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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 September 30, 2002 Commission File No.
WRC MEDIA INC. WEEKLY READER CORPORATION
(Exact name of Registrant as specified in its charter) (Exact of Registrant as specified in itscharter)
DELAWARE DELAWARE
(State or other jurisdiction of incorporation or (State or other jurisdiction of incorporation or
organization) 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
2
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
December 31, September 30,
2001 2002
------------------ -------------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 8,919 $ 9,117
Accounts receivable, net 43,658 53,069
Inventories, net 15,026 16,335
Prepaid expenses 3,468 3,779
Other current assets 13,891 9,068
------------------ -------------------
Total current assets 84,962 91,368
Property and equipment, net 9,215 7,291
Purchased software, net 2,851 4,907
Goodwill, net 234,982 168,021
Deferred financing costs, net 6,645 6,470
Identified intangible assets, net 119,492 103,620
Other assets and investments 20,715 28,099
------------------ -------------------
Total Assets $ 478,862 $ 409,776
================== ===================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 18,180 $ 18,812
Accrued payroll, commissions and benefits 11,305 8,686
Current portion of deferred revenue 39,070 51,385
Other accrued liabilities 33,996 27,146
Current portion of long-term debt 6,171 7,333
------------------ -------------------
Total current liabilities 108,722 113,362
Deferred revenue, net of current portion 2,040 1,136
Deferred tax liability - 6,500
Due to related party 2,160 2,160
Long-term debt 273,544 278,335
------------------ -------------------
Total liabilities 386,466 401,493
------------------ -------------------
Commitments and contingencies
15% Series B preferred stock subject to redemption,
including accrued dividends and accretion of warrant value
(Liquidation preference of $75,000 plus accrued dividends) 92,760 105,436
------------------ -------------------
Warrants on preferred stock 11,751 11,751
------------------ -------------------
Common stock subject to redemption 1,180 965
------------------ -------------------
Stockholders' deficiency:
Common stock, ($.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 17,589
Additional paid-in capital 132,562 132,464
Accumulated comprehensive income (316) (316)
Accumulated deficit (161,024) (259,676)
------------------ -------------------
Total stockholders' deficiency (13,295) (109,869)
------------------ -------------------
Total liabilities and stockholders' deficiency $ 478,862 $ 409,776
================== ===================
The accompanying notes to the condensed consolidated financial statements are
an integral part of these condensed consolidated financial statements.
3
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30
(Unaudited)
(Dollars in thousands)
2001 2002
----------------- -----------------
Sales, net $ 60,237 $ 56,456
Cost of goods sold 16,554 15,375
----------------- -----------------
Gross profit 43,683 41,081
----------------- -----------------
Costs and expenses:
Sales and marketing 14,356 11,135
Research and development 1,353 280
Distribution, circulation and fulfillment 3,677 3,497
Editorial 2,295 2,606
General and administrative 6,519 5,945
Depreciation 813 693
----------------- -----------------
29,013 24,156
----------------- -----------------
Income before amortization of goodwill and intangible assets 14,670 16,925
Amortization of goodwill and intangible assets 17,178 4,495
----------------- -----------------
Income (loss) from operations (2,508) 12,430
Interest expense, including amortization
of deferred financing costs (8,243) (7,576)
Loss on investments (282) (963)
Other, net (162) 1,171
----------------- -----------------
Income (loss) before income tax provision (11,195) 5,062
Income tax provision 223 501
----------------- -----------------
Net income (loss) $ (11,418) $ 4,561
================= =================
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 NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
(Dollars in thousands)
2001 2002
------------------ -----------------
Sales, net $ 161,131 $ 147,182
Cost of goods sold 45,327 41,530
------------------ -----------------
Gross profit 115,804 105,652
------------------ -----------------
Costs and expenses:
Sales and marketing 39,483 36,077
Research and development 3,803 1,236
Distribution, circulation and fulfillment 9,417 9,494
Editorial 7,901 7,476
General and administrative 19,767 16,439
Depreciation 2,419 2,284
------------------ -----------------
82,790 73,006
------------------ -----------------
Income before amortization of goodwill and intangible assets 33,014 32,646
Amortization of goodwill and intangible assets 51,261 14,149
------------------ -----------------
Income (loss) from operations (18,247) 18,497
Interest expense, including amortization
of deferred financing costs (25,530) (22,380)
Loss on investments (411) (2,100)
Other, net (504) 889
------------------ -----------------
Loss before income tax provision (44,692) (5,094)
Income tax provision 503 6,684
------------------ -----------------
Net loss before cumulative effect of change
in accounting principle (45,195) (11,778)
Cumulative effect of change in accounting principle - (72,022)
------------------ -----------------
Net loss $ (45,195) $ (83,800)
================== =================
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 CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
(dollars in thousands)
2001 2002
----------------- ------------------
Cash flows from operating activities:
Net loss $ (45,195) $ (83,800)
Adjustments to reconcile net loss to net cash
used in operating activities:
Cumulative effect of accounting change - 72,022
Deferred income taxes - 6,500
Depreciation and amortization 53,680 16,537
Loss on investments 411 2,100
Unrealized gain from hedging transactions - (1,619)
Loss on disposition of property and equipment 3 43
Interest expense-accretion of discounts 254 291
Amortization of deferred financing fees 760 859
Changes in assets and liabilities:
(Increase) in accounts receivable (16,620) (9,411)
(Increase) in inventories (1,129) (1,309)
Decrease in prepaid expenses and other current assets 1,646 4,512
Increase in other noncurrent assets (7,882) (10,333)
Increase in accounts payable 194 632
Increase in deferred revenue 14,633 11,936
(Decrease) in accrued liabilities (4,687) (9,475)
----------------- ------------------
Net cash used in operating activities (3,932) (515)
----------------- ------------------
Cash flows from investing activities:
Purchase of acquired business (18,286) -
Capital expenditures (2,880) (976)
Software development costs - (3,554)
Proceeds from disposition of property & equipment - 578
Investments (2,698) -
----------------- ------------------
Net cash used in investing activities (23,864) (3,952)
----------------- ------------------
Cash flows from financing activities:
Net proceeds from revolving line of credit 7,000 10,000
Repayment of senior bank debt (3,141) (4,337)
Increase in deferred financing fees - (685)
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 34,099 4,665
----------------- ------------------
Increase in cash and cash equivalents 6,303 198
Cash and cash equivalents, beginning of period 2,968 8,919
----------------- ------------------
Cash and cash equivalents, end of period $ 9,271 $ 9,117
================= ==================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 19,408 $ 16,128
================= ==================
Cash paid during the period for income taxes $ 344 $ 229
================= ==================
Preferred stock dividends accrued $ 11,337 $ 14,153
================= ==================
Accretion of preferred stock $ 688 $ 698
================= ==================
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
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
nine-months ended September 30, 2002, WRC Media has recorded a $2.1 million loss
on this investment. The investment of ThinkBox is currently valued at $1.0
million and is included in Other assets and investments on the balance sheet at
September 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.
7
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 nine-month periods ended
September 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 September 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 $8,180 for the
nine-months ended September 30, 2001.
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.
December 31, Impairment September 30,
(in thousands) 2001 Adjustment 2002
- -------------------------------- --------------------------------------------
Goodwill $ 234,982 $ (66,961) $ 168,021
Long Lived Assets - Trademarks 47,211 (5,061) 42,150
--------- --------- ---------
$ 282,193 $ (72,022) $ 210,171
========= ========= =========
8
The Company also recorded non-cash deferred income tax expense of approximately
$5,000 on January 1, 2002 and $1,500 during the nine-months ended September 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 timing of the reversal of this liability is
indefinite and can no longer be offset by the Company's net operating loss
carryforwards. While book amortization of tax-deductible goodwill and trademarks
ceased on January 1, 2002, the Company continues to amortize these assets for
tax purposes. As a result, the Company will have deferred tax liabilities that
will arise each quarter as the taxable temporary differences related to the
amortization of these assets will not reverse prior to the expiration period of
the Company's deductible temporary differences unless the related assets are
sold or an impairment of the assets is recorded. Accordingly, the Company also
recorded an additional $1,500 to increase the valuation allowance for the
nine-months ended September 30, 2002. The Company expects that it will record an
additional $500 to increase the valuation allowance during the remaining
three-months of 2002.
