, 2004, segment
income from operations decreased by $2.5 million or 51.0% to $2.4 million from
$4.9 million primarily due to a reduction in gross profit of $2.5 million as a
result of the volume decrease described above, a write off of inventory at WA
Books in the first quarter of 2004 and the impact of a discount offer at WAE
Library Services that was not in effect during the same period in 2003. This
decrease in gross margin was partially offset by a reduction in sales and
marketing expense of $0.1 million
59
from the same period in 2003 primarily due to a decrease in expenses on the
promotion of The World Almanac and Books of Facts.
AGS
Nine months ended September 30,
2003 2004
---------- --------
(Dollars in millions)
Revenue, net $ 45.8 $ 55.2
Income from operations 14.7 17.4
Percentage of net revenue 32.1% 31.5%
Revenue, net. For the nine-months ended September 30, 2004, net revenue at the
AGS segment increased by $9.4 million or 20.5% to $55.2 million from $45.8
million for the same period in 2003. AGS Assessment net revenue increased by
$6.7 million from the same period in 2003 as a result of the continued
acceptance of new product releases and net curriculum revenue increased $2.7
million over the same period last year driven by its sales of revised textbooks.
Income from operations. For the nine-months ended September 30, 2004, segment
income from operations increased by $2.7 million or 18.4% to $17.4 million from
$14.7 million for the same period in 2003 as gross profit increased by $7.1
million as a result of the volume increase described above. The increase in
gross profit was partially offset by increases in sales and marketing expense of
$2.6 million, general and administrative expense of $1.0 million and editorial
expense of $0.5 million over the same period in 2003. The increase in sales and
marketing expenses resulted from increases in sales commissions attributable to
the increase in revenue, increases in the number of sales representatives, and
increases in the distribution of complimentary new product samples to
prospective customers over the same period in 2003 The increase in general and
administrative expense was due to increases in employment related costs of $0.6
million and a reversal of accruals for an excess property tax assessment and
building repairs in the second quarter of 2003 of $0.2 million. The increase in
editorial expense was due development costs related to sales contracts, testing
expenditures associated with a high stakes test developed for a major school
district in the first quarter of 2004 and the impairment of capitalized
pre-publication costs in the third quarter.
LIQUIDITY AND CAPITAL RESOURCES
General
At September 30, 2004, WRC Media's sources of cash were its (1) operating
subsidiaries, Weekly Reader, CompassLearning, and ChildU and (2) a $30.0 million
revolving credit facility. As of September 30, 2004, there were no outstanding
balances under the revolving credit facility. Additionally, the Company has
stand-by letters of credit, renewable annually, in the amount of $2.1 million,
which serve as security for a real estate lease entered into by the Company and
certain surety bonds issued on behalf of the Company. While these letters of
credit are in effect, it reduces available borrowing capacity under the
revolving credit facility by $2.1 million. At September 30, 2004, the Company
had $27.9 million of available credit under the revolving credit facility. These
sources of cash are considered adequate for the Company's needs for the
foreseeable future.
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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.
On March 29, 2004, we refinanced all of our term loans under our Senior Bank
Credit Facilities (the "First-Lien Credit 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.
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 is March 29, 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 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 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. We were in compliance with this
financial covenant for the period ended September 30, 2004. The Company's senior
leverage ratio was 3.36:1:00 as of September 30, 2004.
In connection with entering into the Second-Lien Credit Facility, we entered
into an amendment and restatement of our First-Lien Credit Facility, which now
consists solely of a $30.0 million revolving credit facility. The cash available
under our First-Lien Credit Facility, together with the cash from our operating
subsidiaries, Weekly Reader, CompassLearning and ChildU, is considered adequate
for the Company's needs for the foreseeable future.
The First-Lien Credit 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. We were in compliance with this financial covenant as of
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September 30, 2004. As discussed above, the Company's senior leverage ratio was
3.34:1.00 for the period ended September 30, 2004. Interest on revolving loan
borrowings under the First-Lien Credit Facility will bear interest at a rate per
annum equal to the LIBO rate as defined in the First-Lien Credit Facility plus
2.25% or the alternate base rate as defined in the First-Lien Credit Facility
plus 1.25%.
The credit agreement for our First-Lien Credit Facility is secured by liens on
substantially all of our assets, and the credit agreement for our Second-Lien
Credit Facility is secured by second-priority liens on all the assets securing
the First-Lien Facility.
Liquidity, Working Capital and Capital Resources
As of September 30, 2004, WRC Media and its subsidiaries had negative working
capital of $17.3 million. WRC Media's cash and cash equivalents were
approximately $8.2 million at September 30, 2004. WRC Media and its
subsidiaries' operations used approximately $ 4.0 million in cash for the
nine-months ended September 30, 2004. WRC Media and its subsidiaries' principal
uses of cash are for debt service and working capital.
