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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2001 Commission File No. 333-96119
WRC MEDIA INC. WEEKLY READER CORPORATION
(Exact name of Registrant as (Exact name of Registrant as
specified in its charter) specified in its charter)
DELAWARE DELAWARE
(State or other jurisdiction (State or other jurisdiction
of incorporation or organization) of incorporation or organization)
2731 2721
(Primary Standard Industrial (Primary Standard Industrial
Classification Number) Classification Number)
13-4066536 13-3603780
(I.R.S. Employer (I.R.S. Employer
Identification Number) Identification Number)
COMPASSLEARNING, INC.
(Exact name of Registrant as specified in its charter)
2731
DELAWARE
(State or other jurisdiction of incorporation or organization)
7372
(Primary Standard Industrial Classification Number)
13-4066535
(I.R.S. Employer Identification Number)
WRC MEDIA INC. WEEKLY READER CORPORATION
512 7th AVENUE, 23RD FLOOR 512 7th AVENUE, 23RD FLOOR
NEW YORK, NY 10018 NEW YORK, NY 10018
(212) 768-1150 (212) 768-1150
COMPASSLEARNING, INC.
512 7th AVENUE, 23RD FLOOR
NEW YORK, NY 10018
(212) 768-1150
(Address, including zip code, and telephone number, including area code,
of each Registrant's principal executive offices)
Securities Registered Pursuant to Section 12(b)
of the Act:
12 3/4 Senior Subordinated Notes due 2009
Securities Registered Pursuant to
Section 12 (g) of the Act:
None
- -------------------------------------------------------------------------------
TITLE OF CLASS | NAME OF EACH EXCHANGE ON WHICH REGISTERED
- -------------------------------------------------------------------------------
12 3/4% Senior Subordinated Notes due 2009 | OVER-THE-COUNTER MARKET
- -------------------------------------------------------------------------------
2
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [check mark]
PART I
ITEM 1 BUSINESS OVERVIEW
We are the leading publisher of supplemental education materials for the Pre
K-12 market. Our portfolio of products includes a broad range of print and
electronic supplemental instructional materials, testing and assessment products
and library materials. We believe our products have well-known brand names and
that they are recognized by our customers for their effectiveness and
consistent, high quality educational content.
On May 14, 1999, Ripplewood Holdings L.L.C., which specializes in private equity
investments, formed WRC Media Inc. (WRC Media) as a holding company to pursue
leveraged acquisitions in the media industry. WRC Media now serves as a holding
company for CompassLearning, Inc. (CompassLearning), Weekly Reader Corporation
and ChildU, Inc. (ChildU). Weekly Reader Corporation includes Weekly Reader and
its subsidiaries- American Guidance Service, Inc. (AGS or American Guidance) and
World Almanac. CompassLearning was incorporated on May 12, 1999, and Weekly
Reader Corporation was incorporated on November 28, 1990. ChildU was
incorporated on June 1, 1999 and on May 9, 2001 ChildU merged with WRC Media.
WRC Media acquired CompassLearning on July 14, 1999. Prior to this acquisition,
WRC Media had no material operations other than seeking acquisitions. On
November 17, 1999, WRC Media completed the recapitalization of the Supplemental
Education Group of PRIMEDIA Inc., consisting of the businesses of Weekly Reader,
American Guidance and World Almanac and their respective subsidiaries. As a
result of this transaction, Weekly Reader became a subsidiary of WRC Media. For
more information on the recapitalization of the Supplemental Education Group of
PRIMEDIA see Note 1 to the Consolidated Financial Statements of WRC Media. Our
operations are now conducted primarily through the following five operating
subsidiaries, each of which is a market leader in its respective product
categories.
WEEKLY READER. Weekly Reader has been a leading publisher of classroom
periodicals for Pre K-12 students for 100 years. Weekly Reader, or its former
parent or affiliates of its former parent, acquired Facts On File News Services
in 1996, Gareth Stevens, Inc. in 1997 and American Guidance in 1998. We were the
largest publisher of classroom periodicals during the 2000-2001 school year in
terms of total circulation with over 7.0 million subscribers. In addition to our
well-recognized classroom periodicals, such as WEEKLY READER, TEEN NEWSWEEK and
CURRENT EVENTS, we publish 168 distinct, grade-specific basic and life skills
workbooks. We also publish instructional materials paid for by various sponsors,
such as Ford Motor and the National Fire Protection Association, which are
distributed for free primarily to K-12 students throughout the United States.
For the year ended December 31, 2001, Weekly Reader, not including American
Guidance or World Almanac, had net revenue of $47.3 million, representing
approximately 20% of our total net revenue during this period.
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AMERICAN GUIDANCE. American Guidance has been a leading publisher of
individually administered testing and assessment products and supplemental
instructional materials for over 40 years. In 1997, American Guidance acquired
various assets of Craig-Hart Publishing Company and International Thomson
Publishing Inc. In May 2001 AGS acquired the operating assets of Lindy
Enterprises, Inc. (Lindy). Lindy develops curriculum-based skills assessment and
test preparation products that correlate to national and state curriculum.
American Guidance's testing and assessment products are primarily for K-12
students and its supplemental instructional materials are primarily for
low-performing students in middle and secondary schools. One or more of American
Guidance's testing and assessment products or supplemental instructional
materials are used in over 12,000 school districts, or approximately 80% of the
school districts in the United States. Our testing and assessment products are
used to diagnose learning disabilities and measure the cognitive ability,
educational achievement or personal and social adjustment of individual
students. American Guidance's supplemental instructional materials include
various textbooks and worktexts, many of which we believe set the standard for
quality in their respective product categories, with full color content and
accompanying extensive teacher support materials. For the year ended December
31, 2001, American Guidance had net revenue of $56.9 million, representing
approximately 25% of our total net revenue during this period.
COMPASSLEARNING. CompassLearning is a leader in research-based technology
learning solutions, delivering innovative, state-of-the-art educational
management and assessment tools and curriculum aligned to local, state, and
national standards. Offering more than 7,000 hours of interactive
standards-based managed curriculum that inspires educators and students to
explore and achieve success, CompassLearning has been serving the K-12 market
for over 25 years and its products are a vital part of the learning and teaching
process in more than 20,000 schools, representing approximately 19% of all the
schools in the United States. For the year ended December 31, 2001,
CompassLearning had revenue of $68.5 million, representing approximately 30% of
our total net revenue during this period.
CHILDU. ChildU's expertise lies in the web-enabled courseware market. Teamed
with the developers at CompassLearning, ChildU will be instrumental in
co-developing new web-enabled products for the K-8 market.
WORLD ALMANAC. World Almanac has been a leading publisher of reference and
informational materials, as well as other well-known general reference and
informational materials, for over 100 years. Over 55% of the approximately
124,000 school and public libraries in the United States have purchased products
from World Almanac. World Almanac publishes well-known print reference
materials, such as THE WORLD ALMANAC AND BOOK OF FACTS and nonfiction and
fiction books for K-8 students under three GARETH STEVENS imprints. In addition,
World Almanac publishes electronic reference materials such as the FUNK &
WAGNALLS ENCYCLOPEDIA database and an Internet-based version of FACTS ON FILE
WORLD NEWS DIGEST, which in its print version is World Almanac's leading
subscription-based product with renewal rates averaging approximately 86% from
1997 through 2001. World Almanac also distributes third-party products that are
targeted for K-12 students through its World Almanac Education Library Services
catalogs. For the year ended December 31, 2001, World Almanac had net revenue of
$58.0 million, representing approximately 25% of our total net revenue during
this period.
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COMPETITIVE STRENGTHS
A number of competitive strengths have contributed to our leading market
positions, including:
BROAD PRODUCT PORTFOLIO. We are a leading publisher in the supplemental
education materials market and one of the few companies with a comprehensive
portfolio of products covering all the major segments of this market. We offer a
wide range of products to our customers. This broad product portfolio allows us
to address the most attractive segments of the market and respond to emerging
trends and funding sources, including the rapidly developing market of parents
seeking to buy supplemental education materials. See "Products and Services" for
a detailed description of our product portfolio.
STRONG, WELL-ESTABLISHED BRAND NAMES. We believe that we have strong brand names
in each of the market segments we serve. Several of our most recognized print
titles have been in circulation for up to 100 years or more, including CURRENT
EVENTS, a Weekly Reader publication, which was first published in 1902, the
PEABODY PICTURE VOCABULARY TEST, which was first published in 1959, and THE
WORLD ALMANAC AND BOOK OF FACTS, which was first published in 1868. We believe
that our products are well known and trusted by teachers, other educational
professionals and parents for their effectiveness and consistent, high quality
educational content. Brand name and reputation are significant criteria in the
purchasing decision process for supplemental education materials as they are
usually selected at the discretion of individual teachers, school and school
district-level administrators or parents.
STABLE REVENUE BASE. We have a significant base of long-term customers who have
exhibited substantial product loyalty, resulting in a consistent level of
revenues from recurring sales to these customers. In our experience, once a
teacher or administrator is familiar with and accustomed to using a supplemental
instructional product and has developed lesson plans using the product, it is
difficult to convince that teacher to switch to new products. In addition, we
believe there is an important component of trust in the quality, consistency and
support of many of our products which makes it difficult for a competitor to
introduce new products for the same subject area without significant investment
and the support of key opinion makers in the industry. As a result of this
loyalty, many of our products enjoy long customer histories with high renewal
rates. For the last ten years, over 80% of schools purchasing Weekly Reader
periodicals re-subscribed the following year. We believe our school renewal
rates are important because of the value we place on ensuring that our
periodicals remain available within any given school, providing us with a base
on which to further penetrate that school. In addition, six of our top ten
testing and assessment products, based on net revenues, have been published for
over 25 years.