The following information represents pro forma net loss assuming the adoption of
SFAS 142 on January 1, 2001:
For the Three Months Ended For the Nine Months Ended
---------------------------------- -----------------------------------
September 30, September 30, September 30, September 30,
(in thousands) 2001 2002 2001 2002
- ---------------------------------------------------------------------------------------- -----------------------------------
Reported Net Income (loss) $(11,418) $ 4,561 $(45,195) $(83,800)
Addback:
Goodwill Amortization 2,433 -- 7,197 --
Amortization of Trademarks 328 -- 983 --
Cumulative effect of a change in
accounting principle -- -- -- 72,022
Deferred provision for income taxes -- 500 -- 6,500
-------- -------- -------- --------
$ (8,657) $ 5,061 $(37,015) $ (5,278)
======== ======== ======== ========
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 September 30, 2002. 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 2001-2002 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 fixed rate 12.75% Notes to floating
rate. 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, the Company marks-to-market the swap
contract at the end of each quarter. For the nine-months ended September 30,
2002, WRC has recorded an unrealized gain of $1.6 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.
9
Debt
As of September 30, 2002, there were $10 million in outstanding advances under
the Company's $30 million revolving credit facility, which bear interest
approximating 5.3% at September 30, 2002. 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, September 30,
2001 2002
------------ -------------
Finished goods $ 17,588 $ 18,555
Raw materials 211 751
Less - allowance for obsolescence (2,773) (2,971)
---------- -----------
$ 15,026 $ 16,335
========== ==========
Intangibles
The gross carrying amount and accumulated amortization of the Company's
intangible assets other than goodwill and indefinite lived intangible assets as
of December 31, 2001 and September 30, 2002 are as follows:
--------------------------------------------------- ---------------------------------------------------
December 31, 2001 September 30, 2002
--------------------------------------------------- ---------------------------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
--------------- ----------------- -------------- --------------- ----------------- --------------
Customer Lists $ 62,911 $ (15,210) $ 47,701 $ 62,911 $ (19,895) $ 43,016
Copyrights 21,053 (4,537) 16,516 21,053 (7,239) 13,814
Product Titles 13,475 (8,192) 5,283 13,475 (9,843) 3,632
Trade name 3,520 (2,169) 1,351 3,520 (2,829) 691
Workforce in place 2,980 (2,449) 531 2,980 (2,980) -
Non-compete agreements 77,334 (77,334) - 77,334 (77,334) -
Databases 560 (471) 89 560 (530) 30
Other 1,199 (389) 810 677 (390) 287
--------------- ----------------- -------------- --------------- ----------------- --------------
Total: $ 183,032 $ (110,751) $ 72,281 $ 182,510 $ (121,040) $ 61,470
=============== ================= ============== =============== ================= ==============
For intangible assets other than goodwill not subject to amortization, the total
carrying amount is $42,150 at September 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
10
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 2000, the Old Notes were exchanged in full for $152.0 million
of new 12 3/4% Senior Subordinated Notes due 2009 (the "Notes"), which have
terms that are substantially identical to the Old Notes 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 three-months and nine-months ended September, 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.
Subsidiary Guarantors
------------------------------------------------
Weekly Reader CompassLearning
WRC Media Inc. Corporation Inc.
--------------------- --------------------- --------------------------
(In thousands)
Balance Sheet as of September 30, 2002
Current assets $ 9,832 $ 136,270 $ 23,346
Property and equipment, net -- 6,228 816
Goodwill and other intangible assets, net 173,353 55,052 31,969
Other assets 106,622 43,863 2,803
--------- --------- ---------
Total assets $ 289,807 $ 241,413 $ 58,934
========= ========= =========
Current liabilities: $ 83,915 $ 72,932 $ 24,810
Long-term debt, less current portion 147,168 109,467 21,700
Other liabilities 11,751 6,500 3,296
Warrants on preferred stock -- 9,133 2,618
Common stock subject to redemption 965 -- --
Redeemable preferred stock, plus accrued dividends 105,436 75,000 --
Stockholders equity (deficit): (59,428) (151,025) 6,510
Interdivisional equity -- 119,406 --
--------- --------- ---------
Total liabilities and stockholders equity (deficit) $ 289,807 $ 241,413 $ 58,934
========= ========= =========
Subsidiary Guarantors
------------------------------------------------
Weekly Reader CompassLearning
Statement of operations for three months WRC Media Inc. Corporation Inc.
ended September 30, 2002 --------------------- --------------------- --------------------------
(In thousands)
Revenue $ -- $ 44,672 $ 10,502
Operating expenses 1,045 30,298 11,277
Interest expense, net 5,205 7,325 1
Other (income) expense 1,219 (1,423) (4)
Provision for income taxes -- 501 --
Cumulative effect of accounting change -- -- --
--------- --------- ---------
Net income (loss) $ (7,469) $ 7,971 $ (772)
========= ========= =========
Subsidiary Guarantors
------------------------------------------------
Weekly Reader CompassLearning
Statement of operations for nine months WRC Media Inc. Corporation Inc.
ended September 30, 2002 --------------------- --------------------- --------------------------
(In thousands)
Revenue $ -- $ 109,404 $ 35,767
Operating expenses 3,133 84,883 37,166
Interest expense, net 15,550 21,646 10
Other (income) expense 2,860 (1,651) 2
Provision for income taxes 30 6,618 36
Cumulative effect of accounting change -- 72,022 --
--------- --------- ---------
Net income (loss) $ (21,573) $ (74,114) $ (1,447)
========= ========= =========
Cash flow for nine months
ended September 30, 2002
Cash flow provided by (used in) operations $ (14,402) $ (3,975) $ 5,014
Cash flow provided by (used in) investing activities -- (121) (2,502)
Cash flow provided by (used in) financing activities 13,557 5,628 (2,901)
Cash at beginning of period 2,643 5,691 394
--------- --------- ---------
Cash at end of period $ 1,798 $ 7,223 $ 5
========= ========= =========
Subsidiary Guarantors
Non-Guarantor WRC Media Inc.
Subsidiaries Elimination Consolidated
-------------------- ----------------- ---------------------
Balance Sheet as of September 30, 2002
Current assets $ 1,848 $ (79,928) $ 91,368
Property and equipment, net 247 0 7,291
Goodwill and other intangible assets, net 16,174 0 276,548
Other assets -- (118,719) 34,569
--------- --------- ---------
Total assets $ 18,269 $(198,647) $ 409,776
========= ========= =========
Current liabilities: $ 11,624 $ (79,919) $ 113,362
Long-term debt, less current portion -- 278,335
Other liabilities -- 21,547
Warrants on preferred stock -- (11,751) --
Common stock subject to redemption -- -- 965
Redeemable preferred stock, plus accrued dividends -- (75,000) 105,436
Stockholders equity (deficit): 6,645 87,429 (109,869)
Interdivisional equity (119,406) --
--------- --------- ---------
Total liabilities and stockholders equity (deficit) $ 18,269 $(198,647) $ 409,776
========= ========= =========
Non-Guarantor WRC Media Inc.
Statement of operations for three months Subsidiaries Elimination Consolidated
ended September 30, 2002 -------------------- ----------------- ---------------------
Revenue $ 1,282 $ -- $ 56,456
Operating expenses 1,406 -- 44,026
Interest expense, net (1) (4,954) 7,576
Other (income) expense -- -- (208)
Provision for income taxes -- -- 501
Cumulative effect of accounting change -- -- --
--------- --------- ---------
Net income (loss) $ (123) $ 4,954 $ 4,561
========= ========= =========
Non-Guarantor WRC Media Inc.