As of September 30, 2004, Weekly Reader and its subsidiaries had positive
working capital of $36.6 million. Weekly Reader's cash and cash equivalents were
approximately $8.2 million at September 30, 2004. Weekly Reader and its
subsidiaries' operations used approximately $4.8 million in cash for the
nine-months ended September 30, 2004. Weekly Reader and its subsidiaries'
principal uses of cash are for debt service and working capital.
WRC Media and its subsidiaries' investing activities for the nine-months ended
September 30, 2004, included investments in software development of
approximately $ 3.1 million and capital expenditures of approximately $1.2
million.
Weekly Reader and its subsidiaries' investing activities for the nine-months
ended September 30, 2004, included capital expenditures of approximately $1.0
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 nine-months ended September 30,
2004, financing activities provided net cash of $14.7 million. The Second Lien
Credit Facility does not amortize and we do not expect our financing activities
going forward to include regular periodic retirement of term loans prior to
maturity. The Second Lien Credit Facility matures on March 29, 2009.
Weekly Reader 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 nine-months ended
September 30, 2004, financing activities provided net cash of $12.7 million. The
Second Lien Credit Facility does not amortize and we do not expect our financing
activities going forward to include regular periodic retirement of term loans
prior to maturity. The Second Lien Credit Facility matures on March 29, 2009.
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Derivative Financial Instruments
The Company uses derivative financial instruments to reduce its exposure to
interest rate volatility. At September 30, 2004, Weekly Reader 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 and 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
either fixed, hedged or capped for the duration of the applicable facility. As
of September 30, 2004 at least 50% of the Company's total indebtedness was
subject to a fixed interest rate and accordingly, no financial instrument was
required. However, as required under our Amended and Restated Credit Agreement
dated May 9, 2001, on November 15, 2003, we entered into financial instruments
with a notional value of $61.0 million, which terminates on November 15, 2004.
This financial instrument 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 this interest rate cap as of September 30, 2004 was
de-minimis.
Accounting Policies and Estimates
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
is based upon our condensed 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 materially from
these estimates, which would affect our reported results from operations. The
following is a description of what we believe to be the critical accounting
policies and estimates used in the preparation of our condensed 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
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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.
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 notification
from the customer of their intention to retain the previewed
product. The sale of children's books to bookstores and mass
merchandisers primarily are recognized by the Company at the time
the distributor ships these products to its customers. Concurrent
with the recording of this revenue, the Company records distribution
fees as a reduction of revenue.
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,
revenues are deferred until no significant obligations remain.
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. Certain 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. The Company
also enters into lease financing arrangements for its software
products and services. These leases are immediately assigned to a
third-party with no recourse to the Company. The Company retains no
risk in these arrangements and has no history of granting
concessions related to the arrangements. Accordingly, the Company
recognizes revenue upon delivery of its products and services under
these lease arrangements.
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.
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o Advertising - Revenue is recognized when the periodicals are shipped
and available to the subscribers.
o Pre-Publication 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. The amortization is based on the expected life
of the publication which is determined based on the Company's
historical experience with similar publications.
o Direct-Response Advertising Costs - 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 result 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 Company's consolidated
statement of operations.
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. Our evaluations include analyses based on the undiscounted cash
flows generated by the underlying assets, profitability
65
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 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.
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.
Valuation of Equity Instruments
The Company has granted stock options to certain of its employees. Certain of
these options contain a cashless exercise provision which require the Company to
account for such options using variable plan accounting. The Company recognizes
compensation expense related to those options with the cashless exercise
provision if fair market value of the Company's common stock, as estimated by
the Company's Board of Directors, exceeds the exercise price of the options.
The fair market value of the Company's common stock is determined by its Board
of Directors based on information available to the Board of Directors at the
time of determination. The Board considers factors such as the Company's current
and expected future results of operations, current market conditions and the
values of other similar companies.
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.
66
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.
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 costs 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. Internal
use software development costs are amortized using the straight-line method over
a five-year period.
Valuation of Deferred Tax Assets
The Company is not currently recognizing income and due to its lack of
historical earnings has determined it is not likely to realize the benefit of
its net deferred tax assets, and accordingly, records a 100% valuation reserve
against its net deferred tax assets, exclusive of deferred tax liabilities that
cannot be offset as the result of the adoption of SFAS 142. To the extent the
Company recognizes 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.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("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
67
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, effective March 31, 2004, did
not have any effect on the Company's consolidated financial position or results
of operations.