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SUBSTANTIAL ELECTRONIC DELIVERY PLATFORM. At CompassLearning, we have over 20
years of experience in developing and providing electronically delivered
supplemental instructional materials and are well positioned to capitalize on
this rapidly growing market segment. In 1979, CompassLearning introduced its
first electronic learning product, the Computerized Learning Approach System
(CLAS), which operated on an 8K Commodore "Pet" computer. It was a stand-alone
product that included vocabulary comprehension and math skills. One or more of
CompassLearning's products have been sold to over 20,000 K-12 schools in the
United States, more schools than have been reached by any other publisher of
comprehensive electronic courseware.
CompassLearning curriculum is delivered electronically over local area networks
by installing the curriculum on a server with a CD-ROM. A server is a computer
on a network of computers that manages the network resources. The curriculum may
then be accessed from student computer stations located within the lab or
classroom. After the content is installed on the server, the CD-ROM is no longer
needed to run the lesson plans from the student stations.
Each of our primary operating subsidiaries have web sites that promote their
respective products, provide product information and, in some cases, enable
users to order products over the Internet. Given the importance of quality and
name recognition to the development of Internet-based business, we believe that
the strength of our brands and our direct distribution channels position us well
for significant growth in this area.
STRONG DISTRIBUTION CHANNELS. Our products are used in over 80,000 schools, by
over ten million students, in over 6.5 million homes (through Weekly Reader
periodicals being taken home) and in over 68,000 school and public libraries. We
have an extensive network with direct distribution channels into these end user
markets. Some of our products are sold using direct field and telephone sales,
emphasizing personal relationships with teachers, school and school
district-level administrators and other educational professionals.
CompassLearning, for example, uses a three-pronged approach that provides every
customer a sales contact, an educational consultant and a technology support
person, for comprehensive customer service. We also utilize sophisticated direct
mail campaigns, which at Weekly Reader and World Almanac are enhanced by our
proprietary databases. These databases track the purchasing habits of teachers,
schools and/or librarians for many of our products as well as specific
demographics and other factors we believe affect purchasing habits.
EXPERIENCED MANAGEMENT TEAM. We have assembled an experienced management team at
both the administrative and the operating levels. This management team is led by
Martin E. Kenney, Jr., our Chief Executive Officer, who has over 25 years of
experience in educational publishing and electronic courseware. Prior to joining
WRC Media, Mr. Kenney was Executive Vice President of the Educational Publishing
Group and President of the Education Technology Group at Simon & Schuster, the
world's largest educational publisher at that time. The top 11 members of our
management team have an average of approximately 15 years of experience in the
educational publishing industry.
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PRODUCTS AND SERVICES
The following chart outlines our product offerings by primary operating
subsidiary in each of the segments of the supplemental education market in which
we compete:
WEEKLY READER AMERICAN GUIDANCE COMPASSLEARNING WORLD ALMANAC
PRINT AND ELECTRONIC PERIODICALS: 18 BASIC SKILLS: ELECTRONIC TEACHING KITS: Kits
INSTRUCTIONAL MATERIALS grade or Supplemental COURSEWARE: developed by World
subject-specific textbooks and Approximately 7,000 Almanac Education
periodicals for Pre worktexts targeted hours of proprietary Library Services
K-12 students, for low-performing electronic used to teach a
including Weekly students in middle courseware for K-12 variety of skills
Reeder, Teen and secondary schools students, primarily including research
Newsweek and Current covering core for reading, math skills, map skills
Events. curriculum subjects. and language arts, and Internet skills.
including
SKILLS BOOKS: 168 TEST PREPARATION: CompassLearning
distinct, grade Instructional Odyssey Product line.
specific, workbooks materials to prepare
for K-9 students for three of the MANAGEMENT SYSTEMS:
that build and leading achievement Compass management
reinforce basic tests for K-12 system enables
skills, including students. teaches to track
the Map Skills student performance,
series, or focus on PERSONAL GROWTH: record grades,
current topics such Various personal report on progress
as health issues or growth materials and prescribe
upcoming covering topics such lessons based on
Presidential as drug use results.
elections. prevention and Web-enabled
anti-violence courseware allows
SPONSORED training, self-esteem teachers and
INSTRUCTIONAL and career education students to access
MATERIALS: A Compass through the
variety of free Internet.
instructional
materials, including
print and video
products, paid for
by corporate, trade
association and/or
not-for-profit
sponsors primarily
for K-12 students.
TESTING AND ASSESSMENT N/A INDIVIDUALLY COMPUTERIZED N/A
PRODUCTS ADMINISTERED TESTS: ASSEMENT TESTS:
Assessment products COMPASSLEARNING
for K-12 students and PRECISION ASSESSMENT
adults, includes SYSTEM electronic
Ability Assessment, tests based on the
Behavior & Social test items in the
Skills Assessment, five leading
Language, Speech & achievement tests.
Auditory Skills Based on
Assessment. COMPASSLEARNING
PRECISION ASSESSMENT
GROUP TESTS GRADE: SYSTEM, evaluations,
Group testing, which electronic
offers reliable courseware can be
reading diagnostics assigned to students.
for individual
students.
LIBRARY MATERIALS N/A N/A N/A K-12 REFERENCE AND
OTHER INFORMATINOAL
MATERIALS:
Materials developed
by us targeted to
K-12 students such
as THE WORLD ALMANAC
FOR KIDS AND GARETH
STEVENS, INC.
products, as well as
materials developed
by third-parties and
distributed by us.
GENERAL REFERENCE AND
OTHER INFORMATION
MATERIALS: Materials
developed by us, such as
THE WORLD ALMANAC AND BOOK
OF FACTS, FUNK & WAGNALLS
ENCYCLOPEDIA database and
FACTS ON FILE WORLD NEWS
DIGEST.
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WEEKLY READER
Weekly Reader has four primary product lines:
- elementary school periodicals;
- middle and secondary school periodicals;
- sponsored instructional materials published by its subsidiary,
Lifetime Learning Systems, Inc.; and
- skills books.
In addition, Weekly Reader licenses the content of some of its publications
for commercial use by third parties and sells advertising space in some of
its publications as well as on its WEEKLY READER GALAXY web site.
ELEMENTARY SCHOOL PERIODICALS. WEEKLY READER, first published in 1928, has
established itself as a leading source for current events information for
students in grades Pre K-6. WEEKLY READER features seven grade-specific editions
for students, with between 25 and 32 issues per school year for each edition.
Within Elementary, Weekly Reader also offers one optional monthly supplement,
SCIENCESPIN. The following table lists each edition of the WEEKLY READER and our
other elementary school periodicals indicating issues per subscription and
subscription price.
2001-2002 SUBSCRIPTION
ISSUES PER PRICE (PER STUDENT,
PUBLICATION SUBSCRIPTION (YEAR) (a)
- ----------- ------------ ----------
WEEKLY READER:
Pre K............................. 28 $5.35
K................................. 28 4.86
Grade 1........................... 32 3.56
Grade 2........................... 25 3.56
Grade 3........................... 25 3.94
Grade 4........................... 25 3.94
Grades 5-6........................ 25 4.27
SCIENCESPIN....................... 7 1.03
(a) Includes shipping and handling costs.
Subscriptions to Weekly Reader elementary school periodicals in the 2000-2001
school year represented approximately 40% of all elementary school periodical
subscriptions circulated in that year by the three major publishers of these
periodicals which we believe together account for virtually all periodicals
targeted for classrooms. According to Weekly Reader, its periodicals had the
highest total circulation of elementary school periodicals in the 2000-2001
school year, totaling approximately 6.0 million subscriptions including
approximately 0.25 million unpaid, promotional or teacher reference
subscriptions.
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Each edition of WEEKLY READER is specifically written and designed for
particular grade levels in order to bring information on current events to
elementary school students at a conceptually appropriate level. The editions for
younger audiences contain "soft" news focusing on topics such as fire prevention
and animals. Higher-grade level editions contain "hard" news concerning topics
such as world news and current events, including, for example, the September
11th attack, the Afghanistan war, and the 2001 Presidential inauguration. A
teacher's guide with background information, discussion topics and follow-up
questions is included with each issue of each edition.
MIDDLE AND SECONDARY SCHOOL PERIODICALS. We publish ten subject-specific
periodicals covering six subject areas for students in middle and secondary
schools, with between six and 26 issues per school year per periodical. For
example, CURRENT EVENTS first published in 1902, one of our most popular
periodicals for middle school students, provides information on current events
tailored to the reading levels and school curriculum of students in the sixth
through ninth grades. The following table lists each of our middle and secondary
school periodicals indicating target grades, issues per subscription, subject
area and subscription price.