Statement of operations for nine months Subsidiaries Elimination Consolidated
ended September 30, 2002 -------------------- ----------------- ---------------------
Revenue $ 2,011 $ -- $ 147,182
Operating expenses 3,503 -- 128,685
Interest expense, net -- (14,826) 22,380
Other (income) expense -- -- 1,211
Provision for income taxes -- -- 6,684
Cumulative effect of accounting change -- -- 72,022
--------- --------- ---------
Net income (loss) $ (1,492) $ 14,826 $ (83,800)
========= ========= =========
Cash flow for nine months
ended September 30, 2002
Cash flow provided by (used in) operations $ (1,684) $ 14,532 $ (515)
Cash flow provided by (used in) investing activities (1,329) -- (3,952)
Cash flow provided by (used in) financing activities 2,913 (14,532) 4,665
Cash at beginning of period 191 -- 8,919
--------- --------- ---------
Cash at end of period $ 91 $ -- $ 9,117
========= ========= =========
11
Subsidiary Guarantors
------------------------------------------------
Weekly Reader CompassLearning
Statement of operations for three months WRC Media Inc. Corporation Inc.
ended September 30, 2001 -------------------- --------------------- --------------------------
(In thousands)
Revenue $ -- $ 45,676 $ 14,218
Operating expenses 11,630 34,231 15,648
Interest expense, net 5,045 8,136 --
Other (income) expense 481 (26) (11)
Provision for income taxes 8 215 --
--------- --------- ---------
Net income (loss) $ (17,164) $ 3,120 $ (1,419)
========= ========= =========
Statement of operations for nine months
ended September 30, 2001
Revenue $ -- $ 111,967 $ 48,747
Operating expenses 34,707 92,399 50,285
Interest expense, net 15,474 24,853 (7)
Other (income) expense 1,071 (145) (11)
Provision for income taxes 177 324 2
--------- --------- ---------
Net income (loss) $ (51,429) $ (5,464) $ (1,522)
========= ========= =========
Cash flow for nine months
ended September 30, 2001
Cash flow provided by (used in) operations $ (13,528) $ (7,313) $ 5,056
Cash flow provided by (used in) investing activities (14,063) (9,818) (102)
Cash flow provided by (used in) financing activities 31,838 19,028 (4,944)
Cash at beginning of period -- 2,914 54
--------- --------- ---------
Cash at end of period $ 4,247 $ 4,811 $ 64
========= ========= =========
Non-Guarantor WRC Media Inc.
Statement of operations for three months Subsidiaries Elimination Consolidated
ended September 30, 2001 -------------------- ----------------- ---------------------
Revenue $ 343 $ -- $ 60,237
Operating expenses 1,236 -- 62,745
Interest expense, net (1) (4,937) 8,243
Other (income) expense -- -- 444
Provision for income taxes -- -- 223
--------- --------- ---------
Net income (loss) $ (892) $ 4,937 $ (11,418)
========= ========= =========
Statement of operations for nine months
ended September 30, 2001
Revenue $ 417 $ -- $ 161,131
Operating expenses 1,987 -- 179,378
Interest expense, net (1) (14,789) 25,530
Other (income) expense -- -- 915
Provision for income taxes -- -- 503
--------- --------- ---------
Net income (loss) $ (1,569) $ 14,789 $ (45,195)
========= ========= =========
Cash flow for nine months
ended September 30, 2001
Cash flow provided by (used in) operations $ (2,010) $ 13,863 $ (3,932)
Cash flow provided by (used in) investing activities 119 -- (23,864)
Cash flow provided by (used in) financing activities 2,040 (13,863) 34,099
Cash at beginning of period -- -- 2,968
--------- --------- ---------
Cash at end of period $ 149 $ -- $ 9,271
========= ========= =========
Litigation
The Company is a party to litigation arising in the normal course of business.
Management regularly analyzes current information and, as necessary, provides
accruals for probable liabilities on the eventual disposition of these matters.
Management believes that the effect on its results of operations and financial
position, if any, for the disposition of these matters, will not be material.
12
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
December 31, September 30,
2001 2002
--------------------- ------------------------
(Unaudited)
ASSETS
Current Assets:
Cash $ 5,691 $ 7,223
Accounts receivable, net 24,818 41,900
Inventories, net 13,718 14,875
Due from related party, net 2,858 7,934
Prepaid expenses 2,702 2,980
Other current assets 13,891 9,068
--------- ---------
Total current assets 63,678 83,980
Property and equipment, net 7,541 6,228
Goodwill, net 101,978 35,018
Deferred financing costs, net 873 737
Identified intangible assets, net 29,109 20,034
Other assets 17,651 26,950
--------- ---------
Total Assets $ 220,830 $ 172,947
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 15,855 $ 17,220
Deferred revenue 18,398 32,881
Accrued expenses and other 26,664 19,550
Current portion of long-term debt 6,171 7,333
--------- ---------
Total current liabilities 67,088 76,984
Deferred tax liability -- 6,500
Long-term debt 273,544 278,335
--------- ---------
Total liabilities 340,632 361,819
--------- ---------
Commitments and contingencies
Redeemable preferred stock, plus accrued dividends (Liquidation 102,573 114,550
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) (62,693)
Accumulated comprehensive income (316) (316)
Accumulated deficit (163,482) (249,574)
--------- ---------
Total stockholders' deficiency (222,375) (303,422)
--------- ---------
Total liabilities and stockholders' deficiency $ 220,830 $ 172,947
========= =========
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 SEPTEMBER 30,
(Unaudited)
(Dollars in thousands)
2001 2002
------------------ -----------------
Sales, net $ 45,676 $ 44,672
Cost of goods sold 11,471 10,461
-------- --------
Gross profit 34,205 34,211
-------- --------
Costs and expenses:
Marketing and selling 8,767 6,853
Distribution, circulation and fulfillment 3,677 3,497
Editorial 2,295 2,606
General and administrative 4,511 4,339
Depreciation 495 462
-------- --------
19,745 17,757
-------- --------
Income before amortization of goodwill and intangible assets 14,460 16,454
Amortization of goodwill and intangible assets 3,015 2,080
-------- --------
Income from operations 11,445 14,374
Other income (expense):
Interest expense, including amortization
of deferred financing costs (8,136) (7,325)
Other, net 26 1,423
-------- --------
Income before income tax provision 3,335 8,472
Income tax provision 215 501
-------- --------
Net income $ 3,120 $ 7,971
======== ========
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 NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
(Dollars in thousands)
2001 2002
----------------- -----------------
Sales, net $ 111,967 $ 109,404
Cost of goods sold 29,517 27,492
--------- ---------
Gross profit 82,450 81,912
--------- ---------
Costs and expenses:
Marketing and selling 21,188 20,364
Distribution, circulation and fulfillment 9,417 9,494
Editorial 7,901 7,476
General and administrative 14,006 12,181
Depreciation 1,501 1,396
--------- ---------
54,013 50,911
--------- ---------
Income before amortization of goodwill and intangible assets 28,437 31,001
Amortization of goodwill and intangible assets 8,869 6,480
--------- ---------
Income from operations 19,568 24,521
Other income (expense):
Interest expense, including amortization
of deferred financing costs (24,853) (21,646)
Other, net 145 1,651
--------- ---------
Income (loss) before income tax provision (5,140) 4,526
Income tax provision 324 6,618
--------- ---------
Net loss before cumulative effect of change
in accounting principle (5,464) (2,092)
Cumulative effect of change in accounting principle -- (72,022)
--------- ---------
Net loss $ (5,464) $ (74,114)
========= =========
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 NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
(dollars in thousands)
2001 2002
---------------------- ---------------------
Cash flows from operating activities:
Net loss $ (5,464) $(74,114)
Adjustments to reconcile net loss to net cash used in operating activities:
Cumulative effect of accounting change -- 72,022
Deferred income taxes -- 6,500
Depreciation and amortization 10,370 7,876
Unrealized gain from hedging transactions -- (1,619)
Amortization of deferred financing fees 75 135
Loss on disposition of property and equipment 3 43
Interest expense-accretion of discounts and stock 254 291
Changes in operating assets and liabilities:
(Increase) in accounts receivable (15,052) (17,082)
Decrease in inventories (437) (1,157)
(Increase) in prepaid expenses and other assets (5,394) (5,604)
(Decrease) in accounts payable 420 1,365
Increase in deferred revenue 11,236 14,483
(Decrease) in accrued expenses and other liabilities (3,324) (7,114)
-------- --------
Net cash used in operating activities (7,313) (3,975)
-------- --------
Cash flows used in investing activities:
Payments for businesses acquired (7,043) --
Capital expenditures (2,775) (699)
Proceeds from disposition of property and equipment -- 578
-------- --------
Net cash used in investing activities (9,818) (121)
-------- --------
Cash flows from financing activities:
Net proceeds from revolving line of credit 7,000 10,000
Repayment of senior bank debt (3,141) (4,337)
Proceeds from term loans 10,000 --
Decrease in due from parent, net 6,302 (285)
Increase in due from related party (1,133) 250
-------- --------
Net cash provided by financing activities 19,028 5,628
-------- --------
Increase in cash and cash equivalents 1,897 1,532
Cash, beginning of period 2,914 5,691
-------- --------
Cash, end of period $ 4,811 $ 7,223
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 19,408 $ 16,128
======== ========
Cash paid during the period for income taxes $ 142 $ 163
======== ========
Preferred stock dividends accrued $ 10,337 $ 11,977
======== ========
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. ("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 nine-month periods ended September 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 September 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 $2,523 for the nine-months
ended September 30, 2001.
