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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 March 31, 2003 Commission File No.
WRC MEDIA INC. WEEKLY READER CORPORATION
(Exact name of Registrant as specified in its charter) (Exact name of Registrant as specified in its charter)
DELAWARE DELAWARE
(State or other jurisdiction of incorporation or organization) (State or other jurisdiction of incorporation or organization)
2731 2721
(Primary Standard Industrial Classification Number) (Primary Standard Industrial Classification Number)
13-4066536 13-3603780
(I.R.S. Employer Identification Number) (I.R.S. Employer Identification Number)
COMPASSLEARNING, INC.
(Exact name of Registrant as specified in its charter)
2731
DELAWARE
(State or other jurisdiction of incorporation or organization)
7372
(Primary Standard Industrial Classification Number)
7372
13-4066535
(I.R.S. Employer Identification Number)
WRC MEDIA INC. WEEKLY READER CORPORATION
512 7th AVENUE, 22nd FLOOR 512 7th AVENUE, 22nd FLOOR
NEW YORK, NY 10018 NEW YORK, NY 10018
(212) 768-1150 (212) 768-1150
COMPASSLEARNING, INC.
512 7th AVENUE, 22nd 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
- --------------------------------------------------------------------------------------
2
PART 1.
ITEM 1. FINANCIAL STATEMENTS
3
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
December 31, March 31,
2002 2003
------------------ -------------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 9,095 $ 3,529
Accounts receivable, net 38,373 31,841
Inventories, net 15,287 14,416
Prepaid expenses 3,200 4,478
Other current assets 1,797 1,630
------------------ -------------------
Total current assets 67,752 55,894
Property and equipment, net 6,299 5,791
Purchased software, net 4,970 5,144
Goodwill 163,349 163,349
Deferred financing costs, net 6,165 5,860
Other intangible assets, net 100,499 97,429
Other assets and investments 25,218 28,757
------------------ -------------------
Total Assets $ 374,252 $ 362,224
================== ===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 20,869 $ 15,388
Accrued payroll, commissions and benefits 8,693 8,426
Current portion of deferred revenue 39,840 31,272
Other accrued liabilities 23,285 26,137
Current portion of long-term debt 7,721 8,108
------------------ -------------------
Total current liabilities 100,408 89,331
Deferred revenue, net of current portion 1,167 1,244
Deferred tax liability 10,700 11,200
Due to related party 2,160 2,160
Long-term debt 266,219 269,105
------------------ -------------------
Total liabilities 380,654 373,040
------------------ -------------------
Commitments and contingencies
15% Series B preferred stock subject to redemption,
including accrued dividends and accretion of warrant value
(Liquidation preference of $75,000 plus accrued dividends) 109,966 114,657
------------------ -------------------
Warrants on preferred stock 11,751 11,751
------------------ -------------------
Common stock subject to redemption 965 940
------------------ -------------------
Stockholders' deficit:
Common stock, ($.01 par value, 20,000,000 shares authorized;
and 7,009,750 shares outstanding) 70 70
Preferred stock, ($.01 par value, 750,000 shares authorized,
459,525 outstanding) 18,381 19,208
Additional paid-in capital 132,464 132,464
Accumulated comprehensive loss (3,357) (3,357)
Accumulated deficit (276,642) (286,549)
------------------ -------------------
Total stockholders' deficit (129,084) (138,164)
------------------ -------------------
Total liabilities and stockholders' deficit $ 374,252 $ 362,224
================== ===================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
(Dollars in thousands)
2002 2003
----------------- -----------------
Sales, net $ 46,787 $ 46,977
Cost of goods sold 13,374 12,734
----------------- -----------------
Gross profit 33,413 34,243
----------------- -----------------
Costs and expenses:
Sales and marketing 13,349 11,481
Research and development 396 711
Distribution, circulation and fulfillment 3,171 3,510
Editorial 2,807 2,579
General and administrative 5,663 6,720
Restructuring costs and other non-recurring expenses - 480
Depreciation 782 616
Amortization of intangible assets 4,827 4,633
----------------- -----------------
Total operating costs and expenses 30,995 30,730
----------------- -----------------
Income from operations 2,418 3,513
Interest expense, including amortization
of deferred financing costs (7,331) (7,082)
Loss on investment (253) -
Other expense, net (225) (231)
----------------- -----------------
Loss before income tax provision (5,391) (3,800)
Income tax provision 9,339 588
----------------- -----------------
Loss before cumulative effect of change
in accounting principle (14,730) (4,388)
Cumulative effect of change in accounting principle (72,022) -
----------------- -----------------
Net loss $ (86,752) $ (4,388)
================= =================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
(dollars in thousands)
2002 2003
----------------- ------------------
Cash flows from operating activities:
Net loss $ (86,752) $ (4,388)
Adjustments to reconcile net loss to net cash used in operating activities:
Cumulative effect of change in accounting principle 72,022 -
Deferred income tax provision 9,200 500
Depreciation and amortization 5,609 5,508
Loss on investments 253 -
Gain (loss) on disposition of property and equipment 3 (1)
Interest expense-accretion of debt discount 94 107
Amortization of deferred financing costs 281 305
Changes in operating assets and liabilities:
Decrease in accounts receivable 8,924 6,532
Decrease in inventories 522 871
Increase in prepaid expenses and other current assets (2,961) (1,111)
Decrease (increase) in other noncurrent assets 2,719 (4,638)
Decrease increase in accounts payable (3,307) (5,481)
Decrease in deferred revenue (8,039) (8,491)
(Decrease) increase in accrued liabilities (3,952) 2,586
----------------- ------------------
Net cash used in operating activities (5,384) (7,701)
----------------- ------------------
Cash flows from investing activities:
Purchase of property and equipment (458) (112)
Software development costs (1,357) (898)
Proceeds from disposition of property & equipment - 4
----------------- ------------------
Net cash used in investing activities (1,815) (1,006)
----------------- ------------------
Cash flows from financing activities:
Net proceeds from revolving line of credit 7,000 5,000
Retirement of senior bank debt (1,446) (1,834)
Proceeds from issuance of common stock 150 -
Purchase of common stock subject to redemption (463) (25)
----------------- ------------------
Net cash provided by financing activities 5,241 3,141
----------------- ------------------
Decrease in cash and cash equivalents (1,958) (5,566)
Cash and cash equivalents, beginning of period 8,919 9,095
----------------- ------------------
Cash and cash equivalents, end of period $ 6,961 $ 3,529
================= ==================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,838 $ 2,053
================= ==================
Cash paid during the period for income taxes $ 139 $ 88
================= ==================
Preferred stock dividends accrued $ 4,540 $ 5,284
================= ==================
Accretion of preferred stock $ 231 $ 235
================= ==================
The accompanying notes 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)
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 ("Weekly Reader"), CompassLearning, Inc. ("CompassLearning") and
ChildU, Inc. ("ChildU"). WRC was incorporated on May 14, 1999. The term
"Company" refers to WRC Media and its subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
The Company is in the business of developing, publishing and marketing print and
electronic supplemental education materials. Certain of the Company's products
have been sold in the education marketplace for as long as 100 years. The
Company's customers are primarily concentrated within the United States.
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 Weekly Reader.
On May 9, 2001, WRC Media entered into an Agreement and Plan of Merger with
ChildU. 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).
Concurrent with the ChildU acquisition, on May 9, 2001, a subsidiary of the
Company acquired the assets of Lindy Enterprises, Inc. ("Lindy").
On May 18, 2001, WRC Media made a strategic investment in ThinkBox Inc., a
leading creator of Internet-delivered education programs for the school and home
markets. This investment is accounted for under the equity method of accounting.
For the three-months ended March 31, 2002, WRC Media recorded a $0.3 million
loss on this investment. The investment of ThinkBox was fully reserved as of
December 31, 2002.
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.
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, 2002. The operating results for the three-month period ended
March 31, 2002 and 2003 are not necessarily indicative of the results that may
be expected for a full year.