2001-2002 SUBSCRIPTION
ISSUES PER PRICE (PER STUDENT
PUBLICATION GRADE SUBSCRIPTION SUBJECT AREA PER YEAR) (a)
----------- ----- ------------ ------------ -------------
Current Events...................... 6-10 25 Social Studies $ 9.67
Current Science..................... 6-10 16 Science 10.42
READ................................ 6-10 18 Language Arts 10.53
Writing............................. 7-12 6 Language Arts 10.26
Extra............................... 5-9 12 Remedial Reading 10.55
Know Your World..................... 5+ 12 Career Guidance 11.34
Current Health 1.................... 4-7 8 Health 10.53
Current Health 2.................... 7-12 8 Health 10.53
CH2 Sex Supplement.................. 7-12 8 Health 3.78
Teen Newsweek....................... 6-9 26 Social Studies 7.94
(a) Includes shipping and handling
costs.
Weekly Reader's middle and secondary school periodical subscriptions in the
2000-2001 school year represented approximately 45% of all middle and secondary
school periodical subscriptions circulated that year by the three major
publishers which we believe account for virtually all middle and secondary
school periodicals targeted for classrooms. Weekly Reader's middle and secondary
school periodicals had the second highest total circulation of periodicals for
these schools in the 2000-2001 school year with approximately 1.5 million
subscriptions including approximately 0.1 million unpaid promotional or teacher
reference subscriptions. In each of the last ten years, over 60% of middle and
secondary schools that have subscribed to one or more of our middle or secondary
school periodicals subscribed to one or more of our middle or secondary school
periodicals in the following year.
To specifically target the growing sixth to ninth grade market, Weekly Reader
entered into a partnership with NEWSWEEK magazine to create TEEN NEWSWEEK, which
was launched in September 1999. TEEN NEWSWEEK focuses on social studies and
current events and contains grade-appropriate news stories that link history,
geography, government and cultures to the news stories. The partnership is
intended to capitalize on Weekly Reader's expertise in publishing and marketing
materials for classroom use and NEWSWEEK's strong news image, rapid distribution
capabilities and experience in advertising sales.
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LIFETIME LEARNING SYSTEMS, INC. Our Lifetime Learning Systems, Inc. business is
a leader in the creation and distribution of a variety of supplemental education
materials which are paid for by corporate, trade association and/or
not-for-profit sponsors and are distributed free to a target audience. The
materials produced focus on topics chosen by the sponsor and are typically
targeted for use in K-12 classrooms. Lifetime Learning Systems, Inc. also
produces sponsored supplemental education materials targeted for the college and
senior citizen markets. Lifetime Learning Systems, Inc. has created a variety of
formats for supplemental education materials over the years, ranging from:
- posters, teacher's guides and reproducible student activities;
- audio and video tapes; and
- web sites.
Sponsors of Lifetime Learning Systems, Inc. projects have included
corporate sponsors such as Ford Motor Credit, Kimberly Clark, Gillette and
the New York Stock Exchange as well as not-for-profit sponsors such as the
National Fire Protection Association, Cotton, Inc and United Way.
SKILLS BOOKS. We offer skills books, a line of workbooks and other supplemental
education materials that build and reinforce students' basic skills in
curriculum areas such as math or language arts as well as other titles, which
focus on life issues, such as current events or health. The skills book product
line includes 30 different series of workbooks including 168 distinct,
grade-specific titles spanning K-9 grades. For example, the highly successful
Map Skills series builds geographic literacy by teaching students basic
map-reading concepts and skills. The success of this series is attributable to a
proven sequential approach to teaching map skills that matches the curriculum
established by many school systems. Additional products include series covering
topics such as AIDS and anti-drug education.
WEEKLY READER GALAXY. In addition to our presence in the classroom through
printed materials, in 1996 we launched our web site, WEEKLY READER GALAXY, with
the goal of strengthening the brand image of our print products and positioning
Weekly Reader to capitalize on electronic distribution opportunities. WEEKLY
READER GALAXY is a free web site with pages specifically addressing students,
teachers and parents. It offers materials, in the form of puzzles, experiments
and games, which correlate with the content of Weekly Reader periodicals. In
addition, the WEEKLY READER GALAXY web site informs users about our periodicals
and allows them to subscribe over the Internet. For the year ended December 31,
2001, the web site had approximately 18 million page views with the average user
spending approximately ten minutes on the site per visit.
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OTHER PRODUCTS AND SERVICES. Weekly Reader also licenses the content of some of
its publications, promotes other products in its publications and provides its
"seal of approval" to various products. In addition, in November 2001, Weekly
Reader began selling Weekly Reader Book Club selections on QVC generating the
largest one-day sales total in Weekly Reader's history. Weekly Reader expects
this new sales channel to expand in future years.
AMERICAN GUIDANCE
American Guidance has two product lines:
- testing and assessment products; and
- supplemental instructional materials.
TESTING AND ASSESSMENT PRODUCTS. American Guidance's testing and assessment
products provide educators with reliable individually administered tests and
manuals explaining how to administer our tests. Our testing and assessment
products and supplemental instructional materials are primarily used in K-12
schools , but are also used in community health centers, clinics, hospitals,
correctional facilities, community colleges and other adult education programs.
These products are used to diagnose learning disabilities and measure the
cognitive ability, educational achievement and personal and social adjustment of
students.
American Guidance currently publishes over 30 testing and assessment products.
Six of American Guidance's top ten testing products, based on sales, have been
published for over 25 years. American Guidance's tests are revised periodically
to ensure that they reliably measure existing populations. Achievement tests
generally require revisions every eight to ten years while tests that measure
personal and social adjustment or cognitive ability in some cases do not require
revision for as long as 15 years.
American Guidance's testing and assessment products are generally sold as part
of a test kit. Test kits typically contain the test, test record forms, "easels"
used to administer the test, scoring sheets used to score the test and a manual
describing the proper method to score and evaluate the particular test. Sales
from our top ten testing and assessment products and related materials including
easels and scoring sheets represented approximately 70% of American Guidance's
total net revenue from testing and assessment products for the twelve months
ended December 31, 2001, with no individual set of testing products accounting
for more than 14%.
Educators and clinicians apply American Guidance's testing and assessment
products on an individual basis to understand a student's particular educational
needs. In our experience, once the validity and effectiveness of a test is
established and accepted in the educational community, educators',
psychologists' and clinicians' familiarity with the product grows along with
their reluctance to change suppliers and learn different assessment content,
administration approaches and scoring techniques. These professionals often
prefer to use the same tests over a long period of time in order to compare
performance of their student populations.
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SUPPLEMENTAL INSTRUCTIONAL MATERIALS. American Guidance's supplemental
instructional materials consist of curriculum-based instructional materials,
many of which are for low-performing students. Low-performing students are
defined as those students scoring in the lower 50th percentile of the student
population at a particular grade level. We focus primarily on serving middle and
secondary schools with additional sales to post-secondary markets, such as
community colleges and correctional facilities. We generally produce four types
of instructional materials:
- supplemental hardcover textbooks in core curriculum areas for
low-performing students, with related products such as workbooks;
- softcover worktexts in core curriculum areas for low-performing
students;
- test preparation materials which can be used to prepare all students
for leading achievement tests; and
- personal growth products.
American Guidance's supplemental hardcover textbooks are designed to provide
comprehensive coverage of skills and concepts in short, concise lessons. They
are geared to a fourth grade reading level or below with photography and content
that are appropriate for middle and secondary school students as well as adults.
We believe American Guidance's supplemental hardcover textbooks set the standard
for quality in the market, with full-color content and accompanying extensive
teacher support materials. Each textbook has a wrap-around teacher's edition
that reproduces the student edition with notes for the teacher indicated next to
the text such as overviews for each new lesson, alternative questions a teacher
may ask and answers to questions in the text. Each textbook has available a set
of quizzes, worksheets, problem sets and other materials that teachers are
permitted to reproduce for their classes. These materials also are available on
CD-ROM. Most of American Guidance's supplemental hardcover textbooks have
related softcover workbooks, activity books and study guide programs including
videos available in print and on CD-ROM for self-guided learning.
American Guidance's softcover worktexts also cover core curriculum areas. These
worktexts are designed as stand-alone products so that a teacher may use them to
supplement any textbook. These softcover worktexts cover smaller portions of any
given curriculum area than our supplemental hardcover textbooks.
Approximately 13% of American Guidance's net revenue for the year ended December
31, 2001 were from sales of testing and assessment products and supplemental
instructional materials in which the end users were not K-12 schools.
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American Guidance also publishes a rapidly growing line of test-preparation
materials developed to assist students preparing to take three of the leading
achievement tests; Stanford Achievement Test (SAT9), Iowa Test of Basic Skills
(ITBS), and TERRANOVA (Comprehensive Test of Basic Skills (CTBS) and Multiple
Assessments tests).
Additional preparation materials for state specific tests are also published.
American Guidance's test preparation materials are sold in package format.
American Guidance also markets a full line of personal growth products aimed at
developing behavior skills, parent training, drug use prevention and
anti-violence training, self-esteem, and career education.
These materials have differing audiences ranging from the entire K-12 student
population to teachers and adults, and are produced using various formats
including print, computer software and video.
COMPASSLEARNING
CompassLearning is a leader in research-based technology learning solutions,
delivering innovative, state-of-the-art educational management and assessment
tools and curriculum aligned to local, state, and national standards.
CompassLearning derives most of its revenue from the sale of software products
and related professional development and technical support services.
CompassLearning's Odyssey software product line is a comprehensive library of
over 7,000 hours of curriculum correlated to major national and state
educational standards. Software products consist of curriculum, management and
assessment software. The content is grade-specific and focuses on
core-curriculum topics such as reading, spelling, math, science and language
arts, as well as an emphasis on higher-order thinking and problem solving
skills. CompassLearning software products work with technology solutions right
for each school, including LAN and WAN platforms as well as the Internet.