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.
December 31, Impairment September 30,
(in thousands) 2001 Adjustment 2002
- -------------------------------- ---------------------------------------------
Goodwill $ 101,979 $ (66,961) $ 35,018
Long Lived Assets - Trademarks 15,017 (5,061) 9,956
--------- --------- ---------
$ 116,996 $ (72,022) $ 44,974
========= ========= =========
WRC also recorded non-cash deferred income tax expense of approximately $5,000
on January 1, 2002 and $1,500 during the nine-months ended September 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
timing of the reversal of this liability is indefinite and can no longer be
offset by WRC's net operating loss carryforwards. While book amortization of
tax-deductible goodwill and trademarks ceased on January 1, 2002, WRC will
continue to amortize these assets for tax purposes. As a result, WRC will have
deferred tax liabilities that will arise each quarter because the taxable
temporary differences related to the amortization of these assets will not
reverse prior to the expiration period of WRC's deductible temporary differences
unless the related assets are sold or an impairment of the assets is recorded.
Accordingly, WRC also recorded an additional $1,500 to increase the valuation
allowance for the nine-months ended September 30, 2002. WRC expects that it will
record an additional $500 to increase the valuation allowance during the
remaining three-months of 2002.
18
The following information represents pro forma net loss assuming the adoption of
SFAS 142 on January 1, 2001:
For the Three Months Ended For the Nine Months Ended
---------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
(in thousands) 2001 2002 2001 2002
- ---------------------------------------------------------------------------------------------- ---------------------------------
Reported Net Income (loss) $ 3,120 $ 7,971 $ (5,464) $(74,114)
Addback:
Goodwill Amortization 726 -- 2,178 --
Amortization of Trademarks 115 -- 345 --
Cumulative effect of a change in accounting principle -- -- -- 72,022
Deferred provision for income taxes -- 500 -- 6,500
-------- -------- -------- --------
$ 3,961 $ 8,471 $ (2,941) $ 4,408
======== ======== ======== ========
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 September 30, 2002. 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 2001-2002 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
fixed rate 12.75% Notes to floating rate. 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, the Company marks-to-market the swap contract at the end of each quarter.
For the nine-months ended September 30, 2002, WRC has recorded an unrealized
gain of $1.6 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 September 30, 2002, there were $10 million in outstanding advances under
WRC's $30 million revolving credit facility, which bear interest approximating
5.3% at September 30, 2002. 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, September 30,
2001 2002
------------ -------------
Finished goods $ 16,377 $ 17,164
Raw materials 114 682
Less - allowance for obsolescence (2,773) (2,971)
----------- -----------
$ 13,718 $ 14,875
=========== ===========
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
September 30, 2002 and December 31, 2001 are as follows:
---------------------------------------------------- ----------------------------------------------------
December 31, 2001 September 30, 2002
---------------------------------------------------- ----------------------------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
-------------- ------------------ -------------- --------------- ----------------- --------------
Customer Lists $ 36,748 $(33,070) $ 3,678 $ 36,748 $(33,769) $ 2,979
Copyrights 17,520 (12,527) 4,993 17,520 (14,132) 3,388
Product Titles 22,400 (17,117) 5,283 22,400 (18,768) 3,632
Non-compete agreements 17,098 (17,098) -- 17,098 (17,098) --
Databases 5,812 (5,723) 89 5,812 (5,782) 30
Other 264 (215) 49 264 (215) 49
-------- -------- -------- -------- -------- --------
Total: $ 99,842 $(85,750) $ 14,092 $ 99,842 $(89,764) $ 10,078
======== ======== ======== ======== ======== ========
For intangible assets other than goodwill not subject to amortization, the total
carrying amount is $9,956 at September 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
Litigation
The Company is a party to litigation arising in the normal course of business.
Management regularly analyzes current information and, as necessary, provides
accruals for probable liabilities on the eventual disposition of these matters.
Management believes that the effect on its results of operations and financial
position, if any, for the disposition of these matters, will not be material.
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 September 30, 2002 of WRC Media Inc. ("WRC Media") and its
subsidiaries and their results of operations for the three-month and nine-month
periods ended September 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 September 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 September 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 September 30
2001 2002
------------------------------- -------------------------------
Amount % of Net Sales Amount % of Net Sales
------------ ----------------- ----------- -----------------
(Dollars in millions)
Sales, net $ 60.2 100.0% $ 56.5 100.0%
Cost of goods sold 16.5 27.4% 15.4 27.3%
------- ------ ------- -----
Gross profit 43.7 72.6% 41.1 72.7%
Costs and expenses:
Sales and marketing 14.4 24.0% 11.1 19.6%
Research and development 1.3 2.2% 0.3 0.5%
Distribution, circulation and fulfillment 3.7 6.1% 3.5 6.2%
Editorial 2.3 3.8% 2.6 4.6%
General and administrative 6.5 10.8% 6.0 10.6%
Depreciation 0.8 1.3% 0.7 1.2%
------- ------ ------- -----
29.0 48.2% 24.2 42.7%
------- ------ ------- -----
Income before amortization of goodwill and intangible assets,
interest expense, income taxes and other, net 14.7 24.4% 16.9 30.0%
Amortization of goodwill and intangible assets 17.2 28.6% 4.5 8.0%
------- ------ ------- -----
Income(loss) from operations (2.5) (4.2%) 12.4 22.0%
Interest expense, including amortization
of deferred financing costs (8.2) (13.6%) (7.6) (13.5%)
Loss on investments (0.3) (0.5%) (0.9) (1.6%)
Other, net (0.2) (0.3%) 1.2 2.1%
------- ------ ------- -----
Income(loss) before income tax provision (11.2) (18.6%) 5.1 9.0%
Income tax provision 0.2 0.3% 0.5 0.9%
------- ------ ------- -----
Net income(loss) $ (11.4) (18.9%) $ 4.6 8.1%
======= ====== ======= =====
EBITDA(a) $ 16.1 26.7% $ 17.5 31.0%
======= ====== ======= =====
(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 $1.0
million EBITDA loss in 2002 and the $1.1 million EBITDA loss in 2001 contributed
by its unrestricted subsidiaries - ChildU and its investment in Thinkbox.
Three-Months Ended September 30, 2002 Compared to Three-Months Ended September
30, 2001
Sales, net. For the three-months ended September 30, 2002, net sales decreased
$3.7 million, or 6.1%, to $56.5 million from $60.2 million for the same period
in 2001. This decrease was primarily the result of a $3.7 million or 26.1%
decrease at WRC Media's CompassLearning operating unit.
At CompassLearning, net revenue decreased $3.7 million, or 26.1%, to $10.5
million for the three-months ended September 30, 2002 from $14.2 million for the
same period in 2001 primarily driven by lower software revenue. New software
sales for the third quarter of 2002 decreased by $3.0 million or 40.5% to $4.4
million from $7.4 million for the same period in 2001. CompassLearning has been
the most affected by the extremely difficult funding situation, as the primary
funding sources for schools to purchase its software is Title 1 funding. Net
sales at ChildU, WRC's unrestricted subsidiary (see footnote 1 below), increased
nearly $1.0 million or 333.3% to $1.3 million for the three-months ended
September 30, 2002 from $0.3 million for the same period in 2001 driven by sales
of its online curriculum products.
22
At AGS, sales increased $0.5 million, or 2.6%, to $19.8 million for the
three-months ended September 30, 2002 from $19.3 million for the same period in
2001, primarily due to higher sales of assessment products.
At Weekly Reader, not including AGS and World Almanac, net sales decreased $2.0
million, or 14.6%, to $11.7 million from $13.7 million for the same period in
2001. This was attributable to $2.0 million or 46.2% decrease in custom
publishing revenue from Weekly Reader's subsidiary Lifetime Learning Systems for
the three-months ended September 30, 2002. Lifetime Learning Systems has been
affected by the general decline in media advertising spending.