In April 2003, the FASB issued Statements of Financial Accounting Standards
("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 any effect 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 was effective for the
Company beginning January 1, 2004. 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 required the Company to
reclassify its 15% Series B Redeemable Preferred Stock from the mezzanine
section of the balance sheet to long-term liabilities. Effective January 1, 2004
dividend payments for the 15% Senior Preferred Stock ("15% Senior Preferred")
are recorded as interest expense in the consolidated statement of operations.
The adoption of this statement did not result in any adjustment to the book
value of its 15% Senior Preferred as of January 1, 2004 as book value
approximated fair value at January 1, 2004. For the three-month and nine-month
periods ended September 30, 2004 the Company recognized $ 5.6 million and $16.2
million, respectively, of accrued dividends on 15% Senior Preferred as interest
expense.
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. The
Company has adopted such disclosure provisions.
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On March 17, 2004, the Emerging Issues Task Force of the FASB reached a
consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments" ("Issue 03-1"). Issue 03-1 provides
guidance for determining when an investment is other-than-temporarily impaired
specifically, whether an investor has the ability and intent to hold an
investment until recovery. In addition, Issue 03-1 contains disclosure
requirements about impairments that have not been recognized as other than
temporary for investments. Issue 03-1 also requires the investor to disclose
investments with unrealized losses that have not been recognized as
other-than-temporary impairments. The disclosures are effective in annual
financial statements for fiscal years ending after December 15, 2003, for
investments accounted for under Statements 115 and 124. For all other
investments within the scope of this Issue, the disclosures are effective in
annual financial statements for fiscal years ending after June 15, 2004. The
additional disclosures for cost method investments are effective for fiscal
years ending after June 15, 2004. In September 2004 the FASB delayed the
effective date of the measurement and recognition guidance of Issue 03-1 until
the FASB issues FASB Staff Position 03-1a. The adoption of this consensus is not
expected to have any impact on the Company's consolidated results of operations
or financial position.
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/ChildU's net revenues were historically strongest in the second
quarter, and to a lesser extent the fourth quarter. However, due to tight
funding environment during the last few years, the trend for CompassLearning 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
uncommitted budget resources 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. CompassLearning's fourth quarter revenue is generally 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.
In September 2004, the FASB delayed the effective date of the measurement and
recognition guidance of Issue 03-1 until the FASB issues FASB Staff
Position 03-1a.
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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.
Factors That May Affect The Future Results and Financial Condition
This Quarterly Report on Form 10-Q 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;
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;
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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 payment
obligations thereunder and would have a material adverse effect on our financial
condition and liquidity.
The preliminary SEC inquiry is ongoing, and we cannot predict the final outcome
of the inquiry at this time.
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk. Market risk, with respect to our business, is the
potential loss arising from adverse changes in interest rates. We manage our
exposure to this market risk through daily 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 $145.0 million senior secured term loans under our Second Lien Credit
Facility. Interest on revolving loan borrowings under our First Lien Credit
Facility maturing in December 2008 will bear interest at a rate per annum equal
to the LIBO rate as defined in the First Lien Credit Facility plus 3.5% or the
alternate base rate as defined in the First Lien Credit Facility plus 2.5%.
Interest on the term loans under our Second Lien Credit Facility maturing in
March 2009 will bear interest at a rate per annum equal to the LIBO rate as
defined in the Second Lien Credit Facility plus 5.0% or the alternate base rate
as defined in the Second Lien Credit Facility plus 4.0%. A 1% increase in
interest rates would result in an increase in our annual interest costs of
approximately $1.45 million.
The First Lien Credit Facility and the Second Lien Credit 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 $61.0 million, which
terminates on November 15, 2004. This financial instrument 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 September 30, 2004 was de-minimis. At November 15, 2004, more than 50% of the
aggregate principal amount of Total Debt, as defined, is subject to a fixed
interest rate. Therefore the interest rate cap will not be renewed.
The following table sets forth information about the Company's debt instruments
as of September 30, 2004:
Debt Less than After
Obligations Total 1 year 2-3 years 4-5 years 5 years
- ------------------------------ --------- --------- ---------- --------- ---------
Revolving Credit $ - $ - $ - $ - $ -
Average Interest Rate
Second Lien Credit Facility 145,000 - - 145,000 -
Average Interest Rate 6.76% (A)
Senior Subordinated Notes 152,000 - - - 152,000
Average Interest Rate 12.75%
(A) Interest rate through April 29, 2005.
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ITEM 4. CONTROLS AND PROCEDURES
WRC Media management, including the Chief Executive Officer and Chief Financial
Officer, have conducted an evaluation of the effectiveness of disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective in ensuring that all
material information to be filed in this quarterly report has been made known to
them in a timely fashion. There have been no significant changes in the
Company's internal controls, or in other factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation. In making this evaluation, WRC
Media management considered the "material weaknesses" (as defined under
standards established by the American Institute of Certified Public Accountants)
that were identified and communicated to us by our independent auditors in
connection with the audit of our consolidated financial statements for the year
ended December 31, 2003. Our independent auditors identified the following two
such "material weaknesses": (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.
