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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 June 30, 2002 Commission File No.
WRC MEDIA INC. WEEKLY READER CORPORATION
(Exact name of Registrant as specified in its charter) (Exact name of Registrant as specified in its charter)
DELAWARE DELAWARE
(State or other jurisdiction of incorporation or organization) (State or other jurisdiction of incorporation or organization)
2731 2721
(Primary Standard Industrial Classification Number) (Primary Standard Industrial Classification Number)
13-4066536 13-3603780
(I.R.S. Employer Identification Number) (I.R.S. Employer Identification Number)
COMPASSLEARNING, INC.
(Exact name of Registrant as specified in its charter)
2731
DELAWARE
(State or other jurisdiction of incorporation or organization)
7372
(Primary Standard Industrial Classification Number)
13-4066535
(I.R.S. Employer Identification Number)
WRC MEDIA INC. WEEKLY READER CORPORATION
512 7th AVENUE, 23RD FLOOR 512 7th AVENUE, 23RD FLOOR
NEW YORK, NY 10018 NEW YORK, NY 10018
(212) 768-1150 (212) 768-1150
COMPASSLEARNING, INC.
512 7th AVENUE, 23RD FLOOR
NEW YORK, NY 10018
(212) 768-1150
(Address, including zip code, and telephone number, including area code, of
each Registrant's principal executive offices)
- --------------------------------------------------------------------------------
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 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
- ------------------------------------------------------------------------------------------
PART 1.
ITEM 1. FINANCIAL STATEMENTS
3
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
December 31, June 30,
2001 2002
--------- ----------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 8,919 $ 4,834
Accounts receivable, net 43,658 44,354
Inventories, net 15,026 14,026
Prepaid expenses 3,468 4,244
Other current assets 13,891 8,719
--------- ---------
Total current assets 84,962 76,177
Property and equipment, net 9,215 7,757
Purchased software, net 2,851 4,185
Goodwill, net 234,982 168,022
Deferred financing costs, net 6,645 6,081
Identified intangible assets, net 136,406 129,065
Other assets and investments 3,801 3,138
--------- ---------
Total Assets $ 478,862 $ 394,425
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 18,180 $ 15,743
Accrued payroll, commissions and benefits 11,305 8,287
Current portion of deferred revenue 39,070 42,639
Other accrued liabilities 33,996 22,499
Current portion of long-term debt 6,171 6,946
--------- ---------
Total current liabilities 108,722 96,114
Deferred revenue, net of current portion 2,040 1,361
Deferred tax liability -- 6,000
Due to related party 2,160 2,160
Long-term debt 273,544 285,068
--------- ---------
Total liabilities 386,466 390,703
Commitments and contingencies
15% Series B preferred stock subject to redemption,
Including accrued dividends and accretion of warrant value
(Liquidation preference of $75,000 plus accrued dividends) 92,760 101,062
--------- ---------
Warrants on preferred stock 11,751 11,751
--------- ---------
Common stock subject to redemption 1,180 965
--------- ---------
Stockholders' deficiency:
Common stock, ($.01 par value, 20,000,000 shares authorized;
and 7,022,385 shares outstanding) 70 70
Preferred stock, ($.01 par value, 750,000 shares authorized,
385,325 and 420,800 outstanding, respectively) 15,413 16,832
Additional paid-in capital 132,562 132,464
Accumulated comprehensive income (316) (316)
Accumulated deficit (161,024) (259,106)
--------- ---------
Total stockholders' deficiency (13,295) (110,056)
--------- ---------
Total liabilities and stockholders' deficiency $ 478,862 $ 394,425
========= =========
The accompanying notes to the condensed consolidated financial statements 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 JUNE 30
(Unaudited)
(Dollars in thousands)
` 2001 2002
--------- ---------
Sales, net $ 51,403 $ 43,939
Cost of goods sold 14,554 12,781
--------- ---------
Gross profit 36,849 31,158
Costs and expenses:
Sales and marketing 12,393 11,593
Research and development 1,160 560
Distribution, circulation and fulfillment 2,381 2,826
Editorial 2,714 2,063
General and administrative 6,016 4,831
Depreciation 824 809
--------- ---------
25,488 22,682
--------- ---------
Income before amortization of goodwill and intangible assets 11,361 8,476
Amortization of goodwill and intangible assets 17,230 4,827
--------- ---------
Income (loss) from operations (5,869) 3,649
Interest expense, including amortization
of deferred financing costs (8,642) (7,473)
Loss on investments (129) (884)
Other, net (138) (57)
--------- ---------
Loss before income tax provision (14,778) (4,765)
Income tax provision 46 544
--------- ---------
Net loss $ (14,824) $ (5,309)
========= =========
The accompanying notes to the condensed consolidated financial statements are an
integral part of these condensed consolidated financial statements.
5
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30,
(Unaudited)
(Dollars in thousands)
2001 2002
--------- ---------
Sales, net $ 100,894 $ 90,726
Cost of goods sold 28,773 26,155
--------- ---------
Gross profit 72,121 64,571
Costs and expenses:
Sales and marketing 25,127 24,942
Research and development 2,450 956
Distribution, circulation and fulfillment 5,740 5,997
Editorial 5,606 4,870
General and administrative 13,248 10,494
Depreciation 1,606 1,591
--------- ---------
53,777 48,850
--------- ---------
Income before amortization of goodwill and intangible assets 18,344 15,721
Amortization of goodwill and intangible assets 34,083 9,654
--------- ---------
Income (loss) from operations (15,739) 6,067
Interest expense, including amortization
of deferred financing costs (17,287) (14,804)
Loss on investments (129) (1,137)
Other, net (342) (282)
--------- ---------
Loss before income tax provision (33,497) (10,156)
Income tax provision 280 6,183
--------- ---------
Net loss before cumulative effect of change
in accounting principle (33,777) (16,339)
Cumulative effect of change in accounting principle -- (72,022)
--------- ---------
Net loss $ (33,777) $ (88,361)
========= =========
The accompanying notes to the condensed consolidated financial statements are an
integral part of these condensed consolidated financial statements.
6
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(Unaudited)
(dollars in thousands)
2001 2002
--------- ---------
Cash flows from operating activities:
Net loss $ (33,777) $ (88,361)
Adjustments to reconcile net loss to net cash
used in operating activities:
Cumulative effect of accounting change -- 72,022
Deferred income taxes -- 6,000
Depreciation and amortization 35,689 11,245
Loss on investments 129 1,137
Unrealized gain from hedging transactions -- (207)
Loss on disposition of property and equipment 3 43
Interest expense-accretion of discounts 166 191
Amortization of deferred financing fees 603 563
Changes in assets and liabilities:
(Increase) in accounts receivable (13,579) (696)
Decrease in inventories 1,293 1,000
Decrease in prepaid expenses and other assets 1,940 4,396
(Increase) in goodwill and other intangibles (5,575) (2,308)
Decrease (increase) in other noncurrent assets 3 (4,926)
(Decrease) in accounts payable (6,686) (2,437)
Increase in deferred revenue 7,977 3,409
(Decrease) in accrued liabilities (5,730) (14,515)
--------- ---------
Net cash used in operating activities (17,544) (13,444)
--------- ---------
Cash flows from investing activities:
Purchase of acquired business (18,286) --
Capital expenditures (2,476) (752)
Software development costs -- (2,263)
Proceeds from disposition of property & equipment -- 578
Investments (1,621) --
--------- ---------
Net cash used in investing activities (22,383) (2,437)
--------- ---------
Cash flows from financing activities:
Net proceeds from revolving line of credit 17,000 15,000
Repayment of senior bank debt (2,083) (2,891)
Proceeds from term loans 10,000 --
Proceeds from issuance of preferred stock 13,750 --
Proceeds from issuance of common stock 6,500 150
Purchase of common stock subject to redemption (10) (463)
--------- ---------
Net cash provided by financing activities 45,157 11,796
--------- ---------
Decrease in cash and cash equivalents 5,230 (4,085)
Cash and cash equivalents, beginning of period 2,968 8,919
--------- ---------
Cash and cash equivalents, end of period $ 8,198 $ 4,834
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 16,085 $ 13,982
========= =========
Cash paid during the period for income taxes $ 197 $ 199
========= =========
Preferred stock dividends accrued $ 7,128 $ 9,256
========= =========
Accretion of preferred stock $ 458 $ 464
========= =========
The accompanying notes to the condensed consolidated financial statements are an
integral part of these condensed consolidated financial statements.
7
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
The accompanying condensed consolidated financial statements include the
accounts of WRC Media, Inc. ("WRC Media") and its subsidiaries - Weekly Reader
Corporation, CompassLearning, Inc. and ChildU, Inc. The term "Company" refers to
WRC Media and its subsidiaries. Separate financial statements for
CompassLearning, Inc. are not presented and it is not filing a separate report
under the Securities Exchange Act of 1934 because the Company's management has
determined that the information contained in such documents would not be
material to investors.
WRC Media was incorporated on May 14, 1999. On July 14, 1999, WRC acquired
CompassLearning in a business combination accounted for as a purchase.
On November 17, 1999, WRC Media completed the recapitalization and purchase of
Weekly Reader and its subsidiaries. As a result of these transactions, WRC Media
owns 94.9% and PRIMEDIA Inc. owns 5.1% of the common stock of the Weekly Reader
Corporation.
On May 9, 2001, WRC Media entered into an Agreement and Plan of Merger with
ChildU, Inc. ("ChildU"). Pursuant to the agreement, each issued share of
ChildU's common and preferred stock not directly or indirectly owned by ChildU
was converted into a contingent right to receive a number of shares of WRC Media
Inc. common stock. Following the merger, WRC Media agreed to provide funding to
ChildU for up to $5,871,907 of ChildU's existing or committed obligations and
liabilities. Concurrent with the merger, WRC Media and all holders of ChildU's
Group One Notes entered into an exchange agreement pursuant to which WRC Media
exchanged 162,500 shares of WRC Media common stock for all the outstanding Group
One Notes. The Company issued $13.75 million of 18% Junior Participating
Cumulative Convertible Preferred Stock, the proceeds of which will fund the
operating losses of ChildU and WRC Media's investment in ThinkBox(TM) (see
below). ChildU was incorporated on June 1, 1999 and is a leading provider of
Internet-based educational services to both individual and institutional
consumers.
On May 18, 2001 WRC Media made a strategic investment in ThinkBox Inc., a
leading creator of Internet-delivered education programs for the school and home
markets. Key elements of the broad partnership include an investment by WRC
Media in ThinkBox(TM), WRC Media's acquisition of distribution rights for
ThinkBox(TM) programs to schools, and the licensing to ThinkBox(TM) of the
Weekly Reader(R) brand names and content for use in its programs. This
investment is accounted for under the equity method of accounting. For the
six-months ended June 30, 2002, WRC Media has recorded a $1.1 million loss on
this investment. The investment of ThinkBox is currently valued at $1.9 million
and is included in Other assets and investments on the balance sheet at June 30,
2002.
The separate financial statements of the Subsidiary Guarantors have not been
included because (i) the Subsidiary Guarantors constitute all of WRC Media's
direct and indirect subsidiaries, (ii) the Subsidiary Guarantors have fully and
unconditionally guaranteed the Company's obligations on a joint and several
basis; (iii) WRC Media has limited operations and its ability to service its
debt is dependent on the operations of its subsidiaries.
All significant intercompany balances and transactions have been eliminated in
the accompanying condensed consolidated financial statements.
The accompanying condensed consolidated financial statements have been prepared
without audit. In the opinion of management, all adjustments, consisting of only
normal recurring adjustments necessary to present fairly the financial position,
the results of operations and cash flows for the periods presented, have been
made.
8
The accompanying condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Accordingly, certain information and note disclosures normally included
in financial statements prepared in conformity with generally accepted
accounting principles have been condensed or omitted. Certain reclassifications
have been made to the prior year amounts in order to conform to the current
year's presentation.
These condensed consolidated financial statements should be read in conjunction
with the Company's annual financial statements and related notes for the year
ended December 31, 2001. The operating results for the six-month periods ended
June 30, 2001 and 2002 are not necessarily indicative of the results that may be
expected for a full year.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued two new
statements, SFAS No.141, "Business Combinations," and SFAS No.142, "Goodwill and
Other Intangible Assets". SFAS No. 141 requires that the purchase method be used
for all business combinations initiated after June 30, 2001 and prohibits the
use of the pooling of interest method. The adoption of SFAS No. 141 did not have
a material effect on the Company's results of operations or financial position.