Recent Accounting Pronouncements
In November 2002, FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. FIN 45 requires a
guarantor to recognize, at the inception of a guarantee, a liability for the
fair value of the obligations undertaken in issuing the guarantee. The
disclosure provisions of FIN 45 are effective for financial statements of
periods ending after December 15, 2002. The Company has adopted the disclosure
provisions. Additionally, the recognition of a guarantor's obligation should be
applied on a perspective basis to guarantees issued after December 31, 2002. The
recognition provisions of FIN 45 did not have a material effect on its
Consolidated Financial Statements.
7
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variables Interest Entities ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The Company is required to adopt the provisions of
FIN 46 for variable interest entities created after January 31, 2003. The
adoption of FIN 46 did not have a material impact on the Company's results of
operations or financial position.
In August 2001, the FASB issued SFAS 143 which requires entities to record the
fair value of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the entity
capitalizes a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. The standard
is effective for the Company beginning January 1, 2003. The adoption of SFAS 143
did not have a material impact on the Company's results of operations or
financial position.
In August 2001, FASB issued FAS 144 which superseded FAS 121. FAS 144 also
superseded the accounting and reporting provisions of APB 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, relating to the disposal of a segment of a business. FAS 121 did
not address the accounting for a segment of a business accounted for as a
discontinued operation under APB 30 and, therefore, two accounting models
existed for long-lived assets to be disposed of. FAS 144 established one
accounting model for long-lived assets to be held and used, long-lived assets
(including those accounted for as a discontinued operation) to be disposed of by
sale and long-lived assets to be disposed of other than by sale. The Company
adopted FAS 144 on January 1, 2002, and it did not have a material effect on its
Consolidated Financial Statements.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No.142, "Goodwill and Other Intangible Assets". 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 Company completed the transitional impairment tests on its goodwill and
indefinite lived intangibles during the second quarter ended June 30, 2002. The
Company has five reporting units with goodwill. Goodwill was tested for
impairment at the reporting unit level. The Company's measurement of fair value
was based on an evaluation of future discounted cash flows. As a result, the
Company recorded a transitional goodwill and indefinite lived intangible asset
impairment charge of $72,022 at American Guidance Service, Inc., a subsidiary of
Weekly Reader Corporation. This charge is reported as a cumulative effect of
accounting change, as of January 1, 2002, in the Consolidated Statements of
Operations. The Company is required to perform impairment tests on an annual
basis, or between yearly tests under certain circumstances for goodwill and
indefinite lived intangibles. The Company performed the required impairment
tests during the fourth quarter of 2002. No further impairment of goodwill and
indefinite lived intangibles was noted. There can be no assurance that future
impairment tests will not result in a charge to earnings.
8
The Company also recorded non-cash deferred income tax expense of $8,700 on
January 1, 2002, related to the adoption of SFAS 142 and, $500 during the
three-months ended March 31, 2002 and 2003, respectively. The non-cash charge of
$8,700 on January 1, 2002 was recorded to increase the valuation allowance
related to the deferred tax asset associated with the Company's net operating
losses. Historically, the Company did not need a valuation allowance for the
portion of 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 non-cash deferred income tax expense of $500 for the
three-months ended March 31, 2002 and 2003. The Company expects that it will
record an additional $1,500 of deferred tax liabilities during the remaining
nine months of 2003.
The Company 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," (SFAS No. 133, as amended)
as of January 1, 2001. FASB Statement of Financial Standards No. 149 "Amendment
of Statement133 on Derivative Instruments and Hedging Activities" ("SFAS 149")
was issued in April 2003. FASB Statements No. 133 "Accounting for Derivative
Instruments and Hedging Activities" and No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" establish accounting and
reporting standards for derivative instruments including derivatives embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS 149 amends SFAS 133 for certain decisions made by the Board as
part of the Derivatives Implementation Group ("DIG") process. SFAS 149 contains
amendments relating to FASB Concepts Statement No. 7, "Using Cash Flow
Information and Present Value in Accounting Measurements", and FASB Statements
No. 65, "Accounting for Certain Mortgage Banking Activities, No. 91, "Accounting
for nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases", No. 95, "Statement of Cash Flows", and No.
126, "Exemption from Certain Required Disclosures about Financial Instruments
for Certain Nonpublic Entities". Pursuant to the terms of the Amended and
Restated Credit Agreement, the Company is required to enter into and maintain
interest rate protection agreements (interest rate swaps, caps, collars or
similar agreements) in a notional amount equal to at least 50% of the aggregate
principal amount of the senior secured term loans. On November 15, 2002, the
Company entered into a one year interest rate cap agreement with a notional of
$64.8 million, which caps the LIBOR based rate, as defined, on those loans at
2.5%. The interest rate protection agreement did not qualify for hedge
accounting treatment and as such the Company marks to market the contract at the
end of each period. The fair value of the interest rate cap at March 31, 2003 is
de-minimus.
Restructuring and other non-recurring expenses
In June 2002, FASB issued FAS No. 146, Accounting for Costs Associated with Exit
or Disposal Activities. FAS 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). FAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred rather than the date an entity commits to an exit plan. FAS 146 also
establishes that fair value is the objective for initial measurement of the
liability. The provisions of FAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002 with earlier adoption
encouraged. The Company adopted FAS 146 in December 2002.
During the three-months ended March 31, 2003 the Company reviewed the
restructuring reserve established in 2002 and adjusted the reserve for
additional severance in the amount of $0.3 million related to an executive
severed in 2002.
An additional charge of $0.2 million was recorded in the three-months ended
March 31, 2003 and is included in the consolidated statement of operation's
restructuring and other non-recurring charges line relating to failed
acquisition due diligence costs that did not result in or is not expected to
result in a completed transaction.
9
Of the remaining restructuring and other non-recurring expense reserve totaling
approximately $6.5 million, approximately $1.5 million was spent in the first
three-months of 2003 and the remaining $5.1 million is expected to be spent as
follows: remaining nine months of 2003 - $1.9 million and 2004 and beyond - $3.2
million.
Components of the company's restructuring plan initiated in the fourth quarter
of 2002 are shown in the following table.
Balance at Additional Balance at
(000's) December 31, 2002 Charges Amount Paid March 31, 2003
----------------- ------- ----------- --------------
Severance and other benefits $ 1,337 $ 288 $ (924) $ 701
Lease terminations 4,915 - (535) 4,380
--------- ---------- ---------- ---------
Total $ 6,252 $ 288 $ (1,459) $ 5,081
========= ========== ========== =========
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") requires
that an entity account for employee stock-based compensation under a fair value
based method. However, SFAS 123 also allows an entity to continue to measure
compensation cost for employee stock-based compensation arrangements using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company continues to account for employee stock-based compensation using the
intrinsic value based method and is required to make pro forma disclosures of
net income (loss) and related per share amounts as if the fair value based
method of accounting under SFAS 123 had been applied.
In December 2002, the Financial Accounting Standards Board ("FASB") issued FAS
No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, FAS
148 amends FAS 123 to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock based employee compensation and the
effect of the method used on reported results. The provisions of FAS 148 are
effective for financial statements for fiscal years and interim periods ending
after December 15, 2002. The disclosure provisions of FAS 148 have been adopted
by the Company. FAS 148 did not require the Company to change to the fair value
based method of accounting for stock-based compensation. The Company adopted the
disclosure requirements of FAS 148 in 2002.
At March 31, 2002 and 2003, the Company had one stock-based employee
compensation plan. The Company accounts for the plan under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
costs is reflected in net loss, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant.
The following table details the effect on net loss had compensation expense
for the Stock Option Plan been recorded based on the fair value method under
SFAS 123, as amended.
Three-months Ended March 31,
-----------------------------------
2002 2003
-------------- --------------
Net loss, as reported $ (86,752) $ (4,388)
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects (60) (60)
------------ -------------
Pro forma net loss $ (86,812) $ (4,448)
============ =============
10
Since options vest over several years and additional option grants are expected
to be made in future years, the pro forma impact on the results of operations
for the three-months ended March 31, 2002 and 2003, respectively, is not
necessarily representative of the pro forma effects on the results of operations
for future periods.