CompassLearning offers the COMPASS management system which enables teachers and
students to create student lesson plans, track student performance, record
grades, report on progress and assess results against major state, national or
self-defined standards. By using COMPASS, teachers can create individualized
learning paths for each student.
CompassLearning offers a series of comprehensive computerized assessment tests
referred to as CompassLearning Precision Assessment System (C-PAS). C-PAS tests
subject matter typically tested in the following five leading achievement tests
for K-12 students:
- Iowa Test of Basic Skills (ITBS);
- Metropolitan Achievement Test (MAT);
- Stanford Achievement Test (SAT9);
- California Achievement Test (CAT); and
- TERRANOVA (Comprehensive Test of Basic Skills [CTBS] and Multiple
Assessments)
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C-PAS scores tests and determines whether the test taker possesses the
particular stills tested. If the test taker fails any particular subject on the
test, C-PAS prescribes lessons found in CompassLearning's software.
A CompassLearning typical sale consists of software products packaged with
professional development and technical support services for an average price of
$30,000 per school. The curriculum sells for an average of $120 per subject per
grade level plus $100 per workstation for simultaneous access. The COMPASS
management system sells for $3,500 and C-PAS sells for $2,000. Professional
development services range in price from $980 per day for a standard course to
$1,500 per day for customized training sessions. These services are typically
purchased under a contract for specific number of days of service. Technical
support services are typically purchased under one-year contracts for an average
cost of $3,850 per year. After the expiration of any service contract, services
can be purchased on an ongoing basis.
CompassLearning provides professional development services and technical support
services. CompassLearning has a team of over 80 full-time educational
consultants providing professional development services to teachers, ranging
from basic software training to services designed to assist teachers in
implementing and integrating technology into the classroom.
CompassLearning offers various technical support services in connection with the
purchase and ongoing use of its software products. An initial buyer of our
software products typically purchases one year of toll-free telephone help line
services, on-site system engineer services and software updates.
WORLD ALMANAC
World Almanac's operations are divided into the following five divisions: World
Almanac Books, World Almanac Education Library Services, Gareth Stevens, Inc.,
Facts On File News Services and Funk & Wagnalls.
WORLD ALMANAC BOOKS: THE WORLD ALMANAC AND BOOK OF FACTS is, we believe, one of
the most widely used and well-respected general reference publications in the
United States. In 1998, the American Library Association named it one of the
three most important information sources found in libraries and the best almanac
overall. We believe THE WORLD ALMANAC AND BOOK OF FACTS provides more complete
and up-to-date information than competing almanacs. Its comprehensiveness and
brand identity are critical assets. In print for over 130 years, THE WORLD
ALMANAC AND BOOK OF FACTS perennially makes the NEW YORK TIMES' bestseller list,
with six weeks at number one in 2001 - 2002. World Almanac Books also licenses
the content of THE WORLD ALMANAC AND BOOK OF FACTS to third parties for
inclusion in their products. Since 1995, World Almanac Books has also published
THE WORLD ALMANAC FOR KIDS, with over 1,900,000 copies sold to date.
WORLD ALMANAC EDUCATION LIBRARY SERVICES: World Almanac Education Library
Services is a niche distributor of reference and informational materials, which
it targets primarily to K-12 school and public libraries. There are
approximately 108,000 K-12 school libraries and 16,000 public libraries in the
United States. World Almanac Education Library Services reviews and selects
materials from third-party publishers for inclusion in its fourteen catalogs.
The catalogs also include THE WORLD ALMANAC AND BOOK OF FACTS, THE WORLD ALMANAC
FOR KIDS and several best selling series from Gareth Stevens, Inc. World Almanac
Education Library Services mailed a total of approximately 2.3 million catalogs
in 2001. World Almanac Education Library Services also publishes proprietary
teaching kits, including kits covering research skills, map skills and Internet
skills, which include items such as lesson plans for books we believe are
appropriate for classroom use to encourage multiple-copy sales.
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GARETH STEVENS, INC.: Gareth Stevens, Inc. publishes nonfiction and fiction
books for K-8 students. These books cover a broad spectrum of topics including
nature, science, social studies, reference, and language arts, all closely
related to curriculum standards. Approximately 73% of Gareth Stevens, Inc.'s
sales derive from books published under the three Gareth Stevens' imprints:
Gareth Stevens Publishing (K-6), World Almanac Library (4-8), and Weekly Reader
Early Learning Library (PreK-3). In the Gareth Stevens Publishing imprint, a
majority of these titles are sourced from domestic and international third
parties for which Gareth Stevens, Inc. holds, at a minimum, exclusive
distribution rights for K-12 school and public libraries in North America. In
the World Almanac Library and Weekly Reader Early Learning Library imprints, the
majority of titles derive from original development, and in most of these cases
Gareth Stevens, Inc. holds all worldwide rights.
The remaining approximately 27% of Gareth Stevens, Inc.'s sales result from the
telesales distribution of books from other publishers, primarily two lines from
Rosen publishing (a K-3 line and a 6-12 line), and books from a handful of other
publishers, including Capstone, Heinemann Library, Crabtree, and Compass Point,
sold on consignment through the LibraryOne Direct division.
FACTS ON FILE NEWS SERVICES: World Almanac, through Facts On File News Services,
publishes and sells subscription news reference products in print and Internet
formats. There are five print products:
- FACTS ON FILE WORLD NEWS DIGEST;
- ISSUES AND CONTROVERSIES ON FILE;
- TODAY'S SCIENCE ON FILE;
- EDITORIALS ON FILE; and
- SOFTWARE AND CD-ROM REVIEWS ON FILE.
Its core product, FACTS ON FILE WORLD NEWS DIGEST, is a highly respected
publication used by libraries as a comprehensive index of world events beginning
in 1940 in the print version and in 1988 in the electronic version. Librarians,
journalists and library patrons typically use Facts On File News Services
products to research historical events. The in-house editorial staff of FACTS ON
FILE WORLD NEWS DIGEST distills key news information from more than 100
different newspapers, periodicals, journals and government Internet sources and
uses it to update the product weekly in the print and Internet formats. The core
print product has an annual subscription list price of $879, which is discounted
for public and school libraries. The print edition of FACTS ON FILE WORLD NEWS
DIGEST sold over 3,500 subscriptions in 2001 and continues to meet with great
acceptance, as evidenced by renewal rates averaging approximately 86% from 1997
through 2001. Subscriptions to the print edition, however, are expected to
decline gradually as it is replaced by Internet-based versions of the product
described below.
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To take advantage of accelerated library spending on electronic delivery of
reference materials, World Almanac launched FACTS.com in 1999, an Internet
version of FACTS ON FILE WORLD NEWS DIGEST. The increased functionality of the
Internet version allows World Almanac to price this product higher than the
print version. The Internet version has a list price of $1,450 for a single-site
installation, with price discounts per site for multiple-site installation. In
2000, we launched three additional World Almanac databases as part of the
Reference Suite @ Facts.com web service: Issues and Controversies On File,
Today's Science On File and the World Almanac Reference Database.
FUNK & WAGNALLS: World Almanac operates in the electronic encyclopedia business
through Funk & Wagnalls. Although the FUNK & WAGNALLS ENCYCLOPEDIA is no longer
published in print format, Funk & Wagnalls licenses an electronic version of its
encyclopedic database to various third parties and is delivered via FACTS.com.
Funk & Wagnalls also annually sells a general yearbook containing a review of
the major news events that transpired in the previous year and a science
yearbook containing a review of the major scientific events in the previous
year. The general yearbook is licensed from World Book Encyclopedia, Inc. and
the science yearbook is licensed from Grolier Enterprises Inc. The active
subscriber list for these two publications, which primarily consists of former
subscribers to the print edition of the FUNK & WAGNALLS ENCYCLOPEDIA, is
approximately 58,500 for the general yearbook and 23,000 for the science
yearbook. Most science yearbook subscribers are also general yearbook
subscribers. We do not target new subscribers for these yearbooks; however,
renewal rates have averaged approximately 81% for the general yearbook and 77%
for the science yearbook from 1997 through 2001.
PRODUCT AND CONTENT DEVELOPMENT
WEEKLY READER. Weekly Reader has a team of 55 people working in product and
content development. This team includes:
- - editors and writers, who are typically grade and subject specialists with
journalism or teaching experience; and
- designers, who are responsible for the "look and feel" of the
products, including the layout of each publication.
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Editors, writers and designers work in teams on any particular project
including planning meetings used for determining content and
educational focus, the selection of appropriate graphics and
photographs and final editing before submission for printing. The time
it takes to develop our products varies substantially according to the
type of product. Product development for a new periodical typically
takes approximately nine months from concept to initial marketing,
whereas new issues of our existing periodicals typically take
approximately one to two weeks from conception to printing. Our skills
books typically take approximately eight to twelve months from concept
to initial marketing for an entirely new title, and approximately four
to six months for updated versions of existing titles. Development
times for Lifetime Learning Systems, Inc.'s products vary substantially
depending upon the type of product involved, but typically take
approximately three to four months from concept to distribution.