SFAS No. 142 specifies the financial accounting and reporting for acquired
goodwill and other intangible assets. Goodwill and intangible assets that have
indefinite useful lives will not be amortized but rather be tested at least
annually for impairment. SFAS No. 142 requires that the useful lives of
intangible assets acquired on or before June 30, 2001 be reassessed and the
remaining amortization periods adjusted accordingly. Previously recognized
intangible assets deemed to have indefinite lives should be tested for
impairment as well. Goodwill recognized on or before June 30, 2001 has been
assigned to various reporting units and has been tested for impairment during
the six months ending June 30, 2002, the period in which SFAS No. 142 is
initially applied in its entirety. On January 1, 2002, the Company adopted SFAS
No. 142 for its goodwill and identifiable intangible assets. Upon adoption, the
Company ceased the amortization of goodwill and other indefinite lived
intangible assets, which consist of trademarks. As required by this statement,
the Company reviewed its indefinite lived intangibles (trademarks) for
impairment as of January 1, 2002. The effect on the results of operations for
the comparative period ended June 30, 2001 had the Company adopted this
accounting change on January 1, 2001 would have resulted in reducing the
Company's amortization expense and pre-tax losses approximately $5,370 for the
six-months ended June 30, 2002.
The Company performed the transitional impairment tests on its goodwill and
indefinite lived intangibles in the second quarter ended June 30, 2002. The
previous method for determining impairment prescribed by SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to
be Disposed Of," utilized an undiscounted cash flow approach for the impairment
assessment, while SFAS No. 142 utilizes a fair value approach. The Company has
five reporting units with goodwill. Goodwill was tested for impairment at the
reporting unit level. As a result, the Company recorded a transitional goodwill
and indefinite lived intangible asset impairment charge of $72,022 at American
Guidance Service, Inc. a subsidiary of Weekly Reader Corporation. This charge is
reported as a cumulative effect of accounting change, as of January 1, 2002, in
the Condensed Consolidated Statements of Operations. The Company is required to
perform impairment tests on an annual basis, or between yearly tests under
certain circumstances for goodwill and indefinite lived intangibles. There can
be no assurance that future impairment tests will not result in a charge to
earnings.
The Company also recorded non-cash deferred income tax expense of approximately
$5,000 on January 1, 2002 and $1,000 during the six months ended June 30, 2002,
related to the adoption of SFAS 142. The non-cash charge of $5,000 on January 1,
2002 was recorded to increase the valuation allowance related to the deferred
tax asset associated with the Company's net operating losses. Historically, the
Company did not need a valuation allowance for the portion of their net
operating loss equal to the excess of tax over book amortization on
tax-deductible goodwill and trademarks since the liability was expected to
reverse during the carryforward period of the net operating losses. As a result
of the adoption of SFAS 142, the reversal of this liability is indefinite and
can no longer be offset by the Company's net operating loss carryforwards. While
book amortization of tax-deductible goodwill and trademarks ceased on January 1,
2002, the Company continues to amortize these assets for tax purposes. As a
result, the Company will have deferred tax liabilities that will arise each
quarter because the taxable temporary differences related to the amortization of
these assets will not reverse prior to the expiration period of the Company's
deductible temporary differences unless the related assets are sold or an
impairment of the assets is recorded. Accordingly, the Company also recorded an
additional $1,000 to increase the valuation allowance for the six months ended
June 30, 2002. The Company expects that it will record an additional $1,000 to
increase the valuation allowance during the remaining six months of 2002.
9
The following information represents pro forma net loss assuming the adoption of
SFAS 142 on January 1, 2001:
For the Six Months Ended
-------------------------
June 30, June 30,
(in thousands) 2001 2002
- --------------------------------------------------------------------------------
Reported Net Loss $(33,777) $(88,361)
Addback:
Goodwill Amortization 4,764 --
Amortization of Trademarks 606 --
Cumulative effect of a change in accounting principle -- 72,022
Deferred provision for income taxes -- 6,000
-------- --------
$(28,407) $(10,339)
======== ========
The Company adopted the provisions of SFAS No. 133 ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities, as amended by Statements of
Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133, and No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, and as interpreted by the FASB and the Derivatives
Implementation Group through "Statement 133 Implementation Issues," as of
January 1, 2001. The Company believes that it has properly identified all
derivative instruments and any embedded derivative instruments that require
bifurcation. The Company's hedging activities, if any, are in accordance with
its documented and approved hedging and risk management policies. Specifically,
we have appropriately designated all hedging instruments as either fair value or
cash flow hedges, or hedges of a net investment in a foreign operation. We
believe the timing, nature, and amounts of all forecasted transactions are
probable of occurring. The fair values of all derivatives, embedded derivatives
that have been bifurcated, and hedged items have been determined based on
prevailing market prices or by using financial models that we believe are the
appropriate models for valuing such instruments and that incorporate market data
and other assumptions that we have determined to be reasonable and appropriate
at June 30, 2002. For the six-months ended June 30, 2002, WRC Media has recorded
an unrealized gain of $0.2 million related to its interest rate swap, which is
being marked to market under SFAS 133. This gain is reflected in Other, net in
the consolidated statement of operations.
Debt
As of June 30, 2002, there were $15 million in outstanding advances under the
Company's $30 million revolving credit facility. In addition, there is an
annually renewable stand-by letter of credit in the amount of $2 million in
connection with a real estate lease entered into by the Company. While this
letter of credit is in effect, the Company's available borrowing under the
revolving credit facility is reduced by $2 million.
Inventories
Inventories are comprised of the following:
December 31, June 30,
2001 2002
-------- --------
Finished goods $ 17,588 $ 16,739
Raw materials 211 300
Less - allowance for obsolescence (2,773) (3,013)
$ 15,026 $ 14,026
======== ========
10
Intangibles
The gross carrying amount and accumulated amortization of the Company's
intangible assets other than goodwill and indefinite-lived intangible assets as
of June 30, 2002 and December 31, 2001 are as follows:
---------------------------------------- ----------------------------------------
December 31, 2001 June 30, 2002
---------------------------------------- ----------------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
----------- -------------- ----------- ------------ ------------ ------------
Customer Lists $ 62,911 $ (15,210) $ 47,701 $ 62,911 $ (18,335) $ 44,576
Copyrights 21,053 (4,537) 16,516 21,053 (6,338) 14,715
Product Titles 13,475 (8,192) 5,283 13,475 (9,429) 4,046
Pre-publication costs 18,903 (5,082) 13,821 23,562 (6,672) 16,890
Trade name 3,520 (2,169) 1,351 3,520 (2,609) 911
Workforce in place 2,980 (2,449) 531 2,980 (2,945) 35
Direct response advertising 8,085 (4,992) 3,093 7,101 (1,700) 5,401
Non-compete agreements 77,334 (77,334) - 77,334 (77,334) -
Databases 560 (471) 89 560 (509) 51
Other 1,199 (390) 809 680 (390) 290
----------- -------------- ----------- ------------ ------------ ------------
Total: $ 210,020 $ (120,826) $ 89,194 $ 213,176 $ (126,261) $ 86,915
=========== ============== =========== ============ ============ ============
For intangible assets other than goodwill not subject to amortization, the total
carrying amount is $42,150 at June 30, 2002.
The estimated amortization expense for each of the five succeeding fiscal years
is as follows:
For the year ended December 31,
- ------------------------------------------
2002 ............................. $ 20,186
2003 ............................. $ 14,965
2004 ............................. $ 11,294
2005 ............................. $ 8,895
2006 ............................. $ 6,413
Notes Offering and Guarantor and Non-Guarantor Financial Information
In connection with the recapitalization and purchase of Weekly Reader during
November 1999, the Company, Weekly Reader and Compass as co-issuers completed an
offering of $152.0 million 12 3/4% Senior Subordinated Notes due 2009 (the "Old
Notes"). In June 1999, 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 except that the Notes
were registered with the SEC. Interest on the Notes is payable semi-annually, on
May 15 and November 15 of each year. The Notes are jointly, severally, fully and
unconditionally guaranteed by certain subsidiaries of the Company, including
CompassLearning, Inc., a 100% wholly owned subsidiary and Weekly Reader
Corporation, a non-wholly owned subsidiary of the Company (collectively, the
"Subsidiary Guarantors").
The following tables present condensed consolidating financial information for
the six months ended June 30, 2001 and 2002 for: (1) the Company on a standalone
basis, (2) Weekly Reader Corporation, a non-wholly owned subsidiary, (3)
CompassLearning, Inc., a wholly owned subsidiary on a standalone basis, (4) the
non-guarantor subsidiary of the Company (ChildU, Inc.), and (5) the Company on a
consolidated basis.
Separate financial statements for CompassLearning, Inc. are not presented and it
is not filing a separate report under the Securities Exchange Act of 1934
because the Company's management has determined that the information contained
in such documents would not be material to investors.
11
GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
FOOTNOTE SUPPORT
(dollars in thousands)
(Phoenix) (ChildU)
Subsidiary Guarantors
----------------------
Weekly Compass Non- WRC
Reader Learning Guarantor Media Inc.
WRC Media Inc. Corporation Inc. Subsidiaries Elimination Consolidated
--------- --------- --------- --------- --------- ---------
(In thousands)
Balance Sheet as of June 30, 2002
Current assets $ 9,718 $ 119,476 $ 24,282 $ 764 $ (78,063) $ 76,177
Property and equipment, net -- 6,515 979 263 0 7,757
Goodwill and other intangible assets, net 174,399 78,544 32,510 15,819 0 301,272
Other assets 107,151 17,984 2,803 -- (118,719) 9,219
--------- --------- --------- --------- --------- ---------
Total assets $ 291,268 $ 222,519 $ 60,574 $ 16,846 $(196,782) $ 394,425
========= ========= ========= ========= ========= =========
Current liabilities: $ 78,016 $ 61,784 $ 24,290 $ 10,078 $ (78,054) $ 96,114
Long-term debt, less current portion 147,068 115,137 22,863 -- 285,068
Other liabilities 11,751 6,000 3,521 -- 21,272
Warrants on preferred stock -- 9,133 2,618 -- -- 11,751
Common stock subject to redemption 965 -- -- -- -- 965
Redeemable preferred stock, plus accrued dividends 101,062 75,000 -- -- (75,000) 101,062
Stockholders equity (deficit): (47,594) (163,941) 7,282 6,768 87,429 (110,056)
Interdivisional equity -- 119,406 -- (131,157) (11,751)
--------- --------- --------- --------- --------- ---------
Total liabilities and stockholders equity (deficit) $ 291,268 $ 222,519 $ 60,574 $ 16,846 $(196,782) $ 394,425
========= ========= ========= ========= ========= =========
Subsidiary Guarantors
----------------------
Weekly Compass Non- WRC
Reader Learning Guarantor Media Inc.