Debt
As of March 31, 2003, there were $5.0 million in outstanding advances under the
Company's $30.0 million revolving credit facility, which bear interest
approximating 4.7% at March 31, 2003. In addition, there is an annually
renewable stand-by letter of credit in the amount of $2.0 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 $2.0 million.
Inventories
Inventories are comprised of the following:
December 31, March 31,
2002 2003
----------- -----------
Finished goods $ 18,178 $ 17,353
Raw materials 181 146
Less - allowance for obsolescence (3,072) (3,083)
----------- -----------
$ 15,287 $ 14,416
=========== ===========
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 2002 and March 31, 2003 are as follows:
----------------------------------- ----------------------------------------
December 31, 2002 March 31, 2003
----------------------------------- ----------------------------------------
Accumulated Accumulated
Useful Lives Gross Amortization Net Gross Amortization Net
--------------- --------- ------------ --------- --------- ------------ --------
Customer Lists 7-9 yrs $ 62,911 $ (21,456) $ 41,455 $ 62,911 $ (22,984) $ 39,927
Copyrights 8 yrs 21,053 (8,139) 12,914 21,053 (8,917) 12,136
Product Titles 7 yrs 13,475 (10,256) 3,219 13,475 (10,669) 2,806
Trade name 5 yrs 3,520 (3,049) 471 3,520 (3,391) 129
Workforce in place 3 yrs 2,980 (2,980) - 2,980 (2,980) -
Non-compete agreements 2 yr 77,334 (77,334) - 77,334 (77,334) -
Databases 4-10 yrs 560 (551) 9 560 (560) -
Other 1-5 yrs 677 (396) 281 677 (396) 281
--------- ------------ --------- --------- ------------ --------
Total: $ 182,510 $ (124,161) $ 58,349 $ 182,510 $ (127,231) $ 55,279
========= ============ ========= ========= ============ ========
For trademarks not subject to amortization, which is included in other
intangible assests, the total carrying amount was $42,150 as of December 31,
2002 and March 31, 2003, respectively. The intangible amortization expense
recorded was $3,568 and $3,070 as of March 31, 2002 and 2003, respectively.
The estimated amortization expense for each of the five succeeding fiscal years
is as follows:
For the year ended December 31,
- ------------------------------------
2003 .................... $ 11,146
2004 .................... $ 8,865
2005 .................... $ 7,424
2006 .................... $ 5,673
2007 .................... $ 4,191
11
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.
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 Securities and Exchange Commission. Interest on the
Notes is payable semi-annually, on May 15 and November 15 of each year. The
Notes are jointly, severally, fully and unconditionally guaranteed by certain
subsidiaries of the Company, including CompassLearning, a 100% wholly owned
subsidiary and Weekly Reader , a non-wholly owned subsidiary of the Company
(collectively, the "Subsidiary Guarantors").
The following tables present condensed consolidating financial information for
the three-months ended March 31, 2002 and 2003 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 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.
12
Subsidiary Guarantors
-----------------------
Compass
WRC Media Weekly Reader Learning Non-Guarantor WRC Media Inc.
Inc. Corporation Inc. Subsidiaries Elimination Consolidated
---------- ------------- --------- ------------- ----------- -------------
(In thousands)
Balance Sheet as of March 31, 2003
Current assets $ 9,422 $ 111,665 $ 19,663 $ 1,601 $ (86,457) $ 55,894
Property and equipment, net - 5,075 499 217 - 5,791
Goodwill and other intangible assets, net 168,091 52,695 26,579 13,413 - 260,778
Other assets 105,138 45,395 6,329 1,618 (118,719) 39,761
--------- --------- --------- --------- --------- ---------
Total assets $ 282,651 $ 214,830 $ 53,070 $ 16,849 $(205,176) $ 362,224
========= ========= ========= ========= ========= =========
Current liabilities: $ 91,200 $ 47,601 $ 26,333 $ 10,645 $ (86,448) $ 89,331
Long-term debt, less current portion 147,380 103,125 18,600 - - 269,105
Other liabilities 20,791 2,160 3,404 - - 26,355
Common stock subject to redemption 940 - - - - 940
Redeemable preferred stock, plus accrued dividends 114,657 75,000 - - (75,000) 114,657
Stockholders equity (deficit): (92,317) (141,595) 2,115 6,204 87,429 (138,164)
Interdivisional equity - 128,539 2,618 (131,157) -
--------- --------- --------- --------- --------- ---------
Total liabilities and stockholders equity (deficit) $ 282,651 $ 214,830 $ 53,070 $ 16,849 $(205,176) $ 362,224
========= ========= ========= ========= ========= =========
Subsidiary Guarantors
-----------------------
Compass
WRC Media Weekly Reader Learning Non-Guarantor WRC Media Inc.
Inc. Corporation Inc. Subsidiaries Elimination Consolidated
---------- ------------- --------- ------------- ----------- -------------
(In thousands)
Statement of operations for the three months
ended March 31, 2003
Revenue $ - $ 34,758 $ 11,246 $ 973 $ - $ 46,977
Operating expenses 1,524 28,071 12,925 944 - 43,464
Interest expense, net 5,212 6,822 - - (4,952) 7,082
Other (income) expense 237 (6) - - - 231
Provision for income taxes 398 175 15 - - 588
--------- --------- --------- --------- --------- ---------
Net income (loss) $ (7,371) $ (304) $ (1,694) $ 29 $ 4,952 $ (4,388)
========= ========= ========= ========= ========= =========
Cash flow for the three months
ended March 31, 2003
Cash flow provided by (used in) operations $ (537) $ (12,742) $ 709 $ 23 $ 4,846 $ (7,701)
Cash flow used in investing activities - (105) (515) (386) - (1,006)
Cash flow provided by (used in) financing activities 318 7,496 (194) 367 (4,846) 3,141
Cash at beginning of period 1,154 7,819 4 118 - 9,095
--------- --------- --------- --------- --------- ---------
Cash at end of period $ 935 $ 2,468 $ 4 $ 122 $ - $ 3,529
========= ========= ========= ========= ========= =========
Statement of operations for the three months
ended March 31, 2002
Revenue $ - $ 34,008 $ 12,528 $ 251 $ - $ 46,787
Operating expenses 1,058 28,088 14,638 585 - 44,369
Interest expense, net 5,168 7,091 11 - (4,939) 7,331
Other (income) expense 493 (11) (4) - - 478
Provision for income taxes 7,708 1,614 17 - - 9,339
Cumulative effect of accounting change - 72,022 - - - 72,022
--------- --------- --------- --------- --------- ---------
Net income (loss) $ (14,427) $ (74,796) $ (2,134) $ (334) $ 4,939 $ (86,752)
========= ========= ========= ========= ========= =========
Cash flow for the three months
ended March 31, 2002
Cash flow provided by (used in) operations $ (2,299) $ (7,645) $ (6,196) $ (1,224) $ 11,980 $ (5,384)
Cash flow used in investing activities - (257) (995) (563) - (1,815)
Cash flow provided by (used in) financing activities 1,829 6,545 7,031 1,816 (11,980) 5,241
Cash at beginning of period 2,643 5,691 394 191 - 8,919
--------- --------- --------- --------- --------- ---------
Cash at end of period $ 2,173 $ 4,334 $ 234 $ 220 $ - $ 6,961
========= ========= ========= ========= ========= =========
13
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
December 31, March 31,
2002 2003
-------------- -------------
(unaudited)
ASSETS
Current Assets:
Cash $ 7,819 $ 2,468
Accounts receivable, net 22,881 20,378
Inventories, net 14,210 13,290
Due from related party 9,438 10,976
Prepaid expenses 2,957 3,911
Other current assets 1,797 1,630
------------ ------------
Total current assets 59,102 52,653
Property and equipment, net 5,409 5,075
Goodwill 35,018 35,018
Deferred financing costs, net 692 647
Other intangible assets, net 18,833 17,677
Other assets and investments 25,033 28,572
------------ ------------
Total Assets $ 144,087 $ 139,642
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 18,883 $ 13,723
Deferred revenue 20,369 13,856
Accrued expenses and other current liabilities 18,706 16,937
Current portion of long-term debt 7,721 8,108
------------ ------------
Total current liabilities 65,679 52,624
Deferred tax liability 2,000 2,160
Long-term debt 266,219 269,105
------------ ------------
Total liabilities 333,898 323,889
------------ ------------
Commitments and contingencies
Redeemable preferred stock, plus accrued dividends (Liquidation 118,846 123,303
preference of $75,000 plus accrued dividends)
Stockholders' deficit:
Common stock, ($.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 (63,464) (57,596)
Accumulated comprehensive income (3,357) (3,357)
Accumulated deficit (250,997) (255,758)
------------ ------------
Total stockholders' deficit (308,657) (307,550)
------------ ------------
Total liabilities and stockholders' deficit $ 144,087 $ 139,642
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
14
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
(dollars in thousands)
2002 2003
------------ ------------
Cash flows from operating activities:
Net loss $ (74,796) $ (304)
Adjustments to reconcile net loss to net cash used in operating activities:
Cumulative effect of change in accounting principle 72,022 -
Deferred income tax provision 1,520 160
Depreciation and amortization 2,668 2,693
Amortization of deferred financing costs 45 45
Gain (loss) on disposition of property and equipment 3 (1)