Weekly Reader's periodicals are written by a combination of staff and freelance
writers. WEEKLY READER, for example, is written internally. Our staff of
editors, writers and designers determines the subject matter for the particular
edition after which the content is written and edited by Weekly Reader's
employees. For SCIENCESPIN, however, once the content and educational focus for
a particular issue is determined internally, the writing is contracted out to
third parties with the relevant scientific knowledge and the ability to write
for the applicable target audience. TEEN NEWSWEEK is written internally based
upon content from upcoming stories in NEWSWEEK made available to our writers
prior to NEWSWEEK'S publication, and our own internally created content. The
TEEN NEWSWEEK writers determine which stories are appropriate for the targeted
audience and then rewrite the stories with age appropriate information and
language. TEEN NEWSWEEK'S content is subject, in all cases, to NEWSWEEK'S
approval.
Weekly Reader's skills books are typically written by freelance writers at the
direction of Weekly Reader's editors. Lifetime Learning Systems, Inc.'s products
are developed in a variety of formats by an in-house editorial and design staff
with varying degrees of direction provided by the applicable sponsor. In the
past, some sponsors of Lifetime Learning Systems, Inc. projects have approached
Lifetime Learning Systems, Inc. with a definitive concept for which they are
seeking implementation and production, while other sponsors simply have a
message they wish to get across to a target audience and request proposals as
how best to accomplish that goal.
Prior to distribution, whether created internally or externally, all of Weekly
Reader's products are reviewed by either the Editor in Chief of Weekly Reader or
one or more Senior Managing Editors to ensure that the content of the applicable
product is appropriate for the age group targeted by the product, according to
standards developed by Weekly Reader. Lifetime Learning Systems, Inc.'s products
are reviewed by its editorial director for their age and content
appropriateness.
AMERICAN GUIDANCE. American Guidance's new testing and assessment products and
revisions to existing products are developed internally by in-house personnel,
most of whom are trained in one or more specialties including psychology,
education, early childhood development and speech/language, among other
disciplines.
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Our testing and assessment products are firmly rooted in established
psychological and pedagogic theory, and our product development philosophy is
customer-focused. New test concepts are usually derived from the marketplace,
often from our sales representatives who are in contact with teachers, guidance
counselors, school psychologists, school administrators and other professionals
who identify a testing need.
We also develop new products through a systematic review of industry trends,
including emerging trends in the education community, or in conversations with
educators and other professionals who attend various trade and professional
conferences where we are an exhibitor or attendee. Occasionally, we will be
approached by an author with a new test concept, which we will then evaluate in
terms of its overall market potential.
After we have created a test, we then subject it to field tests. Once
field-testing and any indicated adjustments are complete, the test undergoes
standardization, generally being tested on 200 students per age year targeted by
the test and covering a broad range of demographic characteristics. In addition,
we seek support for the test from key opinion makers in the subject area of the
test. Only at this stage do we begin to market the test. The process is similar
for most revisions of existing tests because when a test is updated, the new
content similarly must be field-tested and then the revised test must undergo
standardization. The development cycle for a new test or to make revisions to an
existing test is typically five years from concept through the launch of the new
or revised test. The life cycle for the new or revised test can be up to 15
years or more.
We develop supplemental instructional products internally and externally with
developers and in close consultation with outside authors, on a royalty basis or
on a fee-for-service arrangement. New product concepts are derived from various
sources, including in-house development staff, outside authors and our sales
force based on their regular meeting with educators and administrators.
Most of these products have a development cycle of approximately one year. In
general, we solicit bids for our new products from outside developers and award
the contract based on price and other factors relating to the developer's
ability to deliver the finished product according to our exact specifications.
COMPASSLEARNING AND CHILDU. CompassLearning and ChildU have a combined product
development team of 74 employees. Product development expertise consists of
software engineers, programmers, quality assurance analysts, technical writers,
instructional designers, and project managers. The co-development effort will
focus on three primary objectives:
- delivering a K-8 web-enabled curricula,
- developing a state-of-the-art instructional management system, and
- creating a national-standards-based assessment product.
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WORLD ALMANAC. World Almanac has a 56 person in-house editorial staff that:
- in the case of the World Almanac Books and Funk & Wagnalls, works in
conjunction with outside work-for-hire editors to develop its content;
and
- in the case of the Facts On File New Services products, develops the
content of these products.
Individual members of the in-house editorial staff are generally responsible for
only one of the product lines. The contents of our Funk & Wagnalls yearbooks are
licensed from third parties. The Gareth Stevens, Inc. nonfiction and fiction
books are comprised of either content licensed from third parties and then
repackaged and/or rewritten for the K-12 market in the United States or,
especially in the case of books for the World Almanac Library and Weekly Reader
Early Learning Library imprints, original content developed by in-house staff ,
freelance writers, and other providers of editorial services. World Almanac
Education Library Services has a three-person creative staff which designs the
layout for the catalogs and selects the reference and informational materials
which will be included in the catalogs.
World Almanac Education Library Services updates its catalogs twice each year.
New editions of THE WORLD ALMANAC AND BOOK OF FACTS and THE WORLD ALMANAC FOR
KIDS are published each year. New product development is currently focused on
offering products through Internet delivery. In 2000, we launched the following
three additional World Almanac databases as part of the Facts On File News
Services web service: Issue & Controversies On File, Today's Science On File and
the World Almanac Reference Database.
CUSTOMERS
Our targeted customers, who vary depending on the product line, are teachers,
school and school district-level administrators, librarians, other educational
professionals and parents.
Weekly Reader's periodicals and other instructional materials are purchased
mainly by teachers, as well as by school and school district-level
administrators. In addition, schools sometimes ask parents of students to pay
for their children's subscriptions to Weekly Reader periodicals. According to
Weekly Reader, it was the largest publisher of classroom periodicals in terms of
total circulation in the 2000-2001 school year with over 7.0 million
subscribers.
Customers of Lifetime Learning System, Inc.'s products generally are:
- corporations;
- trade associations;
- not-for-profit organizations; and
- government agencies.
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Customers of American Guidance's assessment products generally are guidance
counselors, school psychologists, speech pathologists, special education
teachers and other similar school district-level specialists.
Customers of American Guidance's supplemental instructional materials generally
are teachers and school-level administrators as well as school district-level
administrators. American Guidance also has customers outside of K-12 schools for
its testing and assessment products and supplemental instructional materials,
which includes clinical psychologists, community colleges, adult educational
programs and correctional facilities.
One or more of American Guidance's testing and assessment or supplemental
instructional products are used in over 12,000 school districts, or
approximately 80% of the school districts in the United States.
CompassLearning's customers consist primarily of school and school
district-level administrators, including:
- superintendents;
- curriculum directors;
- technology directors; and
- principals.
Although individual teachers do not typically make final purchasing decisions,
they frequently have substantial input in the decision making process. One or
more of CompassLearning's products has been sold to more than 20,000 K-12
schools, representing approximately 19% of all schools in the United States.
In 2001, approximately 87% of World Almanac's sales were to schools and
libraries. The remaining 13% of its sales consisted of sales of yearbooks to
former encyclopedia purchasers and sales of THE WORLD ALMANAC AND BOOK OF FACTS
and THE WORLD ALMANAC FOR KIDS to consumers.
Funk & Wagnalls licenses its electronic encyclopedia database to various
licensees and sells its yearbooks primarily to former print encyclopedia
purchasers. Facts On File News Services sells FACTS ON FILE WORLD NEWS DIGEST
and its other products to libraries of all types. World Almanac Education
Library Services and Gareth Stevens, Inc. sell their products primarily to
school libraries and to a lesser extent to public libraries. Over 55% of the
approximately 124,000 school and public libraries in the United States have
purchased products from World Almanac.
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SALES, MARKETING AND DISTRIBUTION
We have an extensive network with direct distribution channels to reach our
primary customers. Our four primary operating subsidiaries use one or more of
the following methods to sell and market our products: direct mail, direct
sales, telemarketing and distribution through retail channels. The chart set
forth below contains information regarding sales, marketing and distribution by
Weekly Reader, American Guidance, CompassLearning and World Almanac, including
their primary distribution channels.
WEEKLY READER AMERICAN GUIDANCE COMPASSLEARNING WORLD ALMANAC
Primary Method of Direct Mail Direct Sales Force Direct Sales Force Direct Mail: Facts
Sales and Marketing (field and telesales) On File News
Services, World
Almanac Education
Library Services and
Funk & Wagnalls
Telemarketing:
Gareth Stevens, Inc.
and Facts On File
News Services Retail
Marketing: World
Almanac Books
Size of Staff 8 50 60 113
Number of Mailings in Total mail quantity N/A Facts on File News
2002 of 8.6 million (in Services generally
March, April, July mails twice a year;
and August) World Almanac Education
Library Services generally
mails four times a year;
Yearbook mail campaigns
once a year
Number of Schools/ 111,777 schools; 3.4 250,000 customer N/A Approximately
Teachers/Libraries in million teachers locations 106,516 schools,
Database 16,664 school
districts, 15,847
public libraries,
3,985 academic
libraries
Estimated Number of 57,086 schools Over 15,000 school Over 20,000 schools Over 68,000 school
Schools/School districts and public libraries
Districts/Libraries have purchased
with our products products from World
Almanac
DIRECT MAIL. Direct mail consists mainly of well-planned mailings that target
current and prospective customers, often with enclosed product samples and
catalogs, which are used to generate product sales. This marketing technique is
utilized to a significant extent by Weekly Reader, World Almanac's Facts On File
News Services and World Almanac Education Library Services, and to a lesser
extent by American Guidance, CompassLearning and World Almanac's Funk &
Wagnalls.