WRC Media Inc. Corporation Inc. Subsidiaries Elimination Consolidated
--------- --------- --------- --------- --------- ---------
(In thousands)
Statement of operations for six months
ended June 30, 2002
Revenue $ -- $ 64,732 $ 25,265 $ 729 $ -- $ 90,726
Operating expenses 2,088 54,585 25,889 2,097 -- 84,659
Interest expense, net 10,345 14,321 9 1 (9,872) 14,804
Other (income) expense 1,641 (228) 6 -- -- 1,419
Provision for income taxes 30 6,117 36 -- -- 6,183
Cumulative effect of accounting change -- 72,022 -- -- -- 72,022
--------- --------- --------- --------- --------- ---------
Net income (loss) $ (14,104) $ (82,085) $ (675) $ (1,369) $ 9,872 $ (88,361)
========= ========= ========= ========= ========= =========
Cash flow for six months
ended June 30, 2002
Cash flow provided by (used in) operations $ (13,786) $ (10,045) $ 2,981 $ (2,280) $ 9,686 $ (13,444)
Cash flow provided by (used in) investing activities -- 51 (1,574) (914) -- (2,437)
Cash flow provided by (used in) financing activities 12,850 6,903 (1,398) 3,127 (9,686) 11,796
Cash at beginning of period 2,643 5,690 395 191 -- 8,919
--------- --------- --------- --------- --------- ---------
Cash at end of period $ 1,707 $ 2,599 $ 404 $ 124 $ -- $ 4,834
========= ========= ========= ========= ========= =========
Statement of operations for six months
ended June 30, 2001
Revenue $ -- $ 66,291 $ 34,529 $ 74 $ -- $ 100,894
Operating expenses 23,077 58,168 34,637 751 -- 116,633
Interest expense, net 10,429 16,717 16,684 -- (26,543) 17,287
Other (income) expense 590 (119) -- -- -- 471
Provision for income taxes 169 109 2 -- -- 280
--------- --------- --------- --------- --------- ---------
Net income (loss) $ (34,265) $ (8,584) $ (16,794) $ (677) $ 26,543 $ (33,777)
========= ========= ========= ========= ========= =========
Cash flow for six months
ended June 30, 2001
Cash flow provided by (used in) operations $ (12,143) $ (10,766) $ (19,594) $ (1,253) $ 26,212 $ (17,544)
Cash flow provided by (used in) investing activities (12,986) (9,437) (81) 121 -- (22,383)
Cash flow provided by (used in) financing activities 31,003 19,325 19,796 1,245 (26,212) 45,157
Cash at beginning of period -- 2,914 54 -- -- 2,968
--------- --------- --------- --------- --------- ---------
Cash at end of period $ 5,874 $ 2,036 $ 175 $ 113 $ -- $ 8,198
========= ========= ========= ========= ========= =========
12
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
December 31, June 30,
2001 2002
--------- ---------
(Unaudited)
ASSETS
Current Assets:
Cash $ 5,691 $ 2,599
Accounts receivable, net 24,818 32,593
Inventories, net 13,718 12,415
Due from related party, net 2,858 7,967
Prepaid expenses 2,702 3,199
Other current assets 13,891 8,719
--------- ---------
Total current assets 63,678 67,492
Property and equipment, net 7,541 6,515
Goodwill, net 101,978 35,018
Deferred financing costs, net 873 782
Identified intangible assets, net 46,023 43,526
Other assets 737 1,026
--------- ---------
Total Assets $ 220,830 $ 154,359
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 15,855 $ 13,872
Deferred revenue 18,398 25,906
Accrued expenses and other 26,664 18,548
Current portion of long-term debt 6,171 6,946
--------- ---------
Total current liabilities 67,088 65,272
Deferred tax liability -- 6,000
Long-term debt 273,544 285,068
Commitments and contingencies
Redeemable preferred stock, plus accrued dividends (Liquidation 102,573 110,410
preference of $75,000 plus accrued dividends)
Stockholders' deficiency:
Common stock, ($.01 par value, 20,000,000 shares authorized;
2,830,000 shares issued & outstanding) 28 28
Additional paid-in capital 9,133 9,133
Due from parent (67,738) (67,831)
Accumulated comprehensive income (316) (316)
Accumulated deficit (163,482) (253,405)
--------- ---------
Total stockholders' deficiency (222,375) (312,391)
--------- ---------
Total liabilities and stockholders' deficiency $ 220,830 $ 154,359
========= =========
The accompanying notes to the condensed consolidated financial statements are an
integral part of these condensed consolidated financial statements.
13
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30
(Unaudited)
(Dollars in thousands)
2001 2002
-------- --------
Sales, net $ 30,709 $ 30,724
Cost of goods sold 8,988 8,651
-------- --------
Gross profit 21,721 22,073
Costs and expenses:
Marketing and selling 5,625 6,267
Distribution, circulation and fulfillment 2,381 2,826
Editorial 2,714 2,063
General and administrative 4,218 4,024
Depreciation 515 467
-------- --------
15,453 15,647
-------- --------
Income before amortization of goodwill and intangible assets 6,268 6,426
Amortization of goodwill and intangible assets 3,090 2,199
-------- --------
Income from operations 3,178 4,227
Other income (expense) :
Interest expense (8,356) (7,230)
Other, net 85 217
-------- --------
Loss before income tax provision (5,093) (2,786)
Income tax provision 76 523
-------- --------
Net loss $ (5,169) $ (3,309)
======== ========
The accompanying notes to the condensed consolidated financial statements are an
integral part of these condensed consolidated financial statements.
14
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30,
(Unaudited)
(Dollars in thousands)
2001 2002
-------- --------
Sales, net $ 66,291 $ 64,732
Cost of goods sold 18,046 17,031
-------- --------
Gross profit 48,245 47,701
Costs and expenses:
Marketing and selling 12,421 13,511
Distribution, circulation and fulfillment 5,740 5,997
Editorial 5,606 4,870
General and administrative 9,495 7,842
Depreciation 1,006 934
-------- --------
34,268 33,154
-------- --------
Income before amortization of goodwill and intangible assets 13,977 14,547
Amortization of goodwill and intangible assets 5,854 4,400
-------- --------
Income from operations 8,123 10,147
Other income (expense) :
Interest expense, including amortization
of deferred financing costs (16,717) (14,321)
Other, net 119 228
-------- --------
Loss before income tax provision (8,475) (3,946)
Income tax provision 109 6,117
-------- --------
Net loss before cumulative effect of change
in accounting principle (8,584) (10,063)
Cumulative effect of change in accounting principle -- (72,022)
-------- --------
Net loss $ (8,584) $(82,085)
======== ========
The accompanying notes to the condensed consolidated financial statements are an
integral part of these condensed consolidated financial statements.
15
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(Unaudited)
(dollars in thousands)
2001 2002
-------- --------
Cash flows from operating activities:
Net loss $ (8,584) $(82,085)
Adjustments to reconcile net loss
to net cash used in operating activities:
Cumulative effect of accounting change -- 72,022
Deferred income taxes -- 6,000
Depreciation and amortization 6,860 5,334
Unrealized gain from hedging transactions -- (207)
Amortization of deferred financing fees 30 91
Loss on disposition of property and equipment 3 43
Interest expense-accretion of discounts and stock 166 191
Changes in operating assets and liabilities:
(Increase) in accounts receivable (5,369) (7,775)
Decrease in inventories 1,828 1,303
(Increase) in prepaid expenses and other assets (2,746) (2,374)
(Decrease) in accounts payable (6,430) (1,983)
Increase in deferred revenue 6,257 7,508
(Decrease) in accrued expenses and other liabilities (2,781) (8,114)
-------- --------
Net cash used in operating activities (10,766) (10,046)
-------- --------
Cash flows used in investing activities:
Payments for businesses acquired (7,043) --
Capital expenditures (2,394) (527)
Proceeds from disposition of property and equipment -- 578
-------- --------
Net cash used in investing activities (9,437) 51
-------- --------
Cash flows from financing activities:
Net proceeds from revolving line of credit 17,000 15,000
Repayment of senior bank debt (2,083) (2,891)
Proceeds from term loans 10,000 --
Decrease in due from parent, net 914 (97)
Increase in due from related party (6,506) (5,109)
-------- --------
Net cash provided by financing activities 19,325 6,903
-------- --------
Decrease in cash and cash equivalents (878) (3,092)
Cash, beginning of period 2,914 5,691
-------- --------
Cash, end of period $ 2,036 $ 2,599
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 16,085 $ 13,982
======== ========
Cash paid during the period for income taxes $ 3 $ 162
======== ========
Preferred stock dividends accrued $ 7,128 $ 9,256
======== ========
The accompanying notes to the condensed consolidated financial statements are an
integral part of these condensed consolidated financial statements.
16
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Weekly Reader Corporation ("WRC"), PRIMEDIA Reference, Inc. ("PRI") and American
Guidance Services, Inc. ("American Guidance") were wholly owned subsidiaries of
PRIMEDIA Inc. ("PRIMEDIA"). On August 13, 1999, PRIMEDIA entered into a
Redemption, Stock Purchase and Recapitalization Agreement (as amended as of
October 6, 1999, the "Recapitalization Agreement") with WRC Media Inc., formerly
EAC II Inc. ("WRC Media"). The terms of the Recapitalization Agreement required
that all of the outstanding capital stock of PRI and American Guidance be
contributed to WRC prior to WRC Media's purchase of a majority interest in WRC
for a purchase price of $395,000. The presentation of these financial statements
reflects the capital contribution made by PRIMEDIA to WRC of all the PRI and
American Guidance shares at their historical carrying values. In addition, on
October 5, 1999, the authorized capital of WRC was amended to consist of
20,000,000 shares of common stock, par value $.01/share, and WRC declared a
10,000-for-one stock split effective on October 5, 1999. On November 17, 1999
WRC Media completed its recapitalization of WRC. The consolidated financial
statements include the accounts of WRC and its subsidiary, Lifetime Learning
System, Inc. ("Lifetime Learning"), PRI and its subsidiaries, Funk & Wagnalls
Yearbook Corporation and Gareth Stevens, Inc. ("Gareth Stevens"), and American
Guidance and its subsidiary, AGS International Sales, Inc. (collectively
referred to as "Weekly Reader"). As a result of the recapitalization, WRC Media
owns 94.9% and PRIMEDIA 5.1% of the common stock of Weekly Reader. On November
17, 1999 PRI legally changed its name to World Almanac Education Group ("WAE").
On May 9, 2001 American Guidance acquired through a subsidiary all of the
operating assets of Lindy Enterprises, Inc. ("Lindy") for approximately $7,500.
The transaction was accounted for as an asset purchase. Lindy develops
curriculum-based skills assessment and test preparation products that correlate
to national and state curriculum. The acquisition, if it had occurred on January
1 of the year prior to acquisition, would not have had a material impact on the
results of operations.
All significant intercompany balances and transactions have been eliminated in
the accompanying condensed consolidated financial statements.
The accompanying condensed consolidated financial statements have been prepared
without audit. In the opinion of management, all adjustments, consisting of only
normal recurring adjustments necessary to present fairly the financial position,
the results of operations and cash flows for the periods presented, have been
made.
The accompanying condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the SEC. Accordingly, certain
information and note disclosures normally included in financial statements
prepared in conformity with generally accepted accounting principles have been
condensed or omitted. Certain reclassifications have been made to the prior year
amounts in order to conform to the current year's presentation.
These condensed consolidated financial statements should be read in conjunction
with Weekly Reader Corporation and Subsidiaries annual financial statements and
related notes for the year ended December 31, 2001.
The operating results for the six-month periods ended June 30, 2001 and 2002 are
not necessarily indicative of the results that may be expected for a full year.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued two new
statements, SFAS No.141, "Business Combinations," and SFAS No.142, "Goodwill and
Other Intangible Assets". SFAS No. 141 requires that the purchase method be used
for all business combinations initiated after June 30, 2001 and prohibits the
use of the pooling of interest method. The adoption of SFAS No. 141 did not have
a material effect on WRC's results of operations or financial position. SFAS No.
142 specifies the financial accounting and reporting for acquired goodwill and
other intangible assets. Goodwill and intangible assets that have indefinite
useful lives will not be amortized but rather be tested at least annually for
impairment. SFAS No. 142 requires that the useful lives of intangible assets
acquired on or before June 30, 2001 be reassessed and the remaining amortization
periods adjusted accordingly. Previously recognized intangible assets deemed to
have indefinite lives should be tested for impairment as well. Goodwill
recognized on or before June 30, 2001 has been assigned to various reporting
units and has been tested for impairment during the six months ending June 30,
2002, the period in which SFAS No. 142 is initially applied in its entirety. On
January 1, 2002, WRC adopted SFAS No. 142 for its goodwill and identifiable
intangible assets. Upon adoption, WRC ceased the amortization of goodwill and
other indefinite lived intangible assets, which consist of trademarks. As
required by this statement, WRC reviewed its indefinite lived intangibles
(trademarks) for impairment as of January 1, 2002. The effect on the results of
operations for the comparative period ended June 30, 2001 had WRC adopted this
accounting change on January 1, 2001 would have resulted in reducing WRC's
amortization expense and pre-tax losses approximately $1,682 for the six-months
ended June 30, 2002.
17
WRC performed the transitional impairment tests on its goodwill and
indefinite-lived intangibles in the second quarter ended June 30, 2002. The
previous method for determining impairment prescribed by SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," utilized an undiscounted cash flow approach for the impairment assessment,
while SFAS No. 142 utilizes a fair value approach. WRC has three reporting units
with goodwill. Goodwill was tested for impairment at the reporting unit level.
As a result, WRC recorded a transitional goodwill and indefinite lived
intangible asset impairment charge of $72,022 at its subsidiary, American
Guidance Service, Inc. This charge is reported as cumulative effect of
accounting change, as of January 1, 2002, in the Condensed Consolidated
Statement of Operations. WRC is required to perform impairment tests on an
annual basis, or between yearly tests under certain circumstances for goodwill
and indefinite lived intangibles. There can be no assurance that future
impairment tests will not result in a charge to earnings.