Interest expense-accretion of debt discount 94 107
Changes in operating assets and liabilities:
Decrease in accounts receivable 4,683 2,503
Decrease in inventories 621 920
Decrease (increase) in prepaid expenses and other assets 522 (5,425)
Decrease in accounts payable (2,669) (5,160)
Decrease in deferred revenue (5,079) (6,513)
Decrease in accrued expenses and other liabilities (7,279) (1,767)
------------ ------------
Net cash used in operating activities (7,645) (12,742)
------------ ------------
Cash flows used in investing activities:
Purchase of property and equipment (257) (109)
Proceeds from disposition of property and equipment - 4
------------ ------------
Net cash used in investing activities (257) (105)
------------ ------------
Cash flows from financing activities:
Net proceeds from revolving line of credit 7,000 5,000
Retirement of senior bank debt (1,446) (1,834)
Decrease (increase) in due from parent, net 4,014 (1,538)
(Increase) decrease in due from related party (3,023) 5,868
------------ ------------
Net cash provided by financing activities 6,545 7,496
------------ ------------
Decrease in cash and cash equivalents (1,357) (5,351)
Cash, beginning of period 5,691 7,819
------------ ------------
Cash, end of period $ 4,334 $ 2,468
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,838 $ 2,053
============ ============
Cash paid during the period for income taxes $ 94 $ 15
============ ============
Preferred stock dividends accrued $ 4,540 $ 4,457
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
15
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 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 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.
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, 2002. The operating results for
the three-month periods ended March 31, 2002 and 2003 are not necessarily
indicative of the results that may be expected for a full year.
Recent Accounting Pronouncements
In November 2002, FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. FIN 45 requires a
guarantor to recognize, at the inception of a guarantee, a liability for the
fair value of the obligations undertaken in issuing the guarantee. The
disclosure provisions of FIN 45 are effective for financial statements of
periods ending after December 15, 2002. The Company has adopted the disclosure
provisions. Additionally, the recognition of a guarantor's obligation should be
applied on a perspective basis to guarantees issued after December 31, 2002. The
Company does not believe that the recognition provisions of FIN 45 will not have
a material effect on its Consolidated Financial Statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variables Interest Entities ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The Company is required to adopt the provisions of
FIN 46 for variable interest entities created after January 31, 2003. The
adoption of FIN 46 did not have a material impact on the Company's results of
operations or financial position.
16
In August 2001, the FASB issued SFAS 143 which requires entities to record the
fair value of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the entity
capitalizes a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. The standard
is effective for the Company beginning January 1, 2003. The adoption of SFAS 143
did not have a material impact on the Company's results of operations or
financial position.
In August 2001, FASB issued FAS 144 which superseded FAS 121. FAS 144 also
superseded the accounting and reporting provisions of APB 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, relating to the disposal of a segment of a business. FAS 121 did
not address the accounting for a segment of a business accounted for as a
discontinued operation under APB 30 and, therefore, two accounting models
existed for long-lived assets to be disposed of. FAS 144 established one
accounting model for long-lived assets to be held and used, long-lived assets
(including those accounted for as a discontinued operation) to be disposed of by
sale and long-lived assets to be disposed of other than by sale. The Company
adopted FAS 144 on January 1, 2002, and it did not have a material effect on its
Consolidated Financial Statements.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No.142, "Goodwill and Other Intangible Assets". 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.
WRC completed the transitional impairment tests on its goodwill and
indefinite-lived intangibles during the second quarter ended June 30, 2002. 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. WRC performed the required
impairment tests during the fourth quarter of 2002. No further impairment of
goodwill and indefinite lived intangibles was noted. There can be no assurance
that future impairment tests will not result in a charge to earnings.
WRC also recorded non-cash deferred income tax expense of approximately $1,360
on January 1, 2002 related to the adoption of SFAS 142. The non-cash charge of
$1,360 on January 1, 2002 was recorded to increase the valuation allowance
related to the deferred tax asset associated with WRC's net operating losses.
Historically, WRC did not need a valuation allowance for the portion of 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 recorded non-cash
deferred income tax expense of $160 for the three-months ended March 31, 2002
and 2003. WRC expects that it will record an additional $480 of deferred tax
liabilities during the remaining nine months of 2003.
17
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," (SFAS No. 133, as amended)
as of January 1, 2001. FASB Statement of Financial Standards No. 149 "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149")
was issued in April 2003. FASB Statements No. 133 "Accounting for Derivative
Instruments and Hedging Activities" and No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" establish accounting and
reporting standards for derivative instruments including derivatives embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS 149 amends SFAS 133 for certain decisions made by the Board as
part of the Derivatives Implementation Group ("DIG") process. SFAS 149 contains
amendments relating to FASB Concepts Statement No. 7, "Using Cash Flow
Information and Present Value in Accounting Measurements", and FASB Statements
No. 65, "Accounting for Certain Mortgage Banking Activities, No. 91, "Accounting
for nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases", No. 95, "Statement of Cash Flows", and No.
126, "Exemption from Certain Required Disclosures about Financial Instruments
for Certain Nonpublic Entities". Pursuant to the terms of the Amended and
Restated Credit Agreement, the Company is required to enter into and maintain
interest rate protection agreements (interest rate swaps, caps, collars or
similar agreements) in a notional amount equal to at least 50% of the aggregate
principal amount of the senior secured term loans. On November 15, 2002, the
Company entered into a one year interest rate cap agreement with a notional of
$64.8 million, which caps the LIBOR based rate, as defined, on those loans at
2.5% The interest rate protection agreement did not qualify for hedge accounting
treatment and as such the Company marks to market the contract at the end of
each period. The fair value of the interest rate cap at March 31, 2003 is
de-minimus.
Restructuring and other non-recurring expenses
In June 2002, FASB issued FAS No. 146, Accounting for Costs Associated with Exit
or Disposal Activities. FAS 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). FAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred rather than the date an entity commits to an exit plan. FAS 146 also
establishes that fair value is the objective for initial measurement of the
liability. The provisions of FAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002 with earlier adoption
encouraged. The Company adopted FAS 146 in December 2002.
Of the remaining restructuring and other non-recurring expense reserve totaling
approximately $2.8 million, approximately $0.5 million was spent in the first
three-months of 2003 and the remaining $2.3 million is expected to be spent as
follows: 2003 - remaining nine months of 2003 $0.6 million and 2004 and beyond -
$1.7 million.
Components of the company's restructuring plan in the fourth quarter of 2002 are
shown in the following table:
(000's) Balance at Amount Balance at
December 31, 2002 Charges Paid March 31, 2003
----------------- -------------- --------------- ----------------
Severance and other benefits $ 649 $ (288) $ 361
Lease terminations 2,121 (167) 1,954
---------------- -------------- --------------- ----------------
Total $ 2,770 $ - $ (455) $ 2,315
================ ============== =============== ================
Debt
As of March 31, 2003, there were $5.0 million in outstanding advances under
WRC's $30.0 million revolving credit facility, which bear interest approximating
4.7% at March 31, 2002. In addition, there is an annually renewable stand-by
letter of credit in the amount of $2.0 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 $2.0
million.