Weekly Reader's classroom periodicals are marketed primarily through the use of
direct mailings. Its experienced and skilled marketing staff has developed
detailed mailing schedules and marketing strategies to reach current and
prospective customers. In the marketing of its classroom periodicals, Weekly
Reader has developed and maintained a valuable and proprietary database tracing
the purchasing habits of approximately 2.7 million individual teachers and
administrators and approximately 108,000 schools over the past five years as
well as various demographic factors in each locale. In 2001, Weekly Reader
mailed over 0.4 million catalogs and 8.3 million direct mail pieces primarily to
teachers as well as to school and school district-level administrators,
librarians and parents. Schools are segmented for mailings according to
"purchasing" and "non-purchasing" status, with marketing campaigns based on
purchasing history specifically targeted to teachers, who are typically the key
decision makers in connection with the purchase of Weekly Reader's classroom
periodicals. Schools that currently purchase Weekly Reader's classroom
periodicals are then further segmented according to penetration levels for each
elementary school grade or middle or secondary school subject area. The timing
of mailings, inclusion of product samples and timing and amount of discounts
offered, among other things, vary depending on which segment is being targeted.
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World Almanac also uses direct mail to generate sales. For example, Facts On
File News Services uses direct mailings for general product announcements, to
generate sales leads and for order procurement from new customers. The strategy
for attracting new customers consists of using targeted direct mail, followed by
telesales calls from representatives who are recruited and trained by Facts On
File News Services. World Almanac's World Almanac Education Library Services
also uses direct mail to sell its products. This division of World Almanac has
developed a sophisticated database that tracks customers and purchasing habits,
including monetary value of an average purchase and other relevant factors,
which it uses to target customers with the appropriate catalogs. Most of World
Almanac Education Library Services' sales are generated from mailings of its
main catalog, which is sent to existing customers, and its prospect catalog,
which is mailed to prospective customers. World Almanac mailed approximately 2.8
million direct mail pieces in 2001, including 2.4 million catalogs.
American Guidance printed and mailed more than 1.5 million promotional and
catalogs materials in 2001, aimed at developing customer leads, spurring
direct-response sales and building overall marketplace awareness of its brand
and products.
CompassLearning also sells its products with the aid of mailings and catalogs
targeted at smaller schools and school districts. World Almanac's Funk &
Wagnalls primarily markets its yearbooks to former subscribers of its previously
published print format encyclopedia using direct mail.
TELEMARKETING. Telemarketing involves the use of the telephone to contact
current and prospective customers as a means of generating sales. World
Almanac's Gareth Stevens, Inc. and Facts On File News Services utilize this
marketing technique to a significant extent, while CompassLearning, Weekly
Reader and World Almanac Education Library Services use it to a lesser extent.
Gareth Stevens, Inc.'s marketing strategy consists primarily of selling products
through its active and growing telemarketing program. The telemarketing division
generates approximately 52% of all Gareth Stevens, Inc. sales by contacting
existing and prospective accounts to solicit commitments to preview titles from
Gareth Stevens, Inc. and other third-party publishers. Through the preview
process, librarians are invited to receive copies of Gareth Stevens, Inc. titles
or the third-party titles it distributes. The librarians then have the
opportunity to review actual copies of the selected titles at their convenience.
Gareth Stevens, Inc. telemarketers follow up with these librarians over a
specified time period to ensure that the product has been received and reviewed.
Any titles not selected for purchase are picked up from the librarian's
location, with all postage and handling expenses borne by Gareth Stevens, Inc.
Depending on the school year cycle, there are usually between 50 and 100
part-time and full-time telesales representatives in the Gareth Stevens, Inc.
telemarketing unit.
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CompassLearning's telemarketing group, comprised of seven people, assists its
direct sales force by pursuing sales leads generated at educational conferences
or through other means and also promotes renewal sales of professional
development and technical support services contracts.
World Almanac's Facts On File News Services' strategy for attracting new
customers consists of using targeted direct mail, followed by telemarketing
calls from representatives who are recruited and trained by Facts On File News
Services. World Almanac Education Library Services also has recently begun using
telemarketing to promote its products. Weekly Reader's has initiated an internal
telemarketing group in the fall of 2001, consisting of three individuals,
targeting new subscribers. Weekly Reader also conducts telemarketing efforts
through independent contractors, to assist in the generation of renewal sales.
DIRECT SALES FORCES. American Guidance, CompassLearning and Weekly Reader's
Lifetime Learning Systems, Inc. each primarily use a direct sales force to sell
and market their products.
To market its testing and supplemental instructional materials, American
Guidance pursues a strategy of developing strong relationships with its current
and prospective customers primarily by using its sales organization, consisting
of:
- 25 field sales representatives;
- 17 inside sales representatives; and
- 4 managers.
These representatives work closely with schools to determine which of American
Guidance's products best serve the needs of a specific school's student body.
Unlike traditional telemarketing, American Guidance's telephone (inside) sales
representatives develop relationships with customers and occasionally make field
visits. All of American Guidance's sales representatives go through a training
process with defined objectives that they must satisfy during the initial six
months of their employment and each year thereafter. In addition, American
Guidance enlists professionals on a per diem basis to provide instruction to
educators concerning test administration, scoring and other professional
training such as disciplinary methods and substance abuse and violence
prevention techniques.
CompassLearning maintains a direct sales force of 60 sales representatives. The
sales representatives are each assigned to a sales region within the United
States. Each member of the direct sales force has access to CompassLearning's
database of detailed information concerning the school districts, current
customers, school funding and other data for its sales territories. On the basis
of this information, the sales representatives seek to establish relationships
with, and brand awareness for, CompassLearning's products among existing and
potential customers in their respective districts by making personal sales
visits to the schools or school administrators.
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Weekly Reader's Lifetime Learning Systems, Inc. has a dedicated marketing and
sales team of eleven people who make presentations directly to potential
corporate, trade association and not-for-profit organization clients.
Presentations generally consist of proposals for education materials and
programs to be shipped free to teachers and schools under the client's
sponsorship.
RETAIL MARKETING/WHOLESALERS. Approximately 67% of World Almanac Books' products
are sold through retail bookstores or through wholesalers into mass-market
locations such as supermarkets and newsstands. World Almanac Books' products are
also sold to book clubs and other resellers as well as into libraries through
World Almanac Education Library Services. In addition, Gareth Stevens, Inc.
distributes approximately 39% of its products through its network of wholesalers
to libraries.
INTERNET WEB SITES. Each of Weekly Reader, American Guidance and World Almanac
has free Internet web sites, which allow customers to order their products. The
Weekly Reader web site:
- features pages specifically addressing students, teachers, and
parents; and
- offers materials in the form of puzzles, experiments and games that
correlate with the content of Weekly Reader periodicals.
The American Guidance web site, launched in 1996, provides extensive company
information, customer service information, order placement information and a
complete description of its products. The web site also includes product forums
which give detailed information about those specific products.
World Almanac has multiple websites that offer a variety of content/services.
Both the World Almanac Education Library Services and Gareth Stevens websites
offer Internet ordering as well as provide a complete description of their
products. The World Almanac for Kids website offers materials in the form of
games, quizzes and reference facts that correlate with the content of The World
Almanac for Kids book. In addition to free Internet websites, World Almanac
sells subscription based Internet products through its Facts On File News
Services unit.
The CompassLearning web site serves as a customer resource for information about
the software solutions.
SHIPMENT. Our periodicals are typically shipped second-class mail directly from
the location at which they were printed. TEEN NEWSWEEK, however, is delivered by
truck and/or air directly to United States Postal Service bulk mail centers to
speed delivery Our other print materials are typically delivered by fourth-class
mail or, in some cases, by the United Parcel Service or other courier services.
Since 1986, we have distributed FACTS ON FILE WORLD NEWS DIGEST through third
parties, which provide electronic on-line delivery of databases to libraries and
have paid these distributors a royalty for each subscription. Because we have
now developed our own Internet delivery format, we expect our use of these
distributors to decline.
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COMPETITION
WEEKLY READER. Our primary competitors in the Pre K-12 classroom periodicals
market are Scholastic Inc. and Time, Inc. These publishers together with Weekly
Reader constitute virtually the entire market of periodicals targeted for Pre
K-12 classrooms. Scholastic Inc. publishes six editions in the elementary school
market and eight editions in the middle and secondary school market. Time, Inc.
publishes three editions in the elementary school market and no editions in the
middle and secondary school market. Competition in the school periodicals market
is based primarily on:
- content;
- prices;
- reputation; and
- customer service.
In the elementary school periodicals market, we believe we have a competitive
advantage over both our competitors with respect to:
- content that has close ties to school curriculum; and
- an extensive marketing system.
In the secondary school periodicals market, our competitive strengths include:
- content that has strong educational value;
- content that has close ties to school curriculum; and
- strong database marketing capabilities.
We require a longer lead-time to deliver news to classrooms than Time, Inc., and
we charge customers prices that are generally higher than Scholastic Inc. and
Time, Inc.
In skills books we compete with many large and small publishers, primarily on
the basis of:
- subject matter expertise;
- breadth of offerings; and
- price.
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Although we have developed a strong niche in mapping books and geography books
and believe we use efficient marketing techniques, our skills books line
maintains a relatively small market share in the larger market for supplementary
instructional materials. This market includes many widely recognized brands
published by competitors with greater brand recognition, larger marketing
budgets and more frequent product revision.