WRC also recorded non-cash deferred income tax expense of approximately $5,000
on January 1, 2002 and $1,000 during the six months ended June 30, 2002, related
to the adoption of SFAS 142. The non-cash charge of $5,000 on January 1, 2002
was recorded to increase the valuation allowance related to the deferred tax
asset associated with WRC's net operating losses. Historically, WRC did not need
a valuation allowance for the portion of their net operating loss equal to the
excess of tax over book amortization on tax-deductible goodwill and trademarks
since the liability was expected to reverse during the carryforward period of
the net operating losses. As a result of the adoption of SFAS 142, the reversal
of this liability is indefinite and can no longer be offset by WRC's net
operating loss carryforwards. While book amortization of tax-deductible goodwill
and trademarks ceased on January 1, 2002, WRC will continue to amortize these
assets for tax purposes. As a result, WRC will have deferred tax liabilities
that will arise each quarter because the taxable temporary differences related
to the amortization of these assets will not reverse prior to the expiration
period of WRC's deductible temporary differences unless the related assets are
sold or an impairment of the assets is recorded. Accordingly, WRC also recorded
an additional $1,000 to increase the valuation allowance for the six months
ended June 30, 2002. WRC expects that it will record an additional $1,000 to
increase the valuation allowance during the remaining six months of 2002.
18
The following information represents pro forma net loss assuming the adoption of
SFAS 142 on January 1, 2001:
For the Six Months Ended
----------------------------
June 30, June 30,
(in thousands) 2001 2002
- ---------------------------------------------------------------------------
Reported Net Loss $(8,584) $(82,085)
Addback:
Goodwill Amortization 1,452 --
Amortization of Trademarks 230 --
Cumulative effect of a change in accounting
principle -- 72,022
Deferred provision for income taxes -- 6,000
------- --------
$(6,902) $ (4,063)
======= ========
WRC adopted the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by Statements of Financial
Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133, and No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, and as interpreted by the FASB and the Derivatives Implementation
Group through "Statement 133 Implementation Issues," as of January 1, 2001. WRC
believes that it has properly identified all derivative instruments and any
embedded derivative instruments that require bifurcation. WRC's hedging
activities, if any, are in accordance with its documented and approved hedging
and risk management policies. Specifically, we have appropriately designated all
hedging instruments as either fair value or cash flow hedges, or hedges of a net
investment in a foreign operation. We believe the timing, nature, and amounts of
all forecasted transactions are probable of occurring. The fair values of all
derivatives, embedded derivatives that have been bifurcated, and hedged items
have been determined based on prevailing market prices or by using financial
models that we believe are the appropriate models for valuing such instruments
and that incorporate market data and other assumptions that we have determined
to be reasonable and appropriate at June 30, 2002. For the six-months ended June
30, 2002, WRC has recorded an unrealized gain of $0.2 million related to its
interest rate swap, which is being marked to market under SFAS 133. This gain is
reflected in Other, net in the consolidated statement of operations.
Debt
As of June 30, 2002, there were $15 million in outstanding advances under WRC's
$30 million revolving credit facility. In addition, there is an annually
renewable stand-by letter of credit in the amount of $2 million in connection
with a real estate lease entered into by the Company. While this letter of
credit is in effect, WRC's available borrowing under the revolving credit
facility is reduced by $2 million.
Inventories
Inventories are comprised of the following:
December 31, June 30,
2001 2002
----------- -----------
Finished goods $ 16,377 $ 15,205
Raw materials 114 223
Less - allowance for obsolescence (2,773) (3,013)
$ 13,718 $ 12,415
=========== ===========
19
Intangibles
The gross carrying amount and accumulated amortization of the WRC's intangible
assets other than goodwill and indefinite-lived intangible assets as of June 30,
2002 and December 31, 2001 are as follows:
------------------------------ ------------------------------
December 31, 2001 June 30, 2002
------------------------------ ------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
-------- ------------ ------- ------- ------------ -------
Customer Lists $ 36,748 $ (33,070) $ 3,678 $ 36,748 $ (33,537) $ 3,211
Copyrights 17,520 (12,527) 4,993 17,520 (13,597) 3,923
Product Titles 22,400 (17,117) 5,283 22,400 (18,354) 4,046
Non-compete agreements 17,098 (17,098) -- 17,098 (17,098) --
Databases 5,812 (5,723) 89 5,812 (5,761) 51
Other, including deferred direct
advertising and pre-publication costs 27,676 (10,714) 16,962 31,351 (9,012) 22,339
-------- -------- ------- -------- -------- -------
Total: $127,254 $(96,249) $31,005 $130,929 $(97,359) $33,570
-------- -------- ------- -------- -------- -------
For intangible assets other than goodwill not subject to amortization, the total
carrying amount is $9,956 at June 30, 2002.
The estimated amortization expense for each of the five succeeding fiscal years
is as follows:
For the year ended December 31,
- ------------------------------------------
2002 ............................. $ 11,998
2003 ............................. $ 7,717
2004 ............................. $ 4,517
2005 ............................. $ 2,188
2006 ............................. $ 845
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in understanding the financial
condition as of June 30, 2002 of WRC Media Inc. ("WRC Media") and its
subsidiaries and their results of operations for the three-month and six-month
periods ended June 30, 2001 and 2002. You should read the following discussion
in conjunction with the financial statements of WRC Media and Weekly Reader
Corporation ("Weekly Reader") attached to this discussion and analysis. Unless
the context otherwise requires, references to "Weekly Reader" herein are to
Weekly Reader and its subsidiaries, including American Guidance Service, Inc.
("AGS" or "American Guidance") and World Almanac Education Group, Inc. ("World
Almanac"). Unless the context otherwise requires, the terms "we," "our," and
"us" refer to WRC Media and its subsidiaries after giving effect to the
transactions related to the acquisition of CompassLearning, Inc.
("CompassLearning") and recapitalization of Weekly Reader effectuated on July
14, 1999 and November 17, 1999, respectively (the "Acquisition and
Recapitalization"). This discussion and analysis contains forward-looking
statements. Although we believe that our plans, intentions and expectations
reflected in or suggested by these forward-looking statements are reasonable, we
cannot assure you that these plans, intentions or expectations will be achieved.
These forward-looking statements are subject to risks, uncertainties and
assumptions about us.
Results of Operations for the Three-Months Ended June 30, 2002-- 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 June 30, 2001 and
2002, respectively, 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 sales 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 sales.
21
Three Months Ended June 30
2001 2002
----------------- -----------------
% of % of
Amount Net Sales Amount Net Sales
-------- --------- --------- ---------
(Dollars in millions)
Sales, net $ 51.4 100.0% $ 43.9 100.0%
Cost of goods sold 14.6 28.4% 12.8 29.2%
------- ----- ------- -----
Gross profit 36.8 71.6% 31.1 70.8%
Costs and expenses:
Sales and marketing 12.4 24.1% 11.6 26.4%
Research and development 1.2 2.3% 0.6 1.4%
Distribution, circulation and fulfillment 2.4 4.7% 2.8 6.4%
Editorial 2.7 5.3% 2.1 4.8%
General and administrative 6.0 11.7% 4.8 10.9%
Depreciation 0.8 1.6% 0.8 1.8%
------- ----- ------- -----
25.5 49.7% 22.7 51.7%
------- ----- ------- -----
Income before amortization of goodwill and
intangible assets, interest expense, income
taxes and other, net 11.3 21.9% 8.4 19.1%
Amortization of goodwill and intangible assets 17.2 33.5% 4.8 10.9%
------- ----- ------- -----
Income (loss) from operations (5.9) (11.6%) 3.6 8.2%
Interest expense, including amortization
of deferred financing costs (8.6) (16.7%) (7.5) (17.1%)
Loss on investments (0.1) (0.2%) (0.9) (2.1%)
Other, net (0.2) (0.4%) -- 0.0%
------- ----- ------- -----
Loss before income tax provision (14.8) (28.9%) (4.8) (11.0%)
Income tax provision -- 0.0% 0.5 1.1%
------- ----- ------- -----
Net loss $ (14.8) (28.9%) $ (5.3) (12.1%)
======= ===== ======= =====
EBITDA(a) $ 12.7 24.7% $ 10.2 23.2%
======= ===== ======= =====
(a) EBITDA is defined as income (loss) before interest expense, income taxes,
depreciation and amortization not including WRC Media's unrestricted
subsidiaries. EBITDA data is included because we understand that this
information may be considered by investors as an additional basis on which to
evaluate WRC Media's ability to pay interest, repay debt and make capital
expenditures. Because all companies do not calculate EBITDA identically, the
presentation of EBITDA in this report is not necessarily comparable to similarly
titled measures of other companies. EBITDA does not represent and should not be
considered more meaningful than, or an alternative to, measures of operating
performance determined in accordance with generally accepted accounting
principles. Given the projected near-term financial performance of ChildU and
ThinkBox, WRC Media designated ChildU and ThinkBox "Unrestricted Subsidiaries"
under its Credit Agreement so as to: (i) exclude them from all the negative
covenants in the Credit Agreement including the financial covenants, and from
agreed upon affirmative covenants, representations and warranties and events of
default; and (ii) Permit additional investments in ChildU and ThinkBox by WRC
Media and its subsidiaries in excess of the acquisition funding requirements to
fund operations, if necessary. As a result of the above-mentioned designation,
ChildU and ThinkBox performance will not be included in any covenant
calculations. Accordingly, Consolidated EBITDA (before unrestricted
subsidiaries) is defined as WRC Media consolidated EBITDA excluding the $1.9
million EBITDA loss contributed by its unrestricted subsidiaries - ChildU and
its investment in ThinkBox.
Three-Months Ended June 30, 2002 Compared to Three-Months Ended June 30, 2001
Sales, net. For the three-months ended June 30, 2002, net sales decreased $7.5
million, or 14.6%, to $43.9 million from $51.4 million for the same period in
2001. This decrease was primarily the result of a $7.9 million or 38.3% decrease
at WRC Media's CompassLearning operating unit combined with a $0.4 million or
3.5% decrease at World Almanac partially offset by revenue increases of $0.4
million at ChildU, $0.3 million at AGS and $0.1 million at Weekly Reader, not
including AGS or World Almanac, respectively.
At CompassLearning, net revenue decreased $7.9 million, or 38.3%, to $12.7
million for the three-months ended June 30, 2002 from $20.6 million in 2001.
This decrease was primarily due to (1) a decrease in software revenue of $6.9
million, or 50.4%, to $6.8 million from $13.7 million in 2001 primarily as a
result of delayed Title 1 funding and post-September 11 state budget deficits,
which contributed to additional spending delays, (2) a planned decrease in
hardware revenue of $0.4 million, or 57.1%, to $0.3 million from $0.7 million in
2001, (3) a decrease in service revenue from technical support of $0.5 million,
or 13.2%, to $3.3 million from $3.8 million in 2001 due to non-renewal of
service contracts associated with older versions of the software which have been
replaced with current software releases that carry a service warranty and (4) a
decrease in professional development revenue of $0.1 million, or 4.2%, to $2.3
million from $2.4 million in 2001.
22
At AGS, net revenue increased $0.3 million or 2.2% to $14.2 million for the
three months ended June 30, 2002 from $13.9 million for the same period in 2001.
The following table shows AGS net revenue by product line category:
Net Revenue for the three months ended June 30
(Dollars in thousands)
Variance to 2001
--------------------
2001 2002 $ %
------- ------- ------- ---
Assessment $ 6,154 $ 6,259 $ 105 1.7%
Curriculum 7,722 7,919 197 2.6%
----- ----- --- ---
Sales, Net $13,876 $14,178 $ 302 2.2%
======= ======= ======= ===
At Weekly Reader, net sales increased $0.1 million, or 2.2%, for the three
months ended June 30, 2002 to $4.6 million from $4.5 million for the same period
in 2001. This increase is primarily attributable to higher licensing revenue,
$0.5 million; offset by lower periodical revenue resulting from the planned
reorganization of the shipping schedule and lower circulation, ($0.4) million.
At World Almanac Education Group, net revenue decreased $0.4 million, or 3.3%,
to $11.9 million for the three months ended June 30, 2002 from $12.3 million in
2001. This decrease was primarily due to lower sales at WAE Library Services and
lower revenue at Facts On File News Services partially offset by higher sales at
Gareth Stevens. The lower sales at WAE Library Services are primarily from lower
sales through its catalog channels. The lower revenue from Facts On File is due
to lower one-time licensing sales in the current period. The higher sales at
Gareth Stevens are primarily from higher sales through its wholesale channel.