18
Inventories
Inventories are comprised of the following:
December 31, March 31,
2002 2003
------------- ----------
Finished goods $ 17,186 $ 16,325
Raw materials 96 48
Less - allowance for obsolescence (3,072) (3,083)
------------- ----------
$ 14,210 $ 13,290
============= ==========
Intangibles
The gross carrying amount and accumulated amortization of the WRC's intangible
assets other than goodwill and indefinite-lived intangible assets as of
December 31, 2002 and March 31, 200 are as follows:
--------------------------------- --------------------------------
December 31, 2002 March 31, 2003
--------------------------------- --------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
-------- -------------- ------- -------- ------------ -------
Customer Lists 7-9 yrs $ 36,748 $ (34,001) $ 2,747 $ 36,748 $ (34,200) $ 2,548
Copyrights 8 yrs 17,520 (14,666) 2,854 17,520 (15,201) 2,319
Product Titles 7 yrs 22,400 (19,181) 3,219 22,400 (19,594) 2,806
Non-compete agreements 2 yrs 17,098 (17,098) - 17,098 (17,098) -
Databases 4-10 yrs 5,812 (5,803) 9 5,812 (5,812) -
Other 2-5 yrs 264 (216) 48 264 (216) 48
-------- --------- ------- -------- --------- --------
Total: $ 99,842 $ (90,965) $ 8,877 $ 99,842 $ (92,121) $ 7,721
======== ========= ======= ======== ========= ========
For trademarks not subject to amortization, which is included in other
intangible assets, the total carrying amount is $9,956 as of December 31, 2002
and March 31, 2003. The intangible amortization expense recorded was $1,406 and
$1,156 as of March 31, 2002 and 2003, respectively.
The estimated amortization expense for each of the five succeeding fiscal years
is as follows:
For the year ended December 31,
- ----------------------------------------
2003 ...................... $ 3,897
2004 ...................... $ 2,087
2005 ...................... $ 646
2006 ...................... $ 104
2007 ...................... $ 13
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.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in understanding the financial
condition as of March 31, 2003 of WRC Media Inc. ("WRC Media") and its
subsidiaries and their results of operations for the three-months ended
March 31, 2002 and 2003. 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, CompassLearning, Inc. ("CompassLearning"),
Weekly Reader Corporation and its subsidiaries and ChildU, Inc. This discussion
and analysis contains forward-looking statements. Although we believe that our
plans, intentions and expectations reflected in or suggested by these
forward-looking statements are reasonable, we cannot assure you that these
plans, intentions or expectations will be achieved. These forward-looking
statements are subject to risks, uncertainties and assumptions about us.
Results of Operations for the Three-Months Ended March 31, 2003-- WRC Media Inc.
and Subsidiaries
The results of operations of WRC Media and its subsidiaries encompass the
operations of Weekly Reader and its subsidiaries, including AGS and World
Almanac, CompassLearning, and ChildU, Inc. ("ChildU"). The results of operations
of WRC Media and its subsidiaries should be read together with the separate
discussion of the results of operations of Weekly Reader.
In analyzing WRC Media's results for the three-months ended March 31, 2002 and
2003, 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.
20
Three Months Ended March 31,
2002 2003
-------------------------- --------------------------
Amount % of Net Sales Amount % of Net Sales
---------- -------------- --------- ---------------
(Dollars in millions)
Sales, net $ 46.8 100.0% $ 47.0 100.0%
Cost of goods sold 13.4 28.6% 12.7 27.0%
---------- -------------- --------- ---------------
Gross profit 33.4 71.4% 34.3 73.0%
Costs and expenses:
Sales and marketing 13.3 28.4% 11.6 24.7%
Research and development 0.4 0.9% 0.7 1.5%
Distribution, circulation and fulfillment 3.2 6.8% 3.5 7.4%
Editorial 2.8 6.0% 2.6 5.5%
General and administrative 5.7 12.2% 6.7 14.3%
Restructuring costs and other non-recurring expenses - 0.0% 0.5 1.1%
Depreciation 0.8 1.7% 0.6 1.3%
Amortization of intangible assets 4.8 10.3% 4.6 9.8%
---------- -------------- --------- ---------------
31.0 66.3% 30.8 65.6%
---------- -------------- --------- ---------------
Income from operations 2.4 5.1% 3.5 7.4%
---------- -------------- --------- ---------------
Interest expense, including amortization
of deferred financing costs (7.3) (15.6%) (7.1) (15.1%)
Loss on investments (0.3) (0.6%) - 0.0%
Other expense, net (0.2) (0.4%) (0.2) (0.4%)
---------- -------------- --------- ---------------
Loss before income tax provision (5.4) (11.5%) (3.8) (8.1%)
Income tax provision 9.3 19.9% 0.6 1.3%
---------- -------------- --------- ---------------
Loss before cumulative effect of change
in accounting principle (14.7) (31.4%) (4.4) (9.4%)
Cumulative effect of change in accounting principle (72.0) (153.8%) - 0.0%
---------- -------------- --------- ---------------
Net loss $ (86.7) (185.2%) $ (4.4) (9.4%)
========== ============== ========= ===============
EBITDA (a) $ 7.5 16.0% $ 9.3 19.8%
========== ============== ========= ===============
Adjusted EBITDA(b) $ 8.1 17.3% $ 9.1 19.4%
========== ============== ========= ===============
(a) EBITDA is defined as income (loss) before interest expense, taxes,
depreciation and amortization. EBITDA data is a non-GAAP measure and is
included in our discussion because we believe that this information may be
considered by investors as an additional basis on which to evaluate WRC
Media's 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 is not intended to represent cash flow
from operating activities and should not be considered an alternative to net
income or loss (as determined in conformity with GAAP) as an indicator of
the Company's operating performance or to cash flow as a measure of
liquidity. It is presented herein as the Company evaluates and measures each
business unit's performance based on their EBITDA results. EBITDA may not be
available for the Company's discretionary use as there are requirements to
repay debt, among other payments.
(b) Adjusted EBITDA is defined as EBITDA excluding WRC Media's unrestricted
subsidiaries. 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 financial
performance will not be included in any covenant calculations or in any
measures of adjusted EBITDA. According, adjusted EBITDA is defined as WRC
Media consolidated EBITDA excluding the $0.1 million EBITDA loss in 2003 and
the $0.6 EBITDA loss in 2002 contributed by its unrestricted subsidiaries -
ChildU and ThinkBox.
Three-Months Ended March 31, 2003 Compared to Three-Months Ended March 31, 2002
Sales, net. For the three-months ended March 31, 2003, net sales increased $0.2
million, or 0.4%, to $47.0 million from $46.8 million for the same period in
2002. This increase was primarily due to an increase in sales at Weekly Reader
of $0.8 million, or 2.4%, to $34.8 million from $34.0 million for the same
period in 2002 combined with an increase in sales at ChildU of $0.7 million, or
233.3%, to $1.0 million from $0.3 million for the same period in 2002. These
sales increases were primarily offset by a decrease in sales at CompassLearning.
21
Weekly Reader, not including AGS and World Almanac, sales increased primarily
$1.3 million, or 14.1%, to $10.5 million from $9.2 million for the same period
in 2002. This was attributable to higher custom publishing shipments by Weekly
Reader's subsidiary Lifetime Learning Systems.
AGS sales decreased $0.4 million, or 3.3%, to $11.7 million for the three-months
ended March 31, 2003 from $12.1 million for the same period in 2002, primarily
due to the growth in core curriculum and assessment products of $0.2 million,
primarily offset by a $0.6 million decrease in supported/backlist curriculum
products.
World Almanac sales decreased by $0.1 million, or 0.8%, to $12.6 million for the
three-months ended March 31, 2003 from $12.7 million for the same period in
2002. Excluding sales of $1.3 million and $1.5 million for the three months
ended March 31, 2003 and 2002, respectively, from World Almanac's non-core
business, Funk & Wagnalls Yearbooks, sales remained relatively flat at $11.2
million.