In sponsored supplemental educational materials, Lifetime Learning Systems, Inc.
competes primarily with Scholastic Inc., as well as with other regional
competitors. Competition in this market is based on editorial quality,
distribution capability and cost.
Lifetime Learning Systems, Inc.'s strengths, which we believe give us a
significant competitive advantage over our smaller competitors, include:
- name recognition with our corporate sponsors;
- breadth and variety of product development offerings; and
- broad distribution capabilities through both its own and Weekly
Reader's distribution channels.
Notwithstanding, we face competition from Scholastic Inc. which combines similar
strengths with stronger corporate relationships and greater promotional
capabilities. Both Scholastic Inc. and we face price competition from our
smaller competitors which have, and may continue to, undercut prices on their
product offerings.
AMERICAN GUIDANCE. In the assessment area, our principal competitors are The
Psychological Corporation, The Riverside Publishing Company and CTB/McGraw-Hill.
These companies focus mainly on norm reference achievement tests, which are
administered in large groups, while individually administered assessment tests,
our target market, represent a secondary product line. We believe we are well
positioned to compete successfully in both the individually administered
assessment test market and the supplemental print instructional materials market
based on our reputation, content and ability to reach the customer base.
In the individually administered assessment test market, where quality and
reputation are the primary decision criteria, we have been providing
market-leading materials for over 40 years.
We believe we are internationally recognized for publishing technically sound
diagnostic assessments that are primarily used to identify strengths and
weaknesses at the individual level. Because we believe none of our competitors
has matched our depth in content, authorship and test instruction in
speech/language assessments, we maintain a competitive advantage in the
individually administered assessment test market.
26
In the supplemental print instructional materials market, we compete directly
with Globe-Fearon Inc., which also targets low-performing students. Other
competitors include Steck-Vaughn Company, and Scholastic Inc. but none of these
large publishers focus exclusively on low-performing students as we do.
In the supplemental print instructional materials market, we believe we are the
only publisher to offer full color textbooks with complete teacher support for
students reading below grade level in middle and senior high school.
COMPASSLEARNING. Within the electronic courseware market, we compete primarily
with other providers of integrated curriculum software and, to a lesser extent,
with independent software vendors and traditional print education publishers.
Our primary competitors are:
- NCS Learn;
- RiverDeep;
- Lightspan;
- Vivendi Knowledge Adventure; and
- Scientific Learning
Competition in the supplemental electronic instructional materials market is
based primarily upon product effectiveness, design flexibility and relationships
with customers. We believe we are competitive on all these factors. Our products
have some competitive price disadvantages when compared to standalone offerings,
and some of our competitors may have broader or deeper curriculum offerings.
WORLD ALMANAC. World Almanac Education Library Services is a niche player in the
school and public library distribution business. Competitor's range from full
service distributors, such as Follet Library Resources and Baker & Taylor
Corporation, to smaller ones such as Gumdrop Books, Inc. and Davidson
Publishing, Inc. World Almanac Education Library Services competes with larger
distributors by providing:
- more product information;
- better customer service; and
- a pre-screened selection of the season's titles.
Gareth Stevens, Inc. competes in the K-12 nonfiction and fiction-publishing
segment of this market which is highly fragmented with many competitors ranging
from small publishers that specialize in the library market to larger publishers
that also sell into the trade market. Some of Gareth Stevens, Inc.'s larger
competitors (and their library imprints or subsidiaries) include:
27
- Reed Elsevier (Heinemann Library, Raintree Steck Vaughn)
- Scholastic (Children's Press, Franklin Watts)
- The Gale Group (Lucent, Greenhaven, KidsHaven, Blackbirch)
- Capstone Publishing
- HaightsCross (Chelsea House)
- Rosen Publishing Group (Rosen, Rosen Central, PowerKids Press)
- Lerner Publishing
Competition in the electronic reference materials category is somewhat more
concentrated. Some of the larger competitors in this category include:
- The Gale Group, Inc.;
- EBSCO Industries, Inc.; and
- UMI Company.
Products sold to school and public libraries tend to be less price sensitive
than in a consumer market. The WORLD ALMANAC AND BOOK OF FACTS competes
primarily with the two other almanacs currently available:
- THE TIME/INFORMATION PLEASE ALMANAC; and
- THE NEW YORK TIMES ALMANAC.
We believe that our almanac has a market share greater than 70%. Competition in
all of these segments is primarily based on reputation and brand names of
products, the length of time products have been on the market and the uniqueness
of a product. We believe we have a competitive advantage with all these factors.
Our competitors, however, have larger publishing organizations, and therefore
are able to generate greater potential economies of scale than we can. Our
larger competitors, which offer broader product lines, also provide more
comprehensive shopping opportunities to library customers than we do with our
narrower product focus.
PRODUCTION, FULFILLMENT AND CUSTOMER SERVICE
All of our print products are printed and bound by third parties with whom we
have contracts. We believe that outside printing and binding services at
competitive prices are available, and we currently use a different printer for
each product line. Most of our pre-press production, typesetting, layout and
design functions are conducted in-house, with the exception of American Guidance
where most pre-press and product assembly is conducted by third-party vendors.
Our non-print products, such as Lifetime Learning Systems, Inc.'s videos and
CompassLearning's CD-ROMs, are produced internally and, if necessary, replicated
by third parties. Some of World Almanac's divisions rely on internal production
capabilities while others utilize third-party manufacturers.
28
The principal raw materials utilized in our products are paper and ink. Paper is
purchased by Weekly Reader and several of World Almanac's divisions from both
suppliers and printers directly based on pricing and, to a lesser extent,
availability, while American Guidance purchases finished goods including paper
components from the printers of its publications. Ink utilized by our
publications is provided by the respective printers of our publications and
included in the cost of print production. Both paper and ink are commodity
products which are affected by demand, capacity and economic conditions. We
believe that adequate sources of supply are, and will continue to be, available
to fulfill our requirements.
Order processing, customer service, cash application, collection functions and
fulfillment are typically performed at separate locations for each of our
operating subsidiaries, including at:
- Delran, New Jersey for Weekly Reader;
- Circle Pines, Minnesota for American Guidance;
- Phoenix, Arizona, Springfield, Illinois and San Diego, California for
CompassLearning; and
- Delran, New Jersey, Milwaukee, Wisconsin, New York, New York and
Cleveland, Ohio for World Almanac.
However, fulfillment for some of World Almanac's products are conducted by third
parties. In 1998, a new and improved fulfillment system was installed for Weekly
Reader in Delran, New Jersey at a cost of $1.5 million. This system is client
server based, reducing maintenance and operating costs, and provides electronic
access to customer information, including past purchases, as well as automated
cash application and improved collection processes.
INTELLECTUAL PROPERTY
WEEKLY READER. Each printed periodical or skills book is copyrighted by Weekly
Reader, including any materials written by freelance or third-party contract
writers. Photographs or artwork used in our products are typically used pursuant
to one-time licenses which grant us the right to use the photograph or artwork
in the particular product and within the United States only. Some material from
third parties is reprinted with permission for one-time use. Ownership of the
intellectual property rights in the materials produced by Lifetime Learning
Systems, Inc. are negotiated on a case-by-case basis with each sponsor.
AMERICAN GUIDANCE. Our tests, the accompanying score sheets and test record
forms, and supplemental instructional materials all have registered copyrights.
Some material from third parties is reprinted with permission for one-time use.
In addition, some products use registered trademarks.
29
COMPASSLEARNING. CompassLearning's computer software products are copyrighted by
CompassLearning. In addition, we periodically obtain permission to use excerpts
of third-party materials on an ongoing basis in some of our products or obtain a
license from these parties to act as a distributor of their products.
WORLD ALMANAC. World Almanac has registered copyrights for THE WORLD ALMANAC AND
BOOK OF FACTS, THE WORLD ALMANAC FOR KIDS, all Facts On File News Services
products other than EDITORIALS ON FILE which consists of editorials reprinted
with permission, all Gareth Stevens, Inc. books which are written in-house or
with outside work-for-hire authors, the FUNK & WAGNALLS ENCYCLOPEDIA database
and the World Almanac Education Library Services catalogs. World Almanac is
typically a licensee of the content of the remainder of its products, other than
products it solely distributes, in which it has no intellectual property rights.
ENVIRONMENTAL MATTERS
We are subject to environmental laws and regulations relating to the protection
of the environment, including those that regulate the generation and disposal of
hazardous materials and worker health and safety. We believe that we currently
conduct our operations in substantial compliance with applicable environmental
laws and regulations. Based on our experience to date, the nature of our
operations and our environmental indemnity from PRIMEDIA, we believe that the
future cost of compliance with existing environmental laws and regulations and
liability for known environmental claims will not have a material adverse effect
on our financial condition or results of operations.
EMPLOYEES
We have a total of approximately 1,000 employees. None of our employees are
represented by any union or other labor organization, and we have had no recent
strikes or work stoppages and believe our relations with our employees are good.
PART I.
ITEM 2. PROPERTIES
The Company maintains its headquarters in the metropolitan New York area, where
it leases approximately 35,000 square feet of space for executive offices and
certain of its operating divisions. The Company also leases an aggregate of
approximately 542,278 square feet of office, warehouse and mixed use space in
New York, Connecticut, Kentucky, California, Arizona, Illinois, Minnesota,
Georgia, West Virginia, Florida, New Jersey, Ohio and Wisconsin. In addition,
the Company owns 10,000 square feet of office space in Minnesota.