Excluding Funk & Wagnalls, core revenue decreased $0.3 million, or 2.5%, to
$11.8 million from $12.1 million in 2001. Non-core revenue is comprised of
revenue from World Almanac's Funk & Wagnalls Yearbooks sales. World Almanac is
no longer soliciting new subscribers for its Yearbooks since the print edition
of the Funk & Wagnalls Encyclopedia was discontinued. Accordingly, Funk &
Wagnalls sales of Yearbooks are naturally declining year-over-year, as it is
entirely dependent upon sales orders from existing customers via renewals.
Gross profit. For the three-months ended June 30, 2002, gross profit decreased
by $5.7 million, or 15.5%, to $31.1 million from $36.8 million for the same
period in 2001. This decrease was primarily due to a decrease in new software
revenue at CompassLearning described above. WRC Media's gross profit as a
percentage of sales slightly decreased to 70.8% for the three-months ended June
30, 2002 from 71.6% for the same period in 2001.
Costs and expenses. For the three-months ended June 30, 2002, costs and expenses
decreased by $2.8 million, or 11.0%, to $22.7 million from $25.5 million for the
same period in 2001. This was primarily attributable to $1.2 million or 20.0%
decrease in general and administrative expenses resulting from the realization
of horizontal synergies recognized in the quarter ended June 30, 2002 driven by
the continued consolidation and rationalization of WRC Media's operating units.
In addition, sales and marketing expense was $0.8 million or 6.5% lower compared
to the same period in 2001 primarily driven by lower sales commissions at
CompassLearning and research and development expenses decreased $0.6 million or
50.0% to $0.6 million for the three-months ended June 30, 2002 from $1.2 million
for the same period in 2001.
23
Income before amortization of goodwill and intangible assets, interest expense,
income taxes and other, net. For the three-months ended June 30, 2002, income
before amortization of goodwill and intangible assets, interest expense, income
taxes and other, net decreased by $2.9 million, or 25.7%, to $8.4 million from
$11.3 million for the same period in 2001. This decrease was primarily due to
$5.7 million lower gross profit driven by lower sales described above, partially
offset by $2.8 million lower operating costs and expenses also described above.
Amortization of goodwill and intangible assets. For the three-months ended June
30, 2002, amortization of intangible assets decreased by $12.4 million, or
72.1%, to $4.8 million from $17.2 million for the same period in 2001. This
decrease was primarily due to a decrease in amortization of goodwill and
intangibles with indefinite lives as a result of the Company's adoption of SFAS
No. 142, which promulgates that goodwill and intangible assets that have
indefinite useful lives will not be amortized but rather be tested at least
annually for impairment. The reassessment of estimated useful lives of
intangible assets was completed during the first quarter of 2002. As a result of
the Company's adoption of SFAS No. 142, a portion of the intangible assets and
all of goodwill recognized prior to December 31, 2001 is no longer being
amortized effective January 1, 2002. The Company completed the transitional
goodwill impairment test during the second quarter ended June 30, 2002 resulting
in an impairment charge of $72.0 million, which was recorded as a cumulative
effect of an accounting change as of January 1, 2002.
Income (loss) from operations. For the three-months ended June 30, 2002, loss
from operations decreased $9.5 million, or 161.0%, to income from operations of
$3.6 million from a loss from operations of $5.9 million for the same period in
2001. This shift from a loss from operations to income from operations was
primarily driven by lower amortization of goodwill and intangible assets of
$12.4 million described above.
Interest expense, including amortization of deferred financing costs. For the
three-months ended June 30, 2002, interest expense decreased by $1.1 million, or
12.8%, to $7.5 million from $8.6 million for the same period in 2001 and
interest expense as a percentage of sales increased to 17.1% from 16.7% for the
same period in 2001. The decrease in interest expense was primarily attributable
to lower interest rates charged on the Company's senior indebtedness. Interest
expense for the three-months ended June 30, 2002 and 2001 relates to debt and
amortization of deferred financing costs associated with the Acquisition and
Recapitalization and the acquisition of Lindy on May 9, 2001.
24
Loss on investments. For the three-months ended June 30, 2002, loss on
investments increased $0.8 million to $0.9 million from $0.1 for the same period
in 2001. This increase was primarily due to $0.9 million loss on investments
recognized during the three-month period ended June 30, 2002 related to WRC
Media's minority investment in ThinkBox, Inc.
Other, net. For the three-months ended June 30, 2002, other, net decreased $0.2
million compared to the same period in 2001.
Income tax provision. For the three-months ended June 30, 2002, the provision
for income taxes increased by $0.5 million compared to $0.0 million income tax
provision for the same period in 2001 entirely as a result of the adoption of
SFAS 142. The non-cash charge of $0.5 million was recorded to increase the
valuation allowance related to the Company's net operating losses for the
three-months ended June 30, 2002.
Net loss. For the three-months ended June 30, 2002, net loss decreased by $9.5
million, or 64.2%, to $5.3 million from $14.8 million for the same period in
2001 primarily as a result of the reasons described above. Net loss as a
percentage of net sales decreased to negative 12.1% for the three-months ended
June 30, 2002 from negative 28.9% for the same period in 2001.
EBITDA (excluding ChildU and ThinkBox). For the three-months ended June 30,
2002, EBITDA decreased $2.5 million or 19.7% to $10.2 million from $12.7 million
for the same period in 2001. We have excluded the EBITDA loss of ChildU and WRC
Media's investment in ThinkBox of $1.0 million and $0.9 million, respectively
because these operations have been classified as unrestricted subsidiaries under
the Company's Credit Agreement and as such, their operating results do not
impact the Company's ability to pay interest, repay debt or make capital
expenditures. ChildU's operations and WRC Media's investment in ThinkBox were
entirely funded from the proceeds of the 18% Junior Participating Cumulative
Convertible Preferred Stock.
25
Results of Operations for the Three-Months Ended June 30, 2002 -- Weekly Reader
Corporation and Subsidiaries
The following table sets forth, for the periods indicated, combined statements
of operations data for Weekly Reader and its subsidiaries expressed in millions
of dollars and as a percentage of net sales.
Three Months Ended June 30
2001 2002
------------------ -------------------
% of % of
Amount Net Sales Amount Net Sales
-------- --------- -------- ---------
(Dollars in millions)
Sales, net $ 30.7 100.0% $ 30.7 100.0%
Cost of goods sold 9.0 29.3% 8.6 28.0%
------- ----- ------- -----
Gross profit 21.7 70.7% 22.1 72.0%
Costs and expenses:
Sales and marketing 5.6 18.2% 6.3 20.5%
Distribution, circulation and fulfillment 2.4 7.8% 2.8 9.1%
Editorial 2.8 9.1% 2.1 6.8%
General and administrative 4.2 13.7% 4.0 13.0%
Depreciation 0.5 1.6% 0.5 1.6%
------- ----- ------- -----
15.5 50.4% 15.7 51.0%
------- ----- ------- -----
Income before amortization of goodwill and intangible
assets, interest expense, income taxes and other, net 6.2 20.3% 6.4 21.0%
Amortization of goodwill and intangible assets 3.1 10.1% 2.2 7.2%
------- ----- ------- -----
Income from operations 3.1 10.2% 4.2 13.8%
Interest expense (8.3) (27.1%) (7.2) (23.5%)
Other, net 0.1 0.3% 0.2 0.7%
------- ----- ------- -----
Loss before income tax provision (5.1) (16.6%) (2.8) (9.0%)
Income tax provision 0.1 0.3% 0.5 1.6%
------- ----- ------- -----
Net loss $ (5.2) (16.9%) $ (3.3) (10.6%)
======= ===== ======= =====
EBITDA(a) $ 6.8 22.1% $ 7.1 23.1%
======= ===== ======= =====
(a) EBITDA is defined as income (loss) before interest expense, income taxes,
depreciation and amortization. EBITDA data is included because we understand
that this information may be considered by investors as an additional basis on
which to evaluate Weekly Reader Corporation's ability to pay interest, repay
debt and make capital expenditures. Because all companies do not calculate
EBITDA identically, the presentation of EBITDA in this report is not necessarily
comparable to similarly titled measures of other companies. EBITDA does not
represent and should not be considered more meaningful than, or an alternative
to, measures of operating performance determined in accordance with generally
accepted accounting principles.
Three Months Ended June 30, 2002 Compared to Three-Months Ended June 30, 2001
Sales, net. For the three-months ended June 30, 2002, net sales were constant at
$30.7 million compared to the same period in 2001. At Weekly Reader, not
including AGS and World Almanac, net sales increased $0.1 million, or 2.2%, to
$4.6 million from $4.5 million for the same period in 2001. This increase is
primarily attributable to higher licensing revenue, $0.5 million; offset by
lower periodical revenue resulting from the planned reorganization of the
shipping schedule and lower circulation, ($0.4) million.
At World Almanac Education Group, net revenue decreased $0.4 million, or 3.3%,
to $11.9 million from $12.3 million in 2001. This decrease was primarily due to
lower sales at WAE Library Services and lower revenue at Facts On File News
Services being partially offset by higher sales at Gareth Stevens. The lower
sales at WAE Library Services results primarily from its catalog channels and is
being driven by reduced library funding resulting from post-September 11, 2001
state library funding cutbacks. The lower revenue from Facts On File is due to
lower licensing sales. The higher sales at Gareth Stevens are primarily from its
wholesale channel. Excluding Funk & Wagnalls, net revenue decreased $0.3
million, or 2.5%, to $11.8 million from $12.1 million in 2001.
26
At AGS, net revenue increased $0.3 million or 2.2% to $14.2 million for the
three months ended June 30, 2002 from $13.9 million for the same period in 2001.
The following table shows net revenue by product line category:
Net Revenue for the three months ended June 30
(Dollars in thousands)
Variance to 2001
-------------------
2001 2002 $ %
------- ------- ---- ---
Assessment $ 6,154 $ 6,259 $105 1.7%
Curriculum 7,722 7,919 197 2.6%
------- ------- ---- ---
Sales, Net $13,876 $14,178 $302 2.2%
======= ======= ==== ===
Gross profit. For the three-months ended June 30, 2002, gross profit increased
by $0.4 million, or 1.8%, to $22.1 million from $21.7 million for the same
period in 2001. The increase in gross profit at Weekly Reader was primarily the
result of (1) an increase in gross profit at American Guidance of $0.2 million,
or 1.9%, to $10.7 million for the three-months ended June 30, 2002 from $10.5
million for the same period in 2001 primarily driven by the volume increase
described above and a shift in sales mix; (2) an increase in gross profit at
Weekly Reader, not including World Almanac and American Guidance, of $0.1
million, or 3.0%, to $3.4 million for the three-months ended June 30, 2002 from
$3.3 million for the same period in 2001 primarily related to the sales increase
mentioned above; and (3) an increase in gross profit at World Almanac of $0.1
million, or 1.3%, to $8.0 million for the three-months ended June 30, 2002 from
$7.9 million for the same period in 2001 primarily driven by a change in sales
mix. Gross profit as a percentage of sales increased to 72.0% for the
three-months ended June 30, 2002 from 70.7% for the same period in 2001.
Costs and expenses. For the three-months ended June 30, 2002, costs and expenses
increased by $0.2 million, or 1.3%, to $15.7 million from $15.5 million for the
same period in 2001 primarily due to an increase in sales and marketing expense
and distribution, circulation and fulfillment costs partially offset by lower
editorial and general and administrative expenses. The largest increase of sales
and marketing expense occurred at AGS which increased $0.2 million or 8.2% over
the same period last year driven by the timing of direct mail expenditures
associated with product releases and new software product promotion and
increased initiatives to generate additional revenue. Similarly, the largest
decrease in editorial expense took place at AGS, which decreased $0.6 million
due to the timing of development expenditures, a reorganization of resources and
an improved capitalization rate. Costs and expenses as a percentage of sales
increased to 51.0% for the three-months ended June 30, 2002 from 50.4% for the
same period in 2001.
27
Income before amortization of goodwill and intangible assets, interest expense,
income taxes and other, net. For the three-months ended June 30, 2002, income
before amortization of goodwill and intangible assets, interest expense, income
taxes and other, net increased by $0.2 million, or 3.2%, to $6.4 million from
$6.2 million for the same period in 2001 and, as a percentage of sales,
increased to 21.0% from 20.3% for the same period in 2001. This increase was
primarily due to the factors described above.