CompassLearning sales decreased $1.3 million, or 10.4%, to $11.2 million for the
three months ended March 31, 2003 from $12.5 million for the same period in
2002. This decrease was primarily due to (1) a decrease in software revenue of
$0.4 million, or 7.0%, to $5.3 million from $5.7 million in 2002 primarily as a
result of delayed Title 1 funding and post-September 11 state budget deficits,
which contributed to additional spending delays, (2) a decrease in service
revenue from technical support of $0.3 million, or 8.6%, to $3.2 million from
$3.5 million in 2002, and (3) a decrease in professional development revenue of
$0.6 million, or 19.4%, to $2.5 million from $3.1 million in 2002.
CompassLearning did recognize $0.2 million in sales in both three-months ended
March 31, 2003 and 2002 from hardware sales which is considered a non-core
business.
ChildU, WRC's unrestricted subsidiary, sales increased $0.7 million or 233.3% to
$1.0 million for the three-months ended March 31, 2003 from $0.3 million for the
same period in 2002 driven by sales of its web-enabled curriculum products.
The K-12 funding environment continues to be impacted by growing state budget
deficits, which have been causing reductions in state and local educational
spending, including spending on supplemental educational materials. While we
believe WRC will benefit from numerous provisions in the federal No Child Left
Behind Act (the "NCLB Act"), most of this federal educational funding will not
be available until later in 2003. Although we expect that federal educational
funding will increase in 2003 as a result of the NCLB Act, we do not believe
this funding improvement will be sufficient to offset cuts in state and local
education funding. In addition, as a result of budget deficits it is expected
that buying decisions may be put off by many states and local school districts
until fiscal year 2004, which typically begins July 1, 2003. We expect these
cuts and delayed purchases will negatively affect our top-line revenue in the
second quarter and may continue to affect our top-line revenue beyond the second
quarter. The uncertainty in the current operation environment makes it difficult
to forecast future results.
22
Gross profit. For the three-months ended March 31, 2003, gross profit increased
by $0.9 million, or 2.7%, to $34.3 million from $33.4 million for the same
period in 2002. This increase was primarily attributable to $0.8 higher margin
at Weekly Reader and $0.7 at ChildU, offset by a lower software margin at
CompassLearning of $0.6 million. WRC Media's gross profit as a percentage of
sales increased to 73.0% for the three-months ended March 31, 2003 from 71.4%
for the same period in 2002.
Costs and expenses. For the three-months ended March 31, 2003, costs and
expenses decreased by $0.2 million, or 0.6%, to $30.8 million from $31.0 million
for the same period in 2002. This was primarily attributable to $1.7 million or
12.8% decrease in sales and marketing expenses, offset by an increase of $1.0
million in general and administrative expenses and an increase of $0.5 million
in restructuring and non-recurring expenses incurred by the Company. The
increase in general and administrative expenses was primarily driven by an
increase in bad debt reserves at CompassLearning. During the quarter ended March
31, 2003 CompassLearning recorded an additional bad debt reserve of $0.9 million
in order to increase its allowance for doubtful accounts. This reserve was
recorded due to the uncertainty of collection of the receivable which resulted
from a change in financial condition of the purchaser.
Income from operations. For the three-months ended March 31, 2003, income from
operations increased $1.1 million or $45.8%, to $3.5 million from $2.4 million
for the same period in 2002, due to the factors described above. This increase
was primarily due to $0.9 million higher gross profit driven by higher sales and
$0.2 million lower operating costs and expenses as described above.
Interest expense, including amortization of deferred financing costs. For the
three-months ended March 31, 2003, interest expense decreased by $0.2 million,
or 2.7%, to $7.1 million from $7.3 million for the same period in 2002 and
interest expense as a percentage of sales decreased to 15.1% from 15.6% for the
same period in 2002.
Loss on investments. For the three-months ended March 31, 2003, loss on
investments decreased $0.3 million to $0.0 from $0.3 for the same period in
2002. The loss in the prior period related to WRC Media's minority investment in
ThinkBox, Inc.
Income tax provision. For the three-months ended March 31, 2003, the provision
for income taxes decreased $8.7 million or 93.5% to an income tax provision of
$0.6 million from $9.3 million for the same period in 2002. The Company recorded
non-cash deferred income tax expense of $8.7 million on January 1, 2002 and $0.5
during the three-months ended March 31, 2002 and 2003, which would not have been
required prior to the adoption of SFAS 142. The non-cash charge of $8.7 million
on January 1, 2002 was recorded to increase the valuation allowance related to
the Company's net operating losses. As a result of the adoption of SFAS 142,
book amortization will not occur during the carry-forward period of the
operating losses. In addition, since book amortization of tax-deductible
goodwill and trademarks ceased on January 1, 2002, the Company will have
deferred tax liabilities that will arise each year because the taxable temporary
differences related to the amortization of these assets will not reverse prior
to the expiration period of the Company's deductible temporary differences
unless the related assets are sold or an impairment of the assets is recorded.
23
Net loss. For the three-months ended March 31, 2003, net loss decreased by $82.3
million, or 94.9%, to $4.4 million from $86.7 million for the same period in
2002 primarily due to the non-cash charges recorded in the prior period
resulting in the Company's adoption of SFAS No. 142 as described above.
EBITDA / ADJUSTED EBITDA. For the three-months ended March 31, 2003, EBITDA
increased $1.0 million or 12.3% to $9.1 million from $8.1 million for the same
period in 2002. The increase was primarily attributable to the higher sales and
the reduced operating expenses discussed above. EBITDA is defined as income
(loss) before interest expense, income taxes, depreciation and amortization.
Adjusted 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 believe 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. Adjusted EBITDA is not intended to represent cash flow from
operating activities and should not be considered an alternative to net income
or loss (as determined in conformity with GAAP) as an indicator of the Company's
operating performance or to cash flow as a measure of liquidity. It is presented
herein as the Company evaluates and measures each business unit's performance
based on their EBITDA results. EBITDA may not be available for the Company's
discretionary use as there are requirements to repay debt, among other payments.
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. See
EBITDA / Adjusted EBITDA reconciliation to net loss below ($ in 000's):
24
EBITDA / Adjusted EBITDA reconciliation to Net Loss 2002 2003
------------- ------------
Net Loss $ (86,752) $ (4,388)
Depreciation and amortization of intangibles** 5,609 5,508
Income taxes 9,339 588
Interest expense 7,331 7,082
Non-cash cumulative effect of accounting change 72,022 -
Restructuring charges - 288
Non-recurring charges - 192
------------- ------------
EBITDA 7,549 9,270
Add: ChildU EBITDA (income)loss 329 (138)
Add: Thinkbox EBITDA loss 253 -
------------- ------------
Adjusted EBITDA $ 8,131 $ 9,132
============= ============
** 2003 Amount includes amortization of capitalized software costs of $259
which are included in operating costs and expenses above.
25
Results of Operations for the Three-Months Ended March 31, 2003 -- Weekly Reader
Corporation and Subsidiaries
The following table sets forth, for the periods indicated, combined statements
of operations data for Weekly Reader and its subsidiaries expressed in millions
of dollars and as a percentage of net sales.