At World Almanac Education Group, third quarter sales increased by $0.4 million,
or 3.1% (Excluding Funk & Wagnalls, World Almanac's third quarter core revenue*
increased 5.1% compared to the same period in 2001), to $13.1 million for the
three-months ended September 30, 2002 from $12.7 million for the same period in
2001, primarily as a result of continued strength of World Almanac's Gareth
Stevens children's library books division. At Gareth Stevens, the third quarter
of 2002 revenue of $4.8 million was $1.1 million or 29.7% greater than the third
quarter of 2001 driven by strong sales in wholesale and press run channels
(mostly from new imprints -World Almanac Library and Weekly Reader Early
Learning Library) and strong special sales. This was partially offset by $0.5
million or 8.6% sales decrease at WAE Library Services division compared to the
same period in 2001 driven by the weak library market.
Gross profit. For the three-months ended September 30, 2002, gross profit
decreased by $2.6 million, or 5.9%, to $41.1 million from $43.7 million for the
same period in 2001. This decrease was primarily driven by a decrease in new
software revenue at CompassLearning described above. WRC Media's gross profit as
a percentage of sales slightly increased to 72.7% for the three-months ended
September 30, 2002 from 72.6% for the same period in 2001.
Costs and expenses. For the three-months ended September 30, 2002, costs and
expenses decreased by $4.8 million, or 16.6%, to $24.2 million from $29.0
million for the same period in 2001. This was primarily attributable to $3.3
million or 22.9% decrease in sales and marketing expenses, primarily lower sales
commissions at CompassLearning resulting from lower software sales combined with
$1.0 million lower research and development expense at CompassLearning and $0.5
million lower general and administrative expenses resulting from cost savings
associated with the reduction in workforce which took place in early 2002.
* At World Almanac, 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.
23
Income before amortization of goodwill and intangible assets, interest expense,
income taxes and other, net. For the three-months ended September 30, 2002,
income before amortization of goodwill and intangible assets, interest expense,
income taxes and other, net increased by $2.2 million, or 15.0%, to $16.9
million from $14.7 million for the same period in 2001. This increase was
primarily due to $4.8 million lower operating costs and expenses partially
offset by $2.6 million lower gross profit driven by lower sales described above.
Amortization of goodwill and intangible assets. For the three-months ended
September 30, 2002, amortization of intangible assets decreased by $12.7
million, or 73.8%, to $4.5 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 September 30, 2002,
the Company had income from operations of $12.4 million, as compared to a loss
from operations of $2.5 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 $12.7 million combined with
$2.2 million higher income before amortization of goodwill and intangible assets
described above.
Interest expense, including amortization of deferred financing costs. For the
three-months ended September 30, 2002, interest expense decreased by $0.6
million, or 7.3%, to $7.6 million from $8.2 million for the same period in 2001
and interest expense as a percentage of sales decreased to 13.5% from 13.6% 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 September 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.
Loss on investments. For the three-months ended September 30, 2002, loss on
investments increased $0.7 million to $1.0 million from $0.3 for the same period
in 2001. This increase was primarily due to $1.0 million loss on investment
recognized during the three-month period ended September 30, 2002 related to WRC
Media's minority investment in ThinkBox, Inc.
Other, net. For the three-months ended September 30, 2002, other, net increased
$1.4 million compared to the same period in 2001. For the three-months ended
September 30, 2002, WRC Media has recorded an unrealized gain of $1.4 million
related to its interest rate swap, which is being marked to market under SFAS
133.
24
Income tax provision. For the three-months ended September 30, 2002, the
provision for income taxes is $0.5 million compared to $0.2 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 September 30, 2002.
Net income (loss). For the three-months ended September 30, 2002, net loss
decreased by $16.0 million, or 140.4%, to net income of $4.6 million from a net
loss of $11.4 million for the same period in 2001 primarily as a result of the
reasons described above.
EBITDA (excluding ChildU and ThinkBox). For the three-months ended September 30,
2002, EBITDA increased $1.4 million or 8.7% to $17.5 million from $16.1 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 $1.1 million for the
three-months ended September 30, 2002 and 2001, 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 September 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 September 30
2001 2002
-------------------------------- -----------------------------
Amount % of Net Sales Amount % of Net Sales
------------ ------------------ ------------ ---------------
(Dollars in millions)
Sales, net $ 45.7 100.0% $ 44.7 100.0%
Cost of goods sold 11.5 25.2% 10.5 23.5%
------- ------ ------- -----
Gross profit 34.2 74.8% 34.2 76.5%
Costs and expenses:
Sales and marketing 8.8 19.3% 6.9 15.4%
Distribution, circulation and fulfillment 3.6 7.9% 3.5 7.8%
Editorial 2.3 5.0% 2.6 5.8%
General and administrative 4.5 9.8% 4.3 9.6%
Depreciation 0.5 1.1% 0.5 1.1%
------- ------ ------- -----
19.7 43.1% 17.8 39.7%
------- ------ ------- -----
Income before amortization of goodwill and intangible assets,
interest expense, income taxes and other, net 14.5 31.7% 16.4 36.8%
Amortization of goodwill and intangible assets 3.0 6.6% 2.0 4.5%
------- ------ ------- -----
Income from operations 11.5 25.1% 14.4 32.3%
Interest expense (8.2) (17.9%) (7.3) (16.3%)
Other, net -- 0.0% 1.4 3.1%
------- ------ ------- -----
Income before income tax provision 3.3 7.2% 8.5 19.1%
Income tax provision 0.2 0.4% 0.5 1.1%
------- ------ ------- -----
Net income $ 3.1 6.8% $ 8.0 18.0%
======= ====== ======= =====
EBITDA(a) $ 15.0 32.8% $ 16.9 37.8%
======= ====== ======= =====
(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 September 30, 2002 Compared to Three-Months Ended
September 30, 2001
Sales, net. For the three-months ended September 30, 2002, net sales decreased
$1.0 million or 2.2% to $44.7 million from $45.7 million for the same period in
2001. At Weekly Reader, not including AGS and World Almanac, net sales decreased
$2.0 million, or 14.6%, to $11.7 million from $13.7 million for the same period
in 2001. This was attributable to $2.0 million or 46.2% decrease in corporate
sponsored periodical revenue from Weekly Reader's subsidiary Lifetime Learning
Systems for the three-months ended September 30, 2002. Lifetime Learning Systems
has been affected by the general decline in media advertising spending.
26
At AGS, sales increased $0.5 million, or 2.6%, to $19.8 million for the
three-months ended September 30, 2002 from $19.3 million for the same period in
2001, primarily due to higher sales of assessment products.
At World Almanac Education Group, third quarter sales increased by $0.4 million,
or 3.1% (Excluding Funk & Wagnalls, World Almanac's third quarter core revenue*
increased 5.1% compared to the same period in 2001), to $13.1 million for the
three-months ended September 30, 2002 from $12.7 million for the same period in
2001, primarily as a result of continued strength of World Almanac's Gareth
Stevens children's library books division. At Gareth Stevens, the third quarter
of 2002 revenue of $4.8 million was $1.1 million or 29.7% greater than the third
quarter of 2001 driven by strong sales in wholesale and press run channels
(mostly from new imprints -World Almanac Library and Weekly Reader Early
Learning Library) and strong special sales. This was partially offset by $0.5
million or 8.6% sales decrease at WAE Library Services division compared to the
same period in 2001 driven by the weak library market.
Gross profit. For the three-months ended September 30, 2002, gross profit was
constant at $34.2 million compared to the same period in 2001. Gross profit as a
percentage of sales increased to 76.5% for the three-months ended September 30,
2002 from 74.8% for the same period in 2001.
Costs and expenses. For the three-months ended September 30, 2002, costs and
expenses decreased by $1.9 million, or 9.6%, to $17.8 million from $19.7 million
for the same period in 2001 due to a decrease in sales and marketing expenses.
Costs and expenses as a percentage of sales decreased to 39.7% for the
three-months ended September 30, 2002 from 43.1% for the same period in 2001.