Amortization of goodwill and intangible assets. For the three-months ended June
30, 2002, amortization of goodwill and intangible assets decreased by $0.9
million, or 29.0%, to $2.2 million from $3.1 million for the same period in
2001. This decrease was primarily due to a decrease in amortization of goodwill
and intangible assets with indefinite lives related to the Company's adoption of
SFAS No. 142, which promulgates that goodwill and intangible assets that have
indefinite useful lives will not be amortized but rather be tested at least
annually for impairment. The reassessment of estimated useful lives of
intangible assets was completed during the first quarter of 2002. As a result of
the Company's adoption of SFAS No. 142, a portion of the intangible assets and
all goodwill recognized prior to December 31, 2001 is no longer being amortized
effective January 1, 2002. The Company completed the transitional goodwill
impairment test during the second quarter ended June 30, 2002 resulting in an
impairment charge of $72.0 million, which was recorded as a cumulative effect of
an accounting change as of January 1, 2002.
Income from operations. For the three-months ended June 30, 2002, income from
operations increased by $1.1 million, or 35.5%, to $4.2 million from $3.1
million for the same period in 2001 and, income from operations as a percentage
of sales improved to 13.8% from 10.2% for the same period in 2001. This increase
was primarily due to the factors described above.
Interest expense. For the three-months ended June 30, 2002, interest expense
decreased by $1.1 million, or 13.3%, to $7.2 million from $8.3 million for the
same period in 2001 and interest expense as a percentage of sales decreased to
23.5% from 27.1% for the same period in 2001. The decrease in interest expense
was primarily attributable to lower interest rates charged on the WRC's senior
indebtedness. The interest expense for the three-months ended June 30, 2002 and
2001 relates to debt associated with the Acquisition and Recapitalization, and
the acquisition of Lindy on May 9, 2001. Since Weekly Reader is jointly and
severally liable for that debt, the interest expense related to that debt is
reflected in the financial statements of Weekly Reader.
Other, net. For the three-months ended June 30, 2002, other, net increased by
$0.1 million to $0.2 million from $0.1 million compared to the same period in
2001.
Income tax provision (benefit). For the three-months ended June 30, 2002,
provision for income taxes increased by $0.4 million to $0.5 million from $0.1
million for the same period in 2001 entirely due to the adoption of SFAS 142.
The non-cash charge of $0.5 million was recorded to increase the valuation
allowance related to the Company's net operating losses for the three months
ended June 30, 2002.
28
Net loss. For the three-months ended June 30, 2002, net loss decreased by $1.9
million, or 36.5%, to $3.3 million from $5.2 million for the same period in 2001
primarily as a result of the reasons described above. Net loss as a percentage
of net sales decreased to negative 10.6% for the three-months ended June 30,
2002 from negative 16.9% for the same period in 2001.
EBITDA. For the three-months ended June 30, 2002, EBITDA increased $0.3 million,
or 4.4%, to $7.1 million from $6.8 million for the same period in 2001. This
increase is primarily attributable to $0.4 million higher gross profit due from
a change in sales mix partially offset by $0.2 million higher costs and expenses
as described above for the three-months ended June 30, 2002 compared to the same
period in 2001.
29
Results of Operations for the Six-Months Ended June 30, 2002-- WRC Media Inc.
and Subsidiaries
The following table sets forth, for the periods indicated, combined statements
of operations data for WRC Media and its subsidiaries, expressed in millions of
dollars and as a percentage of net sales.
Six Months Ended June 30
2001 2002
------------------ -------------------
% of % of
Amount Net Sales Amount Net Sales
-------- --------- -------- ---------
(Dollars in millions)
Sales, net $ 100.9 100.0% $ 90.7 100.0%
Cost of goods sold 28.8 28.5% 26.1 28.8%
-------- ----- -------- -----
Gross profit 72.1 71.5% 64.6 71.2%
Costs and expenses:
Sales and marketing 25.1 24.9% 24.9 27.5%
Research and development 2.5 2.5% 1.0 1.1%
Distribution, circulation and fulfillment 5.7 5.6% 6.0 6.6%
Editorial 5.7 5.6% 4.9 5.4%
General and administrative 13.2 13.1% 10.5 11.6%
Depreciation 1.6 1.6% 1.6 1.8%
-------- ----- -------- -----
53.8 53.3% 48.9 54.0%
-------- ----- -------- -----
Income before amortization of goodwill and
intangible assets, interest expense, income
taxes and other, net 18.3 18.2% 15.7 17.2%
Amortization of goodwill and intangible assets 34.1 33.8% 9.7 10.7%
-------- ----- -------- -----
Income (loss) from operations (15.8) (15.6%) 6.0 6.5%
Interest expense, including amortization
of deferred financing costs (17.3) (17.1%) (14.8) (16.3%)
Loss on investments (0.1) (0.1%) (1.1) (1.2%)
Other, net (0.3) (0.3%) (0.3) (0.3%)
-------- ----- -------- -----
Loss before income tax provision (33.5) (33.1%) (10.2) (11.3%)
Income tax provision 0.3 0.3% 6.2 6.8%
-------- ----- -------- -----
Net loss before cumulative effect of change
in accounting principle (33.8) (33.4%) (16.4) (18.1%)
Cumulative effect of change in
accounting principle -- 0.0% (72.0) (79.4%)
-------- ----- -------- -----
Net loss $ (33.8) (33.4%) $ (88.4) (97.5%)
======== ===== ======== =====
EBITDA(a) $ 20.2 20.0% $ 18.4 20.3%
======== ===== ======== =====
(a) EBITDA is defined as income (loss) before interest expense, income taxes,
depreciation and amortization not including WRC Media's unrestricted
subsidiaries. EBITDA data is included because we understand that this
information may be considered by investors as an additional basis on which to
evaluate WRC Media's ability to pay interest, repay debt and make capital
expenditures. Because all companies do not calculate EBITDA identically, the
presentation of EBITDA in this report is not necessarily comparable to similarly
titled measures of other companies. EBITDA does not represent and should not be
considered more meaningful than, or an alternative to, measures of operating
performance determined in accordance with generally accepted accounting
principles. Given the projected near-term financial performance of ChildU and
ThinkBox, WRC Media designated ChildU and ThinkBox "Unrestricted Subsidiaries"
under its Credit Agreement so as to: (i) exclude them from all the negative
covenants in the Credit Agreement including the financial covenants, and from
agreed upon affirmative covenants, representations and warranties and events of
default; and (ii) Permit additional investments in ChildU and ThinkBox by WRC
Media and its subsidiaries in excess of the acquisition funding requirements to
fund operations, if necessary. As a result of the above-mentioned designation,
ChildU and ThinkBox performance will not be included in any covenant
calculations. Accordingly, Consolidated EBITDA (before unrestricted
subsidiaries) is defined as WRC Media consolidated EBITDA excluding the $2.5
million EBITDA loss contributed by its unrestricted subsidiaries - ChildU and
its investment in ThinkBox.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Sales, net. For the six months ended June 30, 2002, net sales decreased $10.2
million, or 10.1%, to $90.7 million from $100.9 million for the same period in
2001. This decrease was primarily due to a $9.2 million, or 26.7% decrease of
net sales at CompassLearning to $25.3 million from $34.5 million in 2001
combined with a decrease in net sales of $1.6 million or 2.4% to $64.7 million
from $66.3 million in 2001 at Weekly Reader Corporation partially offset by a
sales increase at ChildU of $0.6 million or 600% to $0.7 million from $0.1
million.
30
At CompassLearning, the net sales decrease was primarily due to (1) a decrease
in software revenue of $8.1 million, or 39.1%, to $12.6 million from $20.7
million in 2001 primarily as a result of delayed Title 1 funding and
post-September 11 state budget deficits, which contributed to additional
spending delays, (2) a planned decrease in hardware revenue of $1.1 million, or
68.8%, to $0.5 million from $1.6 million in 2001 and (3) a decrease in service
revenue from technical support of $0.6 million, or 8.1%, to $6.8 million from
$7.4 million in 2001. The decrease was partially offset by an increase in
professional development revenue of $0.6 million, or 12.5%, to $5.4 million from
$4.8 million in 2001.
In addition, sales at Weekly Reader Corporation decreased $1.6 million, or 2.4%,
to $64.7 million for the six months ended June 30, 2002 from $66.3 million for
the same period in 2001. The decrease in sales at Weekly Reader Corporation was
the result of (1) an increase in sales at AGS of $0.3 million, or 1.2%, to $26.3
million for the six months ended June 30, 2002 from $26.0 million for the same
period in 2001 as a result of increases in sales of our curriculum products,
primarily textbooks; (2) a decrease in sales at World Almanac of $0.8 million,
or 3.1%, to $24.6 million from $25.4 million in 2001. This decrease was
primarily due to lower sales at WAE Library Services being partially offset by
higher sales at Gareth Stevens. The lower sales at WAE Library Services was
driven by lower sales from its catalog channels and driven by reduced library
funding resulting from post-September 11, 2001 state library funding cutbacks.
The higher sales at Gareth Stevens were driven by higher sales in its
Telemarketing and Wholesale channels. Excluding Funk & Wagnalls, core revenue
decreased $0.6 million, or 2.5%, to $23.0 million from $23.6 million in 2001.
World Almanac is no longer soliciting new subscribers for its Yearbooks since
the print edition of the Funk & Wagnalls Encyclopedia was discontinued.
Accordingly, Funk & Wagnalls sales of Yearbooks are naturally declining
year-over-year, as it is entirely dependent upon sales orders from existing
customers via renewals; and (3) a decrease in sales at Weekly Reader, not
including World Almanac and American Guidance, of $1.1 million, or 7.4%, to
$13.8 million from $14.9 million for the same period in 2001. This decrease is
primarily attributable to higher licensing revenue, $0.5 million; offset by
lower Lifetime Learning revenue, ($0.3) million; and lower periodical revenue
resulting from the planned reorganization of the shipping schedule and lower
circulation, ($1.3) million.
Gross profit. For the six months ended June 30, 2002, gross profit decreased by
$7.5 million, or 10.4%, to $64.6 million from $72.1 million for the same period
in 2001. This decrease was primarily due to a decrease in gross profit at
CompassLearning of $7.3 million, or 30.7%, to $16.5 million from $23.8 million
in 2001 primarily due to $7.3 million of lower software margin attributable to
lower software sales.
At Weekly Reader, gross profit declined $0.5 million, or 1.0%, to $47.7 million
for the six months ended June 30, 2002 from $48.2 million for the same period in
2001. The decrease in gross profit was a result of (1) an increase in gross
profit at American Guidance of $0.4 million, or 2.1%, to $19.8 million for the
six months ended June 30, 2002 from $19.4 million for the same period in 2001
primarily due to a change in sales mix resulting in a higher gross profit margin
combined with the increased sales described above; (2) a decrease in gross
profit at Weekly Reader, not including World Almanac and American Guidance, of
$0.8 million, or 6.7%, to $11.2 million for the six months ended June 30, 2002
from $12.0 million for the same period in 2001 due to lower sales described
above; and (3) a decrease in gross profit at World Almanac of $0.1 million, or
0.6 % to $16.7 million for the six months ended June 30, 2002 from $16.8 million
for the same period in 2001 due to lower sales described above.
31
Offsetting the decrease in gross profit at CompassLearning and Weekly Reader was
an increase of $0.3 million in gross profit at ChildU.
WRC Media's gross profit as a percentage of sales decreased to 71.2% for the six
months ended June 30, 2002 from 71.5% for the same period in 2001.
Costs and expenses. For the six months ended June 30, 2002, costs and expenses
decreased by $4.9 million, or 9.1%, to $48.9 million from $53.8 million for the
same period in 2001. This was primarily attributable to $2.7 million lower
general and administrative expense combined with $1.5 million lower research and
development expense at CompassLearning, and $0.8 million lower editorial
expense, primarily at AGS ($0.6 million). The decrease in general and
administrative expense was primarily driven by WRC's ongoing reorganization,
which began in early 2001, with the reorganization of its original four
operating units into two operating groups: The Assessment, Curriculum and
Educational Technology Group (comprised of the CompassLearning and AGS operating
units) and the Reference and Periodicals Group (comprised of the World Almanac
Education Group and Weekly Reader operating units). This reorganization was the
next logical step in furthering WRC's strategy for continued market leadership,
fully integrating its substantial asset base, and fully leveraging the operating
infrastructure to allow for future growth. The 2002 phase of this reorganization
has resulted in the further elimination of approximately $6 million in fixed
annual operating costs for the fiscal year ended December 31, 2002.