Weekly Reader - 3 Months
Three Months Ended March 31,
2002 2003
------------------------- --------------------------
Amount % of Net Sales Amount % of Net Sales
--------- -------------- ---------- --------------
(Dollars in millions)
Sales, net $ 34.0 100.0% $ 34.8 100.0%
Cost of goods sold 8.4 24.7% 8.4 24.1%
--------- -------------- ---------- --------------
Gross profit 25.6 75.3% 26.4 75.9%
Costs and expenses:
Sales and marketing 7.2 21.2% 6.3 18.1%
Distribution, circulation and fulfillment 3.2 9.4% 3.5 10.1%
Editorial 2.8 8.2% 2.6 7.5%
General and administrative 3.8 11.2% 4.6 13.2%
Depreciation 0.5 1.5% 0.4 1.1%
Amortization of intangible assets 2.2 6.4% 2.3 6.6%
--------- -------------- ---------- --------------
19.7 57.9% 19.7 56.6%
--------- -------------- ---------- --------------
Income from operations 5.9 17.4% 6.7 19.3%
Interest expense (7.1) (20.9%) (6.8) (19.6%)
--------- -------------- ---------- --------------
Loss before income tax provision (1.2) (3.5%) (0.1) (0.3%)
Income tax provision 1.6 4.7% 0.2 0.6%
--------- -------------- ---------- --------------
Loss before cumulative effect of change
in accounting principle (2.8) (8.2%) (0.3) (0.9%)
Cumulative effect of change in accounting principle (72.0) (211.8%) - 0.0%
--------- -------------- ---------- --------------
Net loss $ (74.8) (220.0%) $ (0.3) (0.9%)
========= ============== ========== ==============
EBITDA(a) $ 8.6 25.3% $ 9.4 27.0%
========= ============== ========== ==============
(a) EBITDA is defined as income (loss) before interest expense, income taxes,
depreciation and amortization. EBITDA data is included because we believe
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 is not intended to represent cash flow from operating activities and
should not be considered an alternative to net income or loss (as determined
in conformity with GAAP) as an indicator of the Company's operating
performance or to cash flow as a measure of liquidity. It is presented
herein as the Company evaluates and measures each business units performance
based on their EBITDA results. EBITDA may not be available for the Company's
discretionary use as there are requirements to repay debt, among other
payments.
26
Three-Months Ended March 31, 2003 Compared to Three-Months Ended March 31, 2002
Sales, net. For the three-months ended March 31, 2003, sales increased $0.8
million or 2.4% to $34.8 million from $34.0 million for the same period in 2002.
At Weekly Reader, not including AGS and World Almanac, net sales increased $1.3
million, or 14.1%, to $10.5 million from $9.2 million for the same period in
2002. This was primarily attributable to higher custom publishing shipments by
Weekly Reader's subsidiary Lifetime Learning Systems.
At AGS, sales decreased $0.4 million, or 3.3%, to $11.7 million for the
three-months ended March 31, 2003 from $12.1 million for the same period in
2002, primarily due a $0.6 million decrease in supported/backlist curriculum
products partially offset by growth in core curriculum and assessment products
of $0.2 million.
At World Almanac, sales decreased by $0.1 million, or 0.8% to $12.6 million for
the three-months ended March 31, 2003 from $12.7 million for the same period in
2002. Excluding sales of $1.3 million and $1.5 million for the three months
ended March 31, 2003 and 2002, respectively, from World Almanac's non-core
business, Funk & Wagnalls Yearbooks, sales remained relatively flat at $11.2
million.
Gross profit. For the three-months ended March 31, 2003, gross profit increased
$0.8 million, or 3.1% to $26.4 million from $25.6 million for the same period in
2002. Gross profit as a percentage of sales increased to 75.9% for the
three-months ended March 31, 2003 from 75.3% for the same period in 2002. This
increase was primarily attributable to the higher sales volume mentioned above.
Costs and expenses. For the three-months ended March 31, 2003, costs and
expenses remained unchanged at $19.7 million with the same period in 2002, and
costs and expenses as a percentage of sales decreased to 56.6% for the
three-months ended March 31, 2003 from 57.9% for the same period in 2002. The
$0.9 million decrease in sales and marketing expenses was offset by a $0.8
million increase in general and administrative expenses and a $0.1 decrease in
other expenses.
Income from operations. For the three-months ended March 31, 2003, income from
operations increased by $0.8 million, or 13.6%, to $6.7 million from $5.9
million for the same period in 2002 and income from operations as a percentage
of sales improved to 19.3% from 17.4% for the same period in 2002. This increase
was primarily due to the factors described above.
Interest expense. For the three-months ended March 31, 2003, interest expense
decreased by $0.3 million, or 4.2%, to $6.8 million from $7.1 million for the
same period in 2002 and interest expense as a percentage of sales decreased to
19.6% from 20.9% for the same period in 2002.
27
Income tax provision. For the three-months ended March 31, 2003, provision for
income taxes decreased by $1.4 million, or 87.5%, to $0.2 million from $1.6
million for the same period in 2002. Weekly Reader also recorded non-cash
deferred income tax expense of approximately $1.4 million on January 1, 2002
related to the adoption of SFAS 142. The non-cash charge of $1.4 million on
January 1, 2002 was recorded to increase the valuation allowance related to the
deferred tax asset associated with Weekly Reader's net operating losses.
Historically, Weekly Reader did not need a valuation allowance for the portion
of 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 Weekly Reader's net operating loss
carryforwards. While book amortization of tax-deductible goodwill and trademarks
ceased on January 1, 2002, Weekly Reader will continue to amortize these assets
for tax purposes. As a result, Weekly Reader will have deferred tax liabilities
that will arise each quarter because the taxable temporary differences related
to the amortization of these assets will not reverse prior to the expiration
period of Weekly Reader's deductible temporary differences unless the related
assets are sold or an impairment of the assets is recorded. Accordingly, Weekly
Reader recorded non-cash deferred income tax expense of $0.2 million for the
three-months ended March 31, 2002 and 2003.
Net loss. For the three-months ended March 31, 2003, net loss decreased by $74.5
million, or 99.6%, to $0.3 million from $74.8 million for the same period in
2002 primarily due to the non-cash charges recorded in the prior period
resulting in the Company's adoption of SFAS No. 142 as described above. Net loss
as a percentage of net sales improved to 0.9% for the three-months ended
March 31, 2003 from 220.0% for the same period in 2002.
EBITDA. For the three-months ended March 31, 2003, EBITDA increased $0.8
million, or 9.3%, to $9.4 million from $8.6 million for the same period in 2002.
This increase is primarily attributable to the factors described above. EBITDA
is defined as income (loss) before interest expense, income taxes, depreciation
and amortization. EBITDA data is included because we believe that this
information may be considered by investors as an additional basis on which to
evaluate Weekly Reader's ability to pay interest, repay debt and make capital
expenditures. Because all companies do not calculate EBITDA identically, the
presentation of EBITDA in this report is not necessarily comparable to similarly
titled measures of other companies. EBITDA is not intended to represent cash
flow from operating activities and should not be considered an alternative to
net income or loss (as determined in conformity with GAAP) as an indicator of
the Company's operating performance or to cash flow as a measure of liquidity.
It is presented herein as the Company evaluates and measures each business
unit's performance based on their EBITDA results. EBITDA may not be available
for the Company's discretionary use as there are requirements to repay debt,
among other payments. See EBITDA reconciliation to our net loss below ($ in
000's):
2002 2003
------------- ------------
EBITDA reconciliation
Net Loss $ (74,796) $ (304)
Depreciation and amortization of intangibles 2,668 2,693
Income taxes 1,614 175
Interest expense 7,091 6,822
Non-cash cumulative effect of accounting change 72,022 -
------------- ------------
EBITDA $ 8,599 $ 9,386
============= ============
28
Liquidity, Working Capital and Capital Resources
WRC Media's sources of cash are its (i) operating subsidiaries, Weekly Reader
Corporation and CompassLearning, Inc. and (ii) a $30.0 million revolving credit
facility. As of March 31, 2003, $5.0 million of the revolving credit facility
has been drawn which bears interest approximating 4.7%. 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. We
expect these sources of cash to be adequate for the Company's needs for the
foreseeable future.
As of March 31, 2003, WRC Media and its subsidiaries had negative working
capital of $33.4 million. For the January through June time period, WRC Media
and its subsidiaries usually experience negative cash flow due to the
seasonality of its business. As a result of this business cycle, borrowings
usually increase during the period January through June, and borrowings
generally will be at its lowest point in fourth quarter. WRC Media's cash and
cash equivalents were approximately $3.5 million at March 31, 2003. Included in
cash is approximately $0.8 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 $0.8 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' operations used approximately $7.7 million in
cash for the three-months ended March 31, 2003. WRC Media and its subsidiaries
principal uses of cash are for debt service, capital expenditures, working
capital and potential acquisitions.