Income before amortization of goodwill and intangible assets, interest expense,
income taxes and other, net. For the three-months ended September 30, 2002,
income before amortization of goodwill and intangible assets, interest expense,
income taxes and other, net increased by $1.9 million, or 13.1%, to $16.4
million from $14.5 million for the same period in 2001 and, as a percentage of
sales, increased to 36.8% from 31.7% for the same period in 2001. This increase
was primarily due to the factors described above.
* At World Almanac, 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.
27
Amortization of goodwill and intangible assets. For the three-months ended
September 30, 2002, amortization of goodwill and intangible assets decreased by
$1.0 million, or 33.3%, to $2.0 million from $3.0 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 September 30, 2002, income
from operations increased by $2.9 million, or 25.2%, to $14.4 million from $11.5
million for the same period in 2001 and income from operations as a percentage
of sales improved to 32.3% from 25.2% for the same period in 2001. This increase
was primarily due to the factors described above.
Interest expense. For the three-months ended September 30, 2002, interest
expense decreased by $0.9 million, or 11.0%, to $7.3 million from $8.2 million
for the same period in 2001 and interest expense as a percentage of sales
decreased to 16.3% from 17.9% 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
September 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 September 30, 2002, other, net increased
by $1.4 million to income of $1.4 million from $0.0 million compared to the same
period in 2001. For the three-months ended September 30, 2002, WRC Media has
recorded an unrealized gain of $1.4 million related to its interest rate swap,
which is being marked to market under SFAS 133.
Income tax provision. For the three-months ended September 30, 2002, provision
for income taxes increased by $0.3 million to $0.5 million from $0.2 million for
the same period in 2001 entirely due to the adoption of SFAS 142. A 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 September 30,
2002.
Net income. For the three-months ended September 30, 2002, net income increased
by $4.9 million, or 158.1%, to $8.0 million from $3.1 million for the same
period in 2001 primarily as a result of the reasons described above. Net income
as a percentage of net sales increased to 18.0% for the three-months ended
September 30, 2002 from 6.8% for the same period in 2001.
28
EBITDA. For the three-months ended September 30, 2002, EBITDA increased $1.9
million, or 12.7%, to $16.9 million from $15.0 million for the same period in
2001. This increase is primarily attributable to $1.9 million lower costs and
expenses as described above for the three-months ended September 30, 2002
compared to the same period in 2001.
29
Results of Operations for the Nine-Months Ended September 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.
Nine Months Ended September 30
2001 2002
------------------------------- -------------------------------
Amount % of Net Sales Amount % of Net Sales
------------ ----------------- ------------ -----------------
(Dollars in millions)
Sales, net $ 161.1 100.0% $ 147.2 100.0%
Cost of goods sold 45.3 28.1% 41.5 28.2%
-------- ----- -------- -----
Gross profit 115.8 71.9% 105.7 71.8%
Costs and expenses:
Sales and marketing 39.5 24.5% 36.1 24.5%
Research and development 3.8 2.4% 1.2 0.8%
Distribution, circulation and fulfillment 9.4 5.8% 9.5 6.5%
Editorial 7.9 4.9% 7.5 5.1%
General and administrative 19.8 12.3% 16.4 11.1%
Depreciation 2.4 1.5% 2.3 1.6%
-------- ----- -------- -----
82.8 51.4% 73.0 49.6%
-------- ----- -------- -----
Income before amortization of goodwill and intangible assets,
interest expense, income taxes and other, net 33.0 20.5% 32.7 22.2%
Amortization of goodwill and intangible assets 51.3 31.8% 14.2 9.6%
-------- ----- -------- -----
Income(loss) from operations (18.3) (11.3%) 18.5 12.6%
Interest expense, including amortization
of deferred financing costs (25.5) (15.8%) (22.4) (15.2%)
Loss on investments (0.4) (0.2%) (2.1) (1.4%)
Other, net (0.5) (0.3%) 0.9 0.6%
-------- ----- -------- -----
Loss before income tax provision (44.7) (27.6%) (5.1) (3.4%)
Income tax provision 0.5 0.3% 6.7 4.6%
-------- ----- -------- -----
Net loss before cumulative effect of change
in accounting principle (45.2) (27.9%) (11.8) (8.0%)
Cumulative effect of change in accounting principle -- 0.0% (72.0) (48.9%)
-------- ----- -------- -----
Net loss $ (45.2) (27.9%) $ (83.8) (56.9%)
======== ===== ======== =====
EBITDA(a) $ 36.3 22.5% $ 35.7 24.3%
======== ===== ======== =====
(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 $3.5
million EBITDA loss in 2002 and the $1.8 million EBITDA loss in 2001 contributed
by its unrestricted subsidiaries - ChuldU and its investment in Thinkbox.
Nine-Months Ended September 30, 2002 Compared to Nine-Months Ended
September 30, 2001
Sales, net. For the nine-months ended September 30, 2002, net sales decreased
$13.9 million, or 8.6%, to $147.2 million from $161.1 million for the same
period in 2001. This decrease was primarily due to a $12.9 million, or 26.5%
decrease of net sales at CompassLearning to $35.8 million from $48.7 million in
2001 combined with a decrease in net sales of $2.5 million or 2.2% to $109.4
million from $111.9 million in 2001 at Weekly Reader Corporation partially
offset by a sales increase at ChildU of $1.6 million or 400.0% to $2.0 million
from $0.4 million.
30
At CompassLearning, net revenue decreased $12.9 million, or 26.5%, to $35.8
million from $48.7 million in 2001. This decrease was primarily due to (1) a
decrease in software revenue of $11.2 million, or 39.9%, to $16.9 million from
$28.1 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 $1.0 million, or
50.0%, to $1.0 million from $2.0 million in 2001 and (3) a decrease in service
revenue from technical support of $0.8 million, or 7.2%, to $10.3 million from
$11.1 million in 2001. The decrease was offset by an increase in professional
development revenue of $0.1 million, or 1.4%, to $7.5 million from $7.4 million
in 2001.
In addition, sales at Weekly Reader Corporation decreased $2.6 million, or 2.3%,
to $109.4 million for the nine-months ended September 30, 2002 from $112.0
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 $0.9 million,
or 2.0%, to $46.2 million from $45.3 million for the same period in 2001.
Assessment and curriculum revenues have increased by $0.2 million or 1.0% and
$0.8 million or 3.3%, respectively; (2) a decrease in sales at World Almanac of
$0.4 million, or 1.0%, to $37.7 million from $38.1 million in 2001. This
decrease was primarily due to lower sales at WAE Library Services and Funk &
Wagnalls being partially offset by higher sales at Gareth Stevens. The lower
sales at WAE Library Services is driven by lower sales from its catalog
channels. The lower sales at Funk & Wagnalls is driven by the anticipated
decline in the yearbook business. The yearbook program is sold as an extension
of the encyclopedia program. Given that the print encyclopedia business was
exited in 1998, the yearbook business is simply a renewal business for existing
subscribers. The higher sales at Gareth Stevens is driven by higher sales in its
Telemarketing, Press Run and Miscellaneous (special sales) channels. Excluding
Funk & Wagnalls, net revenue remained flat year-over-year at $35.6 million; and
(3) a decrease in sales at Weekly Reader, not including World Almanac and
American Guidance, of $3.0 million, or 10.5%, to $25.5 million from $28.5
million for the same period in 2001. This decrease is primarily attributable to
lower Lifetime Learning revenue, ($2.3) million; lower skills books revenue,
($0.1) million; and lower periodical revenue resulting from the planned
restructuring of the shipping schedule and lower circulation, ($1.3) million;
partially offset by higher licensing revenue, $0.7 million.
Gross profit. For the nine-months ended September 30, 2002, gross profit
decreased by $10.1 million, or 8.7%, to $105.7 million from $115.8 million for
the same period in 2001. This decrease was primarily due to a decrease in gross
profit at CompassLearning of $10.7 million, or 32.4%, to $22.3 million from
$33.0 million in 2001 primarily due to $10.4 million of lower software margin
attributable to lower software sales. At Weekly Reader Corporation, gross profit
decreased $0.6 million, or 0.7%, to $81.9 million from $82.5 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 $1.2 million, or 3.5%, to $35.2
million from $34.0 million for the same period in 2001. The volume increase
described above coupled with a shift in sales mix drove the variance over the
prior year; (2) an increase in gross profit at World Almanac of $0.3 million, or
1.2%, to $25.7 million from $25.4 million in 2001; and (3) a decrease in gross
profit at Weekly Reader, not including World Almanac and American Guidance, of
$2.1 million, or 9.1%, to $20.9 million from $23.0 million for the same period
in 2001. This is due primarily to the sales variance mentioned above partially
offset by lower paper costs.