Income before amortization of goodwill and intangible assets, interest expense,
income taxes and other, net. For the six months ended June 30, 2002, income
before amortization of goodwill and intangible assets, interest expense, income
taxes and other, net decreased by $2.6 million, or 14.2%, to $15.7 million from
$18.3 million for the same period in 2001, and as a percentage of sales
decreased to 17.2% from 18.2% for the same period in 2001. These decreases were
primarily due to the decrease in gross profit described above, partially offset
by the decrease in costs and expenses, also described above.
32
Amortization of goodwill and intangible assets. For the six months ended June
30, 2002, amortization of goodwill and intangible assets decreased by $24.4
million, or 71.6%, to $9.7 million from $34.1 million for the same period in
2001. This decrease was primarily due to a decrease in amortization of goodwill
and intangible assets with indefinite lives related to the Company's adoption of
SFAS No. 142, which promulgates that goodwill and intangible assets that have
indefinite useful lives will not be amortized but rather be tested at least
annually for impairment. The reassessment of estimated useful lives of
intangible assets was completed during the first quarter of 2002. As a result of
the Company's adoption of SFAS No. 142, a portion of the intangible assets and
goodwill recognized prior to December 31, 2001 is no longer being amortized
effective January 1, 2002. The Company completed the transitional goodwill
impairment test during the second quarter ended June 30, 2002 resulting in an
impairment charge of $72.0 million, which was recorded as a cumulative effect of
a change in accounting principle as of January 1, 2002.
Income (loss) from operations. For the six months ended June 30, 2002, loss from
operations decreased $21.8 million, or 138.0%, to income of $6.0 million from
$15.8 million loss for the same period in 2001. This improvement in income from
operations was primarily due to the factors described above.
Interest expense, including amortization of deferred financing costs. For the
six months ended June 30, 2002, interest expense decreased by $2.5 million, or
14.5%, to $14.8 million from $17.3 million for the same period in 2001 and
interest expense as a percentage of sales was decreased to 16.3% for the six
months ended June 30, 2002 from 17.1% in the same period in 2001. The decrease
in interest expense was primarily attributable to lower interest rates charged
on the Company's senior indebtedness. Interest expense for the six months ended
June 30, 2002 and 2001 relates to debt and amortization of deferred financing
costs associated with the Acquisition and Recapitalization and the acquisition
of Lindy on May 9, 2001.
Other, net. For the six months ended June 30, 2002, Other, net remained constant
at $0.3 million compared to the same period in 2001.
Income tax provision (benefit). For the six months ended June 30, 2002,
provision for income taxes increased by $5.9 million to $6.2 million from $0.3
million for the same period in 2001 primarily as a result of the adoption of
SFAS 142. The non-cash charge of $6.0 million was recorded to increase the
valuation allowance related to the Company's net operating losses for the
six-months ended June 30, 2002.
Net loss before cumulative effect of change in accounting principle. For the six
months ended June 30, 2002, net loss before cumulative effect of change in
accounting principle decreased by $17.4 million, or 51.5%, to $16.4 million from
$33.8 million for the same period in 2001 primarily as a result of the $24.4
million decrease in amortization expenses for intangible assets resulting from
the Company's adoption of SFAS No. 142 described above. Net loss before
cumulative effect of change in accounting principle as a percentage of net sales
decreased to negative 18.1% for the six months ended June 30, 2002 from negative
33.4% for the same period in 2001.
33
Cumulative effect of change in accounting principle. As a result of the
Company's adoption of SFAS No. 142, a portion of the intangible assets and
goodwill recognized prior to December 31, 2001 is no longer being amortized
effective January 1, 2002. The Company completed the transitional goodwill
impairment test during the second quarter ended June 30, 2002, resulting in an
impairment charge of $72.0 million, which was recorded as a cumulative effect of
an accounting change as of January 1, 2002.
Net loss. For the six months ended June 30, 2002, net loss increased by $54.6
million, or 161.5%, to $88.4 million from $33.8 million for the same period in
2001 primarily as a result of the reasons described above. Net loss as a
percentage of net sales increased to negative 97.5% for the six months ended
June 30, 2002 from negative 33.4% for the same period in 2001.
EBITDA. For the six months ended June 30, 2002, EBITDA decreased $1.8 million,
or 8.9%, to $18.4 million from $20.2 million for the same period in 2001. This
decrease is primarily attributable to the factors described above.
34
Results of Operations for the Six-Months Ended June 30, 2002 -- Weekly Reader
Corporation and Subsidiaries
The following table sets forth, for the periods indicated, combined statements
of operations data for Weekly Reader and its subsidiaries expressed in millions
of dollars and as a percentage of net sales.
Six Months Ended June 30
2001 2002
------------------ -------------------
% of % of
Amount Net Sales Amount Net Sales
-------- --------- -------- ---------
(Dollars in millions)
Sales, net $ 66.3 100.0% $ 64.7 100.0%
Cost of goods sold 18.1 27.3% 17.0 26.3%
------- ----- ------- ------
Gross profit 48.2 72.7% 47.7 73.7%
Costs and expenses:
Sales and marketing 12.4 18.7% 13.5 20.9%
Distribution, circulation and fulfillment 5.8 8.7% 6.0 9.3%
Editorial 5.6 8.4% 4.9 7.6%
General and administrative 9.5 14.3% 7.9 12.2%
Depreciation 1.0 1.5% 0.9 1.4%
------- ----- ------- ------
34.3 51.6% 33.2 51.4%
------- ----- ------- ------
Income before amortization of goodwill and intangible
assets, interest expense, income taxes and other, net 13.9 21.1% 14.5 22.3%
Amortization of goodwill and intangible assets 5.8 8.7% 4.4 6.8%
------- ----- ------- ------
Income from operations 8.1 12.4% 10.1 15.5%
Interest expense (16.7) (25.2%) (14.3) (22.1%)
Other, net 0.1 0.2% 0.2 0.3%
------- ----- ------- ------
Loss before income tax provision (8.5) (12.6%) (4.0) (6.3%)
Income tax provision 0.1 0.2% 6.1 9.4%
------- ----- ------- ------
Net loss before cumulative effect of change
in accounting principle (8.6) (12.8%) (10.1) (15.7%)
Cumulative effect of change in accounting principle -- 0.0% (72.0) (111.3%)
------- ----- ------- ------
Net loss $ (8.6) (12.8%) $ (82.1) (127.0%)
======= ===== ======= ======
EBITDA(a) $ 15.0 22.6% $ 15.7 24.3%
======= ===== ======= ======
(a) EBITDA is defined as income (loss) before interest expense, income taxes,
depreciation and amortization. EBITDA data is included because we understand
that this information may be considered by investors as an additional basis on
which to evaluate Weekly Reader Corporation's ability to pay interest, repay
debt and make capital expenditures. Because all companies do not calculate
EBITDA identically, the presentation of EBITDA in this report is not necessarily
comparable to similarly titled measures of other companies. EBITDA does not
represent and should not be considered more meaningful than, or an alternative
to, measures of operating performance determined in accordance with generally
accepted accounting principles.
Six-Months Ended June 30, 2002 Compared to Six-Months Ended June 30, 2001
Sales, net. For the six months ended June 30, 2002, net sales decreased $1.6
million, or 2.4%, to $64.7 million from $66.3 million for the same period in
2001. This decrease in sales was the result of (1) an increase in sales at AGS
of $0.3 million, or 1.2%, to $26.3 million for the six months ended June 30,
2002 from $26.0 million for the same period in 2001 as a result of increases in
sales of our curriculum products, primarily textbooks; (2) a decrease in sales
at World Almanac of $0.8 million, or 3.1%, to $24.6 million from $25.4 million
in 2001. This decrease was primarily due to lower sales at WAE Library Services
being partially offset by higher sales at Gareth Stevens. The lower sales at WAE
Library Services was driven by lower sales from its catalog channels and driven
by reduced library funding resulting from post-September 11, 2001 state library
funding cutbacks. The higher sales at Gareth Stevens were driven by higher sales
in its Telemarketing and Wholesale channels. Excluding Funk & Wagnalls, core
revenue decreased $0.6 million, or 2.5%, to $23.0 million from $23.6 million in
2001. World Almanac is no longer soliciting new subscribers for its Yearbooks
since the print edition of the Funk & Wagnalls Encyclopedia was discontinued.
Accordingly, Funk & Wagnalls sales of Yearbooks are naturally declining
year-over-year, as it is entirely dependent upon sales orders from existing
customers via renewals; and (3) a decrease in sales at Weekly Reader, not
including World Almanac and American Guidance, of $1.1 million, or 7.4%, to
$13.8 million from $14.9 million for the same period in 2001. This decrease is
primarily attributable to higher licensing revenue, $0.5 million; offset by
lower Lifetime Learning revenue, ($0.3) million; and lower periodical revenue
resulting from the planned reorganization of the shipping schedule and lower
circulation, ($1.3) million.
35
Gross profit. For the six months ended June 30, 2002, gross profit decreased by
$0.5 million, or 1.0%, to $47.7 million from $48.2 million for the same period
in 2001. The decrease in gross profit at Weekly Reader was a result of (1) an
increase in gross profit at American Guidance of $0.4 million, or 2.1%, to $19.8
million for the six months ended June 30, 2002 from $19.4 million for the same
period in 2001 primarily due a change in sales mix resulting in a higher gross
profit margin combined with the increased sales described above; (2) a decrease
in gross profit at Weekly Reader, not including World Almanac and American
Guidance, of $0.8 million, or 6.7%, to $11.2 million for the six months ended
June 30, 2002 from $12.0 million for the same period in 2001 due to lower sales
described above; and (3) a decrease in gross profit at World Almanac of $0.1
million, or 0.6 % to $16.7 million for the six months ended June 30, 2002 from
$16.8 million for the same period in 2001 due to lower sales described above.
Weekly Reader's gross profit as a percentage of sales increased to 73.7% for the
six months ended June 30, 2002 from 72.7% for the same period in 2001.
Costs and expenses. For the six months ended June 30, 2002, costs and expenses
decreased by $1.1 million, or 3.2%, to $33.2 million for the six months ended
June 30, 2002 from $34.3 million for the same period in 2001, primarily due to a
decrease in general and administrative expenses and editorial expenses of $1.6
million and $0.7 million, respectively partially offset by a $1.1 million
increase in sales and marketing expenses. The decrease in general and
administrative expense was primarily driven by WRC's ongoing reorganization,
which began in early 2001, with the reorganization of its original four
operating units into two operating groups: The Assessment, Curriculum and
Educational Technology Group (comprised of the CompassLearning and AGS operating
units) and the Reference and Periodicals Group (comprised of the World Almanac
Education Group and Weekly Reader operating units). This reorganization was the
next logical step in furthering WRC's strategy for continued market leadership,
fully integrating its substantial asset base, and fully leveraging the operating
infrastructure to allow for future growth.
Costs and expenses as a percentage of sales decreased to 51.4% for the six
months ended June 30, 2002 from 51.6% for the same period in 2001.
36
Income before amortization of goodwill and intangible assets, interest expense,
income taxes and other, net. For the six months ended June 30, 2002, income
before amortization of goodwill and intangible assets, interest expense, income
taxes and other, net increased by $0.6 million, or 4.3%, to $14.5 million from
$13.9 million for the same period in 2001 and, as a percentage of sales,
increased to 22.3% from 21.1% for the same period in 2001. These increases were
primarily due to the factors described above.
Amortization of goodwill and intangible assets. For the six months ended June
30, 2002, amortization of goodwill and intangible assets decreased by $1.4
million, or 24.1%, to $4.4 million from $5.8 million for the same period in
2001. This decrease was primarily due to a decrease in amortization of goodwill
and intangible assets with indefinite lives related to the Company's adoption of
SFAS No. 142, which promulgates that goodwill and intangible assets that have
indefinite useful lives will not be amortized but rather be tested at least
annually for impairment. The reassessment of estimated useful lives of
intangible assets was completed during the first quarter of 2002. As a result of
the Company's adoption of SFAS No. 142, a portion of the intangible assets and
all goodwill recognized prior to December 31, 2001 is no longer being amortized
effective January 1, 2002. The Company completed the transitional goodwill
impairment test during the second quarter ended June 30, 2002 resulting in an
impairment charge of $72.0 million, which was recorded as a cumulative effect of
a change in accounting principle as of January 1, 2002.
Income from operations. For the six months ended June 30, 2002, income from
operations increased $2.0 million or 24.7% to $10.1 million from $8.1 million
for the same period in 2001 and, income from operations as a percentage of sales
increased to 15.5% from 12.4% for the same period in 2001. This increase was
primarily due to the factors described above.