Prior to the identification of these "material weaknesses" by our independent
auditors, the Company began implementing various policies and procedures in
connection with its own review of its accounting and external reporting
functions.
In mid-2003, in connection with our review of the matter which led to the
restatement of revenue relating to a software and services sale, we reviewed our
revenue recognition policy for potential control weaknesses. At that time, our
software revenue recognition policy permitted deviations from our approved forms
of sales documentation with the approval of the operating unit's general
manager. We have changed our software revenue recognition policy to provide that
deviations from approved forms of sales documentation require both the approval
of the Chief Financial Officer of WRC Media, and the approval of legal counsel.
We have taken a number of other steps that will impact the effectiveness of our
internal controls, including the following:
o We have centralized our finance and accounting organization. The
operating unit controllers, who formerly reported to the operating
unit general managers, now report directly to the parent company
Principal Financial Officer;
o We restructured our finance group in a manner that places greater
emphasis on control and accountability issues;
o We have amended our Code of Conduct and Compliance Policies to
require all employees to sign a personal Code of Conduct Statement
that states that they have read the WRC Code of Conduct and
represent that they are in compliance, and that they are not aware
of any violations of the Company's Code of Conduct by others at the
Company or its affiliates. If they are aware of, or become aware of
a violation they are obligated to document and report the incident
to the Chief Executive or Chief Financial Officer of the Company.
73
o We have established new policies and procedures for such matters as
complex transactions, and contract management procedures.
o We established a Disclosure Committee, consisting of senior
personnel from the business units and the finance group, as well as
legal counsel, and we now follow an extensive review and
certification process in connection with our filings with the SEC;
and
o We hired an Assistant Treasurer/Controller in February 2004 to
increase resources in the external reporting area.
o We hired a Chief Financial Officer in September 2004.
We believe that these efforts address the "material weaknesses" identified by
our independent auditors. The Company continues to improve and refine its
internal controls. This process is ongoing, and the Company seeks to foster an
exemplary internal controls environment. Our management, including our Chief
Executive Officer and Chief Financial Officer, has concluded that, taking into
account the Company's efforts to address the matters described above, as of the
evaluation date, our disclosure controls and procedures are designed, and are
effective, to give reasonable assurance that information we must disclose in
reports filed with the SEC is properly recorded, processed, and summarized, and
then reported within the time periods specified in the rules and forms of the
SEC.
74
OTHER INFORMATION
PART II.
ITEM 5.OTHER INFORMATION
Pre-approval of Non-Audit Services
In accordance with Section 10A(i) of the Exchange Act, the Audit Committee of
the Board of Directors of the Company will pre-approve the provision of all
non-audit services to be provided to the Company by its independent auditors,
Deloitte & Touche LLP, as permitted by Section 10A.
Investor Relations
The Company posts on its Web site, www.wrcmedia.com, the date of its upcoming
financial press releases and telephone investor calls at least five days prior
to the event. The Company's investor calls are open to the public and remain
available to the public through the Company's Web site for at least five days
thereafter.
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PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
31.1 Certification of Martin E. Kenney, Jr., Chief Executive Officer of WRC
Media Inc., CompassLearning, Inc. and Weekly Reader Corporation, pursuant
to Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of 1934,
as amended, dated November 15, 2004.
31.2 Certification of Robert S. Yingling, Chief Financial Officer of WRC Media
Inc., and Weekly Reader Corporation, pursuant to Rules 13a-14(a) and
15(d)-14(a) of the Securities Exchange Act of 1934, as amended, dated
November 15, 2004.
32 Certification of Chief Executive Officer and Chief Financial Officer of
WRC Media Inc. and Subsidiaries and Weekly Reader Corporation pursuant to
18 U.S.C. ss. 1350, dated November 15, 2004.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
/s/ Martin E. Kenney, Jr. Date: November 15, 2004
- --------------------------------- -----------------------
Martin E. Kenney, Jr.
Director: WRC Media Inc., Weekly
Reader Corporation and
CompassLearning, Inc.; Chief Executive
Officer: WRC Media Inc. and
CompassLearning, Inc.; Principal
Executive Officer and Executive Vice
President: Weekly Reader Corporation
/s/ Robert S. Yingling Date: November 15, 2004
- --------------------------------- ------------------------
Robert S. Yingling
Chief Financial Officer
WRC Media Inc. and Weekly Reader Corporation
77