31
Gross profit at ChildU increased by $1.2 million or 400.0% to $1.5 million for
the nine-months ended September 30, 2002 from $0.3 million for the same period
in 2001. WRC Media's gross profit as a percentage of sales decreased slightly to
71.8% for the nine-months ended September 30, 2002 from 71.9% for the same
period in 2001.
Costs and expenses. For the nine-months ended September 30, 2002, costs and
expenses decreased by $9.8 million, or 11.8%, to $73.0 million from $82.8
million for the same period in 2001. This was primarily attributable to $3.4
million lower general and administrative expense combined with $2.6 million
lower research and development expense primarily at CompassLearning, and $3.4
million lower sales and marketing expense, primarily at CompassLearning ($4.7
million) driven by lower sales commissions. 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 $7.5 million in fixed
annual operating costs.
Income before amortization of goodwill and intangible assets, interest expense,
income taxes and other, net. For the nine-months ended September 30, 2002,
income before amortization of goodwill and intangible assets, interest expense,
income taxes and other, net decreased by $0.3 million, or 0.9%, to $32.7 million
from $33.0 million for the same period in 2001, and as a percentage of sales
increased to 22.2% from 20.5% for the same period in 2001. This was primarily
due to the decrease in gross profit described above, partially offset by the
decrease in costs and expenses, also described above.
Amortization of goodwill and intangible assets. For the nine-months ended
September 30, 2002, amortization of goodwill and intangible assets decreased by
$37.1 million, or 72.3%, to $14.2 million from $51.3 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.
32
Income (loss) from operations. For the nine-months ended September 30, 2002,
loss from operations decreased $36.8 million, or 201.1%, to income from
operations of $18.5 million from loss from operations of $18.3 million 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
nine-months ended September 30, 2002, interest expense decreased by $3.1
million, or 12.2%, to $22.4 million from $25.5 million for the same period in
2001 and interest expense as a percentage of sales was decreased to 15.2% for
the nine-months ended September 30, 2002 from 15.8% 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
nine-months ended September 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 nine-months ended September 30, 2002, other, net remained
increased $1.4 million compared to the same period in 2001. For the nine-months
ended September 30, 2002, WRC Media has recorded an unrealized gain of $1.6
million related to its interest rate swap, which is being marked to market under
SFAS 133.
Income tax provision. For the nine-months ended September 30, 2002, provision
for income taxes increased by $6.2 million to $6.7 million from $0.5 million for
the same period in 2001 primarily as a result of the adoption of SFAS 142. The
non-cash charge of $6.5 million was recorded to increase the valuation allowance
related to the Company's net operating losses for the nine-months ended
September 30, 2002.
Net loss before cumulative effect of change in accounting principle. For the
nine-months ended September 30, 2002, net loss before cumulative effect of
change in accounting principle decreased by $33.4 million, or 73.9%, to $11.8
million from $45.2 million for the same period in 2001 primarily as a result of
the $37.1 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 8.0% for the nine-months ended September 30,
2002 from negative 27.9% for the same period in 2001.
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 nine-months ended September 30, 2002, net loss increased by
$38.6 million, or 85.4%, to $83.8 million from $45.2 million for the same period
in 2001 primarily as a result of the reasons described above. Net loss as a
percentage of net sales increased to negative 56.9% for the nine-months ended
September 30, 2002 from negative 27.9% for the same period in 2001.
33
EBITDA. For the nine-months ended September 30, 2002, EBITDA decreased $0.6
million, or 1.7%, to $35.7 million from $36.3 million for the same period in
2001. This decrease is primarily attributable to the factors described above.
34
Results of Operations for the Nine-Months Ended September 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.
Nine Months Ended September 30
2001 2002
-------------------------------- --------------------------------
Amount % of Net Sales Amount % of Net Sales
------------ ------------------ ------------ ------------------
(Dollars in millions)
Sales, net $ 112.0 100.0% $ 109.4 100.0%
Cost of goods sold 29.5 26.3% 27.5 25.1%
-------- ----- -------- -----
Gross profit 82.5 73.7% 81.9 74.9%
Costs and expenses:
Sales and marketing 21.2 19.0% 20.3 18.6%
Distribution, circulation and fulfillment 9.4 8.4% 9.5 8.7%
Editorial 7.9 7.1% 7.5 6.9%
General and administrative 14.0 12.5% 12.2 11.2%
Depreciation 1.5 1.3% 1.4 1.3%
-------- ----- -------- -----
54.0 48.3% 50.9 46.7%
-------- ----- -------- -----
Income before amortization of goodwill and intangible assets,
interest expense, income taxes and other, net 28.5 25.4% 31.0 28.2%
Amortization of goodwill and intangible assets 8.9 7.9% 6.5 5.9%
-------- ----- -------- -----
Income from operations 19.6 17.5% 24.5 22.3%
Interest expense (24.9) (22.2%) (21.6) (19.7%)
Other, net 0.1 0.1% 1.6 1.5%
-------- ----- -------- -----
Income (loss) before income tax provision (5.2) (4.6%) 4.5 4.1%
Income tax provision 0.3 0.3% 6.6 6.0%
-------- ----- -------- -----
Net loss before cumulative effect of change
in accounting principle (5.5) (4.9%) (2.1) (1.9%)
Cumulative effect of change in accounting principle -- 0.0% (72.0) (65.8%)
-------- ----- -------- -----
Net loss $ (5.5) (4.9%) $ (74.1) (67.7%)
======== ===== ======== =====
EBITDA(a) $ 30.1 26.9% $ 32.4 29.6%
======== ===== ======== =====
(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.
Nine-Months Ended September 30, 2002 Compared to Nine-Months Ended September 30,
2001
Sales, net. For the nine-months ended September 30, 2002, net sales decreased
$2.6 million, or 2.3%, to $109.4 million for the nine-months ended September 30,
2002 from $112.0 million for the same period in 2001. The decrease in sales was
the result of (1) an increase in sales at AGS of $0.9 million, or 2.0%, to $46.2
million from $45.3 million for the same period in 2001. Assessment and
curriculum revenues have increased by $0.2 million or 1.0% and $0.8 million or
3.3%, respectively; (2) a decrease in sales at World Almanac of $0.4 million, or
1.0%, to $37.7 million from $38.1 million in 2001. This decrease was primarily
due to lower sales at WAE Library Services and Funk & Wagnalls being partially
offset by higher sales at Gareth Stevens. The lower sales at WAE Library
Services is driven by lower sales from its catalog channels. The lower sales at
Funk & Wagnalls is driven by the anticipated decline in the yearbook business.
The yearbook program is sold as an extension of the encyclopedia program. Given
that the print encyclopedia business was exited in 1998, the yearbook business
is simply a renewal business for existing subscribers. The higher sales at
Gareth Stevens is driven by higher sales in its Telemarketing, Press Run and
Miscellaneous (special sales) channels. Excluding Funk & Wagnalls, net revenue
remained flat year-over-year at $35.6 million; and (3) a decrease in sales at
Weekly Reader, not including World Almanac and American Guidance, of $3.0
million, or 10.5%, to $25.5 million from $28.5 million for the same period in
2001. This decrease is primarily attributable to lower Lifetime Learning
revenue, ($2.3) million; lower skills books revenue, ($0.1) million; and lower
periodical revenue resulting from the planned restructuring of the shipping
schedule and lower circulation, ($1.3) million; partially offset by higher
licensing revenue, $0.7 million.
35
Gross profit. For the nine-months ended September 30, 2002, gross profit
decreased by $0.6 million, or 0.7%, to $81.9 million from $82.5 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 $1.2 million, or 3.5%, to $35.2
million from $34.0 million for the same period in 2001. The volume increase
described above coupled with a shift in sales mix drove the variance over the
prior year; (2) an increase in gross profit at World Almanac of $0.3 million, or
1.2%, to $25.7 million from $25.4 million in 2001; and (3) a decrease in gross
profit at Weekly Reader, not including World Almanac and American Guidance, of
$2.1 million, or 9.1%, to $20.9 million from $23.0 million for the same period
in 2001. This is due primarily to the sales variance mentioned above partially
offset by lower paper costs.