Interest expense. For the six months ended June 30, 2002, interest expense
decreased by $2.4 million, or 14.4%, to $14.3 million from $16.7 million for the
same period in 2001 and interest expense as a percentage of sales decreased to
22.1% from 25.2% for the same period in 2001. The decrease in interest expense
was primarily attributable to lower interest rates charged on the Company's
senior indebtedness. The interest expense for the six months ended June 30, 2002
and 2001 relates to debt associated with the Acquisition and Recapitalization
and the acquisition of Lindy on May 9, 2001. Since Weekly Reader is jointly and
severally liable for that debt, the interest expense related to that debt is
reflected in the financial statements of Weekly Reader.
Other, net. For the six months ended June 30, 2002, other, net increased $0.1
million or 100% to $0.2 million from $0.1 million for the same period in 2001.
Income tax provision. For the six months ended June 30, 2002, provision for
income taxes increased by $6.0 million to $6.1 million from $0.1 million for the
same period in 2001 entirely as a result of the adoption of SFAS 142. The
non-cash charge of $6.0 million was recorded to increase the valuation allowance
related to the Company's net operating losses for the six-months ended June 30,
2002.
37
Net loss before cumulative effect of change in accounting principle. For the six
months ended June 30, 2002, net loss before cumulative effect of change in
accounting principle increased by $1.5 million, or 17.4%, to $10.1 million from
$8.6 million for the same period in 2001. Net loss before cumulative effect of
change in accounting principle as a percentage of net sales increased to 15.7%
for the six months ended June 30, 2002 from 12.8% for the same period in 2001.
This decrease was primarily due to the factors described above.
Cumulative effect of change in accounting principle. As a result of the
Company's adoption of SFAS No. 142, a portion of the intangible assets and
goodwill recognized prior to December 31, 2001 is no longer being amortized
effective January 1, 2002. The Company completed the transitional goodwill
impairment test during the second quarter ended June 30, 2002, resulting in an
impairment charge of $72.0 million, which was recorded as a cumulative effect of
an accounting change as of January 1, 2002.
Net loss. For the six months ended June 30, 2002, net loss increased by $73.5
million, or 854.7%, to $82.1 million from $8.6 million for the same period in
2001 primarily as a result of the reasons described above. Net loss as a
percentage of net sales increased to negative 127.0% for the six months ended
June 30, 2002 from negative 12.8% for the same period in 2001.
EBITDA. For the six months ended June 30, 2002, EBITDA increased $0.7 million,
or 4.7%, to $15.7 million from $15.0 million for the same period in 2001. This
increase is primarily attributable to $1.1 million of lower costs and expenses
partially offset by $0.5 million lower gross profit for the six months ended
June 30, 2002 compared to the same period in 2001.
Liquidity and Capital Resources
WRC Media's sources of cash are its (i) operating subsidiaries, Weekly Reader
Corporation and CompassLearning, Inc. (ii) a $30.0 million revolving credit
facility and (iii) equity placements. As of June 30, 2002, $15.0 million of the
revolving credit facility has been drawn. Additionally, a stand-by letter of
credit in the amount of $2.0 million is outstanding in connection with a real
estate lease. While this letter of credit is in effect, it reduces available
borrowing under the revolving credit facility by $2.0 million. These sources of
cash are considered adequate for the Company's needs for the foreseeable future.
In May 2001 the Company issued $13.75 million of its 18% Junior Participating
Cumulative Convertible Preferred Stock, due in 2011 with a liquidation
preference of $40.00 per share to finance in part the ChildU acquisition and
investment in ThinkBox.
For the January through June time period, WRC Media and its subsidiaries usually
experience negative cash flow due to the seasonality of its business. As a
result of this business cycle, borrowings usually increase during the period
January through June, and borrowings generally will be at its lowest point in
fourth quarter. WRC Media's cash and cash equivalents were approximately $4.8
million at June 30, 2002. Included in cash is approximately $1.3 million of
restricted monies, which represent the remaining proceeds from the issuance of
$13.7 million 18%, Junior Cumulative Convertible Preferred Stock on May 9, 2001
used to purchase and fund ChildU and its minority investment in ThinkBox. The
$1.3 million in funds cannot be commingled with WRC Media's cash from operations
or borrowings under its revolving credit facility. Similarly, the Company cannot
use cash from operations or borrowings under its revolving credit facility to
fund ChildU's operation or WRC Media's investment in ThinkBox.
38
WRC Media and its subsidiaries principal uses of cash are for debt service,
capital expenditures, working capital and acquisitions. For the six-months ended
June 30, 2002, WRC Media and its subsidiaries' operations used approximately
$13.4 million in cash in operating activities.
For the six-months ended June 30, 2002, WRC Media and its subsidiaries investing
activities included: investment in software development of approximately $2.3
million and capital expenditures of approximately $0.8 million. Weekly Reader's
capital expenditures, which consisted primarily of expenditures for property and
equipment, were $0.5 million for the six-months ended for June 30, 2002. During
the second quarter, one of Weekly Reader's subsidiaries, AGS sold a building it
owned for approximately $0.6 million. CompassLearning's capital expenditures,
which consisted primarily of purchases of computer equipment, were $0.3 million
for the six-months ended June 30, 2002.
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 six-months ended June 30, 2002,
financing activities provided cash of $11.8 million, which primarily resulted
from borrowings of $15.0 million under the revolving credit facility and a
repayment of $2.9 million of the senior secured term loans.
Working Capital
As of June 30, 2002, WRC Media and its subsidiaries had a working capital
deficit of approximately $19.9 million, which includes $20.4 million of deferred
revenue for Weekly Reader, not including AGS or World Almanac as of June 30,
2002 related to 2002/2003 school year subscriptions. Weekly Reader subscriptions
are recorded as deferred revenue when received and recognized as income over the
term of the subscription.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements require us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosures of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to allowances for doubtful accounts, reserves for sales returns
and allowances and the recoverability of long-lived assets. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances. These form the basis of our
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates, which would affect our reported results from operations. We believe
the following is a description of the critical accounting policies and estimates
used in the preparation of our consolidated financial statements.
39
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.
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.
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.
The Company periodically evaluates the recoverability of our long-lived assets,
including property and equipment, and finite-lived intangible assets, whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable or in connection with its annual financial review process. Our
evaluations include analyses based on the cash flows generated by the underlying
assets, profitability information, including estimated future operating results,
trends or other determinants of fair value. 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.
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
sales are significantly affected by the school year. Weekly Reader's sales in
the third, and to a lesser extent the fourth, quarters are generally the
strongest as products are shipped for delivery during the school year.
CompassLearning's sales are generally strongest in the second quarter, and to a
lesser extent the fourth quarter. CompassLearning's sales are strong in the
second quarter generally because schools frequently combine funds from two
budget years, which typically end on June 30 of each year, to make significant
purchases, such as purchases of CompassLearning's electronic courseware, and
because by purchasing in the second quarter, schools are able to have the
software products purchased installed over the summer and ready to train
teachers when they return from summer vacation. CompassLearning's fourth quarter
sales are strong as a result of sales patterns driven in part by its
commissioned sales force seeking to meet year-end sales goals as well as by
schools purchasing software to be installed in time for teachers to be trained
prior to the end of the school year in June.
40
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
WRC is exposed to market risk. Market risk, with respect to the business, is the
potential loss arising from adverse changes in interest rates. Exposure to this
market risk is managed through regular operating and financing activities and,
when deemed appropriate, through the use of derivatives. Derivatives are used as
risk management tools and not for trading purposes.
WRC is subject to market risk exposure related to changes in interest rates on
the $144.9 million (as of June 30, 2002) senior secured term loans under the
senior credit facilities. Interest on borrowings under the senior credit
facilities will bear interest at a rate per annum equal to:
(1) For the revolving credit facility maturing in three years and the
$22.9 million senior secured term loan A facility maturing in three
years, the LIBO rate as defined in the credit agreement plus 3.375% or
the alternate base rate as defined in the credit agreement plus 2.375%
subject to performance-based step downs; and
(2) For the $97.3 million senior secured term loan B facility maturing in
four years, the LIBO rate plus 4.00% or the alternate base rate plus
3.00%.
(3) For the $9.8 million senior secured new term A loan facility maturing
in four years, the LIBO rate plus 4.00% or the alternate base rate
plus 3.00%
The senior credit facilities require WRC to obtain interest rate protection for
at least 50% of the senior secured term loans for the duration of the senior
credit facilities. On November 15, 2001, we entered into an arrangement with a
notional value of $67.1 million, which terminates on November 15, 2002 and
requires us to pay a floating rate of interest based on the three-month LIBO
rate as defined in that arrangement with a cap rate of 3.0%.
WRC Media Corporation has $152 million of callable senior subordinated notes
outstanding. These notes pay a fixed coupon of 12.75% and mature on 11/15/09.
The prolonged Fed easing campaign of 2001 has brought short-term rates down to
40-year lows, greatly increasing the opportunity cost of the notes. In order to
immediately reduce funding costs, WRC Media moved down the yield curve by
swapping a portion of the 12.75% Notes to floating. In addition, WRC also
guaranteed positive carry for the one-year period May 15, 2002 through May 15,
2003 of the transaction by locking in the LIBOR forwards below the fixed rate of
the swap. The swap transaction does not qualify for hedge accounting treatment
and as such, we will mark-to-market the swap contract at the end of each
quarter. At June 30, 2002 we recorded an unrealized gain of $0.2 million. This
gain is reflected in Other, net in the condensed consolidated statement of
operations.
41
PART II
Other Information
Item 6 - Exhibits and reports on Form 8-K
(a) - Exhibits
10.1 Amendment to Credit Agreement
99.1 Section 906 Certification
(b) Reports on Form 8-K
On February 25, 2002, registrant reported, on Form 8-K, the results for the
fiscal year ended December 31, 2001.
On February 26, 2002, registrant reported, on Form 8-K, a statement issued
by the President of registrant.
On May 1, 2002, WRC Media Inc. reported on Form 8-K, a change in
registrant's certifying accountant.
On May 1, 2002, Weekly Reader Corporation reported on Form 8-K, a change in
registrant's certifying accountant.
On May 10, 2002, registrant reported, on Form 8-K, the results for the
fiscal quarter ended March 30, 2002.
On May 14, 2002, registrant reported, on Form 8-K, a statement issued by the
President of registrant.
On August 9, 2002, registrant reported, on Form 8-K, the results for the
fiscal quarter ended June 30, 2002.
42
SIGNATURES
In accordance with 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.
Date:
- ----------------------------------------------------- ------------------------------
David F. Burgstahler
Director: WRC Media, Weekly Reader and CompassLearning
Date:
- ----------------------------------------------------- ------------------------------
Ralph D. Caulo
Non-Executive Vice-Chairman: WRC Media
Date:
- ----------------------------------------------------- ------------------------------
Timothy C. Collins
Director: WRC Media, Weekly Reader and CompassLearning
Date:
- ----------------------------------------------------- ------------------------------
D. Ronald Daniel
Non-Executive Chairman: WRC Media, Weekly Reader and CompassLearning
/s/ Martin E. Kenney, Jr. Date: August 12, 2002
- ----------------------------------------------------- ------------------------------
Martin E. Kenney, Jr.
Director: WRC Media, Weekly Reader and CompassLearning;
Chief Executive Officer: WRC Media and CompassLearning;
President: CompassLearning; and Executive Vice President, Weekly Reader
Date:
- ----------------------------------------------------- ------------------------------
James N. Lane
Director: WRC Media, Weekly Reader and CompassLearning
Date:
- ----------------------------------------------------- ------------------------------
Charles L. Laurey
Director: WRC Media, Weekly Reader and CompassLearning; and
Secretary: WRC Media, Weekly Reader and CompassLearning
/s/ Robert S. Lynch Date: August 12, 2002
- ----------------------------------------------------- ------------------------------
Robert S. Lynch
Director: WRC Media, Weekly Reader and CompassLearning;
Executive Vice President, Chief Operating Officer:
WRC Media and CompassLearning; and
Treasurer: WRC Media, Weekly Reader and CompassLearning
/s/ Richard Nota Date: August 12, 2002
- ----------------------------------------------------- ------------------------------
Richard Nota
Vice President, Finance: WRC Media
43
EXHIBIT INDEX
EXHIBIT ITEM
- ------- ----
10.1 Amendment to Credit Agreement
99.1 Section 906 Certification