WRC Media and its subsidiaries investing activities for the three-months ended
March 31, 2003 included investments in software development of approximately
$0.9 million and capital expenditures of approximately $0.1 million.
WRC Media and its subsidiaries' financing activities consist of making drawings
from, and repayments to, our revolving credit facility and retiring amounts due
under our senior secured term loans. For the three-months ended March 31, 2003,
financing activities provided cash of $3.1 million, which primarily resulted
from borrowings of $5.0 million under the revolving credit facility partially
offset by a $1.8 million repayment of the senior secured term loans. We believe
that our current cash position, cash from operations and the availability under
our revolving credit facility is sufficient to finance the Company's operations
through December 31, 2003.
The terms of our senior secured credit agreement require us on an ongoing basis
to meet certain financial covenants, including a maximum leverage ratio covenant
and a minimum fixed charge coverage ratio covenant. Compliance with these
covenants is measured as of the last day of each fiscal quarter. Each ratio
becomes more stringent periodically through March 31, 2004. With respect to the
first two fiscal quarters of 2003, we are required to have a leverage ratio not
in excess of 5.75:1.0 and a fixed charge coverage ratio not less than 1.05:1.0.
For the fiscal quarter ended March 31, 2003, our leverage ratio was 5.27:1.0 and
our fixed charge coverage ratio was 1.17:1.0.
29
As of March 31, 2003, we were in compliance with our financial covenants. Our
compliance with the financial covenants in our credit agreement in future
quarters is primarily dependant on our ability to increase sales and control
costs. We are pursuing a variety of sales and cost control initiatives. If these
initiatives are not successful or the educational funding environment of our
customers does not improve later this year, we may not be able to comply with
our quarterly financial covenants at some point in fiscal year 2003.
Accordingly, we are currently exploring various potential alternatives that may
be available to us in the event we do not comply with such quarterly financial
covenants. We cannot assure you that we will be successful in achieving any of
these alternatives or that they will be achieved on a timely basis with
reasonable terms or at all.
If we are unable to comply with the financial covenants as in effect at the end
of any fiscal quarter, we will be in default under our credit agreement. Upon
the occurrence of an event of default under our credit agreement, our lenders
have no obligation to grant us a waiver or extend additional loans under the
revolving facility and have the right to accelerate in full the repayment of all
amounts outstanding under our credit agreement, including all amounts
outstanding under the term loan facilities and revolving credit facility. As of
March 31, 2003, $124.8 million was outstanding under our term loan facilities
and there was $5.0 million of outstanding borrowings under our revolving credit
facility. If any such event of default occurs under our credit agreement and the
lenders take steps to accelerate the amounts due, we can make no assurance that
we would be able to repay such amounts. Our credit agreement is secured by liens
on substantially all of our assets. In the event that the lenders were to
accelerate our prepayment obligations under the term loan facilities and the
revolving facility, such action would constitute an event of default under our
Notes.
Accounting Policies and Estimates
There have been no changes in accounting policies or estimates that would have a
material effect on the financial statements. See Note #2 to the consolidated
financial statements filed in WRC Media's annual report Form 10-K for the year
ended December 31, 2002.
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.
30
Inflation
We do not believe that inflation has had a material impact on our financial
position or results of operations for the periods discussed above. Although
inflationary increases in paper, postage, labor or operating costs could
adversely affect operations, we have generally been able to offset increases in
costs through price increases, labor scheduling and other management actions.
Factors that may affect the future results and financial condition
This Quarterly Report on Form 10-Q contains forward-looking statements.
Additional written and oral forward-looking statements may be made by the
Company from time to time in Securities and Exchange Commission ("SEC") filings
and otherwise. The Company cautions readers that results predicted by
forward-looking statements, including, without limitation, those relating to the
Company's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs and income, are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward-looking statements, due to factors including the
following and other risks and factors identified from time to time in the
Company's filings with the SEC:
The Company's ability to continue to produce successful supplemental education
material and software products;
Reductions in state and local funding for educational spending materials
resulting, among other things, from increasing state budget deficits.
Uncertainty in the current operating environment which makes it difficult to
forecast future results.
The ability of the Company's print and electronic supplemental instructional
materials to continue to successfully meet market needs;
The Company's ability to maintain relationships with its creative talent;
Changes in purchasing patterns in and the strength of educational, trade and
software markets;
Competition from other supplemental education materials companies;
Significant changes in the publishing industry, especially relating to the
distribution and sale of supplemental educational materials;
31
The effect on the Company of volatility in the price of paper and periodic
increases in postage rates;
The Company's ability to effectively use the Internet to support its existing
businesses and to launch successful new Internet initiatives;
The general risks inherent in the market and the impact of rising interest rates
with regard to its variable debt facilities; and
The terms of our senior secured credit agreement require us on an ongoing basis
to meet certain financial covenants, including a maximum leverage ratio covenant
and a minimum fixed charge coverage ratio covenant. Each ratio becomes more
stringent periodically through March 31, 2004. A default under the credit
agreement could result in acceleration of payment obligations and would impact
our ability to finance our business through other debt agreements.
The foregoing list of factors should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company prior to the
date hereof. The Company disclaims any intention or obligation to update or
revise forward-looking statements, whether as a result of new information,
future events or otherwise.
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 $124.8 million (as of March 31, 2003) 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 two years and the $18.6
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 $96.5 million senior secured term loan B facility maturing in
three years, the LIBO rate plus 4.25% or the alternate base rate plus
3.25%.
(3) For the $9.7 million senior secured new term A loan facility maturing in
three 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, 2002, we entered into an
arrangement with a notional value of $64.8 million, which terminates on November
15, 2003 and requires us to pay a floating rate of interest based on the
three-month LIBO rate as defined in that arrangement with a cap rate of 2.5%.
The fair value of the interest rate cap as of March 31, 2003 was de-minimus.
32
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.
33
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Form 8-K, filed March 24, 2003, reporting operating results for the quarter
ended December 31, 2002.
2. Form 8-K, filed March 27, 2003, reporting the transcript of an investor
conference call held March 26, 2003.
Exhibit Description
- ------- -----------
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
34
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:
a. 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;
b. 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
c. 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:
a. 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
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
35
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 Inc., Weekly Reader
Corporation and CompassLearning, Inc.;
Chief Executive Officer: WRC Media Inc. and
CompassLearning, Inc.;
President: CompassLearning, Inc.; and Executive
Vice President, Weekly Reader Corporation
36
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:
a. 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;
b. 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
c. 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:
a. 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
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
37
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 Inc., Weekly Reader
Corporation and CompassLearning, Inc.;
Executive Vice President, Chief Operating Officer:
WRC Media Inc. and CompassLearning, Inc.; and
Treasurer: WRC Media Inc., Weekly Reader
Corporation and CompassLearning, Inc.
38
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:
a. 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;
b. 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
c. 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:
a. 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
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
39
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 Inc.
40
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert Jackson, 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:
a. 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;
b. 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
c. 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:
a. 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
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
41
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 Jackson
President, Weekly Reader Corporation
42
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 15, 2003
- ----------------------------------------------------- ------------------------------
Martin E. Kenney, Jr.
Director: WRC Media Inc., Weekly Reader Corporation
and CompassLearning, Inc.;
Chief Executive Officer: WRC Media Inc. and CompassLearning, Inc.;
President: CompassLearning, Inc.; and Executive Vice President,
Weekly Reader Corporation
Date: May 15, 2003
- ----------------------------------------------------- ------------------------------
Robert S. Lynch
Director: WRC Media Inc., Weekly Reader Corporation
and CompassLearning, Inc.;
Executive Vice President, COO: WRC Media Inc. and
CompassLearning, Inc.; and Treasurer: WRC Media Inc.,
Weekly Reader Corporation and CompassLearning, Inc.
Date: May 15, 2003
- ----------------------------------------------------- ------------------------------
Richard Nota
Vice President, Finance: WRC Media Inc.
Date: May 15, 2003
- ----------------------------------------------------- ------------------------------
Robert Jackson
President, Weekly Reader Corporation
43