Weekly Reader's gross profit as a percentage of sales increased to 74.9% for the
nine-months ended September 30, 2002 from 73.7% for the same period in 2001.
Costs and expenses. For the nine-months ended September 30, 2002, costs and
expenses decreased by $3.1 million, or 5.7%, to $50.9 million for the
nine-months ended September 30, 2002 from $54.0 million for the same period in
2001, primarily due to a decrease in general and administrative expenses and
editorial expenses of $1.8 million and $0.4 million, respectively combined with
a $0.9 million decrease 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 46.7% for the
nine-months ended September 30, 2002 from 48.3% for the same period in 2001.
36
Income before amortization of goodwill and intangible assets, interest expense,
income taxes and other, net. For the nine-months ended September 30, 2002,
income before amortization of goodwill and intangible assets, interest expense,
income taxes and other, net increased by $2.5 million, or 8.8%, to $31.0 million
from $28.5 million for the same period in 2001 and, as a percentage of sales,
increased to 28.2% from 25.4% for the same period in 2001. These increases were
primarily due to the factors described above.
Amortization of goodwill and intangible assets. For the nine-months ended
September 30, 2002, amortization of goodwill and intangible assets decreased by
$2.4 million, or 27.0%, to $6.5 million from $8.9 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 nine-months ended September 30, 2002, income
from operations increased $4.9 million or 25.0% to $24.5 million from $19.6
million for the same period in 2001 and, income from operations as a percentage
of sales increased to 22.3% from 17.5% for the same period in 2001. This
increase was primarily due to the factors described above.
Interest expense. For the nine-months ended September 30, 2002, interest expense
decreased by $3.3 million, or 13.3%, to $21.6 million from $24.9 million for the
same period in 2001 and interest expense as a percentage of sales decreased to
19.7% from 22.2% 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 nine-months ended September
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 nine-months ended September 30, 2002, other, net increased
$1.5 million to $1.6 million from $0.1 million for the same period in 2001. For
the nine-months ended September 30, 2002, Weekly Reader Corporation recorded an
unrealized gain of $1.6 million related to its interest rate swap, which is
being marked to market under SFAS 133.
37
Income tax provision. For the nine-months ended September 30, 2002, provision
for income taxes increased by $6.3 million to $6.6 million from $0.3 million for
the same period in 2001 entirely as a result of the adoption of SFAS 142. The
non-cash charge of $6.5 million was recorded to increase the valuation allowance
related to the Company's net operating losses for the nine-months ended
September 30, 2002.
Net loss before cumulative effect of change in accounting principle. For the
nine-months ended September 30, 2002, net loss before cumulative effect of
change in accounting principle decreased by $3.4 million, or 61.8%, to $2.1
million from $5.5 million for the same period in 2001. Net loss before
cumulative effect of change in accounting principle as a percentage of net sales
decreased to 1.9% for the nine-months ended September 30, 2002 from 4.9% 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 nine-months ended September 30, 2002, net loss increased by
$68.6 million, or 1247.3%, to $74.1 million from $5.5 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 67.7% for the nine-months ended
September 30, 2002 from negative 4.9% for the same period in 2001.
EBITDA. For the nine-months ended September 30, 2002, EBITDA increased $2.3
million, or 7.6%, to $32.4 million from $30.1 million for the same period in
2001. This increase is primarily attributable to $3.1 million of lower costs and
expenses partially offset by $0.6 million lower gross profit for the nine-months
ended September 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 September 30, 2002, $10.0 million of
the revolving credit facility has been drawn which bear interest approximating
5.3%. 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.
38
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 $9.1
million at September 30, 2002. Included in cash is approximately $1.3 million of
restricted monies, which represent the remaining proceeds from the issuance of
$13.75 million of 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.
WRC Media and its subsidiaries principal uses of cash are for debt service,
capital expenditures, working capital and acquisitions. For the nine-months
ended September 30, 2002, WRC Media and its subsidiaries' operations used
approximately $0.5 million in cash in operating activities.
For the nine-months ended September 30, 2002, WRC Media and its subsidiaries
investing activities included: investment in software development of
approximately $3.6 million and capital expenditures of approximately $1.0
million. Weekly Reader's capital expenditures, which consisted primarily of
expenditures for property and equipment, were $0.7 million for the nine-months
ended for September 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 nine-months ended September 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 nine-months ended September 30,
2002, financing activities provided cash of $4.7 million, which primarily
resulted from borrowings of $10.0 million under the revolving credit facility
and a repayment of $4.3 million of the senior secured term loans.
Working Capital
As of September 30, 2002, WRC Media and its subsidiaries had a working capital
deficit of approximately $22.0 million, which includes $27.2 million of deferred
revenue for Weekly Reader, not including AGS or World Almanac as of September
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.
40
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.
41
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
WRC Media 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 Media is subject to market risk exposure related to changes in interest
rates on the $138.5 million (as of September 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
$21.7 million senior secured term loan A facility maturing in three
years, the LIBO rate as defined in the credit agreement plus 3.50% or
the alternate base rate as defined in the credit agreement plus 2.50%
subject to performance-based step downs; and
(2) For the $97.0 million senior secured term loan B facility maturing in
four years, the LIBO rate plus 4.25% or the alternate base rate plus
3.25%.
(3) For the $9.8 million senior secured new term A loan facility maturing
in four years, the LIBO rate plus 4.25% or the alternate base rate
plus 3.25%
The senior credit facilities require WRC Media 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 mark-to-market the swap contract at the end of each quarter. For
the nine months ended September 30, 2002 we recorded an unrealized gain of $1.6
million. This gain is reflected in Other, net in the condensed consolidated
statement of operations.
42
ITEM 4. CONTROLS AND PROCEDURES
WRC Media management, including the Chief Executive Officer and Chief Financial
Officer, have conducted an evaluation of the effectiveness of disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective in ensuring that all
material information required to be filed in this quarterly report has been made
known to them in a timely fashion. There have been no significant changes in
internal controls, or in factors that could significantly affect internal
controls, subsequent to the date the Chief Executive Officer and Chief Financial
Officer completed their evaluation.
43
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of WRC Media Inc. and its subsidiaries
(the "Company") on Form 10-Q for the period ending September 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
each of the undersigned in his capacity as an officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) Based on the officer's knowledge, the Report fully complies with the
requirements of section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
(2) Based on the officer's knowledge, the information contained in the
Report fairly presents, in all material respects, the financial
condition, result of operations and cash flows of the Company for the
periods presented in the report.
/s/ Martin E. Kenney, Jr.
- ---------------------------------------------
Martin E. Kenney, Jr.
Chief Executive Officer
/s/ Robert S. Lynch
- ---------------------------------------------
Robert S. Lynch
Chief Operating Officer and
Principal Financial Officer
/s/ Richard Nota
- ---------------------------------------------
Richard Nota
Vice President, Finance and
Principal Accounting Officer
44
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Martin E. Kenney, Jr., certify that:
1. I have reviewed this quarterly report of WRC Media Inc. and its
subsidiaries;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
o designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which the quarterly
report is being prepared;
o evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
o presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
o all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
o any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
45
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
--------------------------------------
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
46
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert S. Lynch, certify that:
1. I have reviewed this quarterly report of WRC Media Inc. and its
subsidiaries;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
o designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which the quarterly
report is being prepared;
o evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
o presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
o all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
o any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
47
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
--------------------------------------------------
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
48
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard Nota, certify that:
1. I have reviewed this quarterly report of WRC Media Inc. and its
subsidiaries;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
o designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which the quarterly
report is being prepared;
o evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
o presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
o all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
o any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
49
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
----------------------------------
Richard Nota
Vice President, Finance: WRC Media
50
On August 9, 2002, registrant reported, on Form 8-K, the results for the fiscal
quarter ended June 30, 2002.
On November 7, 2002, registrant reported, on Form 8-K, the results for the
fiscal quarter ended September 30, 2002.
51
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:
- ----------------------------------------------------- ------------------------------
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:
- ----------------------------------------------------- ------------------------------
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
Date:
- ----------------------------------------------------- ------------------------------
Richard Nota
Vice President, Finance: WRC Media
52