The Company considers its properties adequate for its current needs. No
difficulties are anticipated in negotiating lease renewals as leases expire or
in finding other satisfactory space, if current premises become unavailable.
Refer to Note 19 of Notes to Consolidated Financial Statements for additional
information on the Company's obligations under its leases.
30
PART I.
ITEM 3. LEGAL PROCEEDINGS
Various claims and lawsuits arising out of the normal course of business are
pending against the Company. The results of these proceedings are not expected
to have a material adverse effect on the Company's consolidated financial
position or results of operations.
PART I.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year covered by this report, no matter was
submitted to the vote of security holders, through the solicitation of proxy or
otherwise.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S SENIOR SUBORDINATED NOTES
The Company's 12.75% Senior Subordinated Notes are traded on the
Over-the-Counter Market under the symbol WRCMED.
PART II.
ITEM 6. SELECTED HISTORICAL FINANCIAL INFORMATION
WRC MEDIA AND ITS SUBSIDIARIES
The following table presents selected historical consolidated financial
information for WRC Media and its subsidiaries from the date of inception
(May 14, 1999) to December 31, 1999 and selected historical consolidated
financial information for WRC Media and its subsidiaries for the years ended
December 31, 2000 and 2001. The selected historical consolidated financial
information presented in the table below is based on the audited historical
consolidated financial statements of WRC Media and its subsidiaries for the
period May 14, 1999 (inception) through December 31, 1999 and the audited
historical consolidated financial statements of WRC Media and its subsidiaries
for the years ended December 31, 2000 and 2001, which are included elsewhere in
this annual report. The selected historical consolidated financial information
does not purport to indicate results of operations as of any future date or for
any future period. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--WRC Media and Subsidiaries," and the
financial statements of WRC Media and its subsidiaries and the notes to them,
included elsewhere in this annual report.
31
- ------------------------------------------------------------------------------------------------------------------
Period from
May 14, 1999 - For the year ended For the year ended
(amounts in thousands) December 31, 1999 December 31, 2000 December 31, 2001
- ------------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
SALES, NET $50,570 $218,847 $231,469
GROSS PROFIT 34,468 152,375 165,787
SALES AND MARKETING 14,030 48,879 54,658
RESEARCH AND DEVELOPMENT 3,861 4,708 5,751
GENERAL AND ADMINISTRATIVE EXPENSES 8,904 48,600 51,339
OTHER OPERATING COSTS:
GOODWILL AND INTANGIBLE ASSET
AMORTIZATION AND DEPRECIATION (a) 7,233 77,547 68,025
WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT
(b) 9,000 -- --
LOSS FROM OPERATIONS (7,570) (26,331) (12,945)
INTEREST EXPENSE, NET 7,902 34,045 32,046
NET LOSS (19,331) (62,015) (48,505)
BALANCE SHEET DATA:
(END OF YEAR)
WORKING CAPITAL (DEFICIT) (9,990) (27,830) (23,751)
TOTAL ASSETS 572,229 504,464 478,862
TOTAL DEBT 276,556 273,957 279,715
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 105,283 30,248 (13,286)
OTHER DATA:
CAPITAL EXPENDITURES, including pre-publication
costs 700 8,836 11,194
RATIO OF EARNINGS TO FIXED CHARGES (c) -- -- --
EBITDA (d) 9,396 50,892 56,241
- ------------------------------------------------------------------------------------------------------------------
(a) Includes depreciation of fixed assets, amortization of capitalized
software, prepublication costs, goodwill, other intangibles and deferred
financing costs.
(b) WRC Media and its subsidiaries wrote off purchased in-process research and
development on July 14, 1999 after its purchase of CompassLearning.
(c) Ratio of earnings to fixed charges is calculated as earnings, which is
defined as income (loss) before income tax provision (benefit) plus fixed
charges, divided by fixed charges. Fixed charges are defined as interest
expended and capitalized, amortized premiums, discounts and capitalized
expenses related to indebtedness and estimated interest included in rental
expense. Earnings were insufficient to cover fixed charges by $15,995 for
the period May 14, 1999 through December 31, 1999, $61,380 for the year
ended December 31, 2000 and $47,847 for the year ended December 31, 2001.
(d) EBITDA is defined as income (loss) before interest expense, income taxes,
depreciation and amortization. EBITDA excludes $52 of non-recurring sales
related to a discontinued contract for the period from May 14, 1999 to
December 31, 1999 and excludes $445 of general and administrative expense
related to non-recurring transition bonuses for the period from May 14,
1999 to December 31, 1999, excludes a $3,336 write-off of deferred
financing fees through an extraordinary charge as CompassLearning
refinanced its debt and excludes a $171 management fee charged by a
shareholder. EBITDA excludes $440 of non-cash, non-recurring charges
related to changing CompassLearning's name from its predecessor's name for
the year ended December 31, 2000. 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
include 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 in any covenant calculations.
Accordingly, Consolidated EBITDA (excluding unrestricted subsidiaries) is
defined as WRC Media consolidated EBITDA excluding the $3.8 million EBITDA
loss contributed by its unrestricted subsidiaries - ChildU and its
investment in ThinkBox for the year ended December 31, 2001. EBITDA data is
included because we understand that this information may be considered by
investors as an additional basis on which to evaluate WRC Media and its
subsidiaries ability to pay interest, repay debt and make capital
expenditures. Because all companies do not calculate EBITDA identically,
the presentation of EBITDA in this annual report is not necessarily
comparable to similarly titled measures of other companies. EBITDA does not
represent and should not be considered more meaningful than, or an
alternative to, measures of operating performance determined in accordance
with generally accepted accounting principles.
32
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
WEEKLY READER
The following table presents selected historical consolidated financial
information for Weekly Reader and its subsidiaries for each of the five years in
the period ended December 31, 2001. The financial statements of Weekly Reader
included in this annual report, including the selected historical consolidated
financial information presented below, include a retroactive adjustment to
reflect the contribution of 100% of the capital stock of American Guidance and
World Almanac by PRIMEDIA to Weekly Reader in 1999 using the historical carrying
value of the stock. The selected historical consolidated financial information
presented below is based on the audited historical consolidated financial
statements of Weekly Reader for the year ended December 31, 1997 and 1998, which
are not included in this annual report, as well as the audited historical
consolidated financial statements of Weekly Reader for the years ended December
31, 1999, 2000 and 2001 which are included elsewhere in this annual report. The
selected historical consolidated financial statements do not indicate results of
operations as of any future date or for any future period. This information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations--Weekly
Reader and Subsidiaries" and the financial statements and related notes to them
included elsewhere in this report.
33
For the years ended December 31, (a)
- ------------------------------------------------------------------------------------------------------------------------------------
(amounts in thousands) 1997 1998 1999 2000 2001
STATEMENT OF INCOME DATA:
SALES, NET (b) $ 92,904 $ 118,236 $ 148,287 $ 154,819 $ 162,165
GROSS PROFIT (c) 23,825 30,646 108,076 113,493 118,474
SALES AND MARKETING 11,745 17,636 24,316 27,060 29,255
GENERAL AND ADMINISTRATIVE EXPENSES (d, e) 35,815 42,335 45,374 42,214 43,803
OTHER OPERATING COSTS:
GOODWILL AND INTANGIBLE
AMORTIZATION AND DEPRECIATION (f) 11,428 12,212 15,345 13,983 14,064
INCOME FROM OPERATIONS 10,091 15,407 23,041 30,236 31,472
INTERCOMPANY INTEREST EXPENSE 6,968 9,232 10,133 -- --
INTEREST EXPENSE, NET -- -- 4,690 34,293 32,237
NET INCOME (LOSS) (1,767) 1,865 3,189 (4,418) (1,046)
BALANCE SHEET DATA:
(END OF YEAR)
WORKING CAPITAL (DEFICIT) (5,008) (1,766) 218 (2,525) (3,410)
TOTAL ASSETS 108,138 237,276 236,341 220,973 220,830
TOTAL DEBT -- -- 276,556 273,957 279,715
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 73,071 167,392 (191,375) (208,605) (222,375)
OTHER DATA:
CAPITAL EXPENDITURES (including prepublication
costs) 387 4,299 5,870 7,251 10,965
RATIO OF EARNINGS TO FIXED CHARGES (g) 1.52x 1.62x 1.52x -- --
EBITDA (h) 23,064 27,435 38,860 44,709 45,416
- -----------------------------------------------------------------------------------------------------------------------------------
(a) The financial statements of Weekly Reader included in this annual report,
including the selected historical consolidated financial information
presented in the table above, include a retroactive adjustment to reflect
the contribution of 100% of the capital stock of American Guidance and
World Almanac by PRIMEDIA to Weekly Reader using the historical carrying
value of the stock, which occurred prior to the recapitalization of Weekly
Reader on November 17, 1999. The financial statements include the
operations of American Guidance from July 1, 1998, the effective date of
PRIMEDIA's acquisition of all of the capital stock of American Guidance.
(b) Total sales includes sales of Gareth Stevens, Inc. and American Guidance
following Gareth Stevens, Inc.'s acquisition in February 1997 and American
Guidance's acquisition in July 1998. For the year ended December 31, 1999,
$440 of sales was recorded to account for non-recurring income related to a
discontinued contract.
(c) For the year ended December 31, 1999, $866 of cost of goods sold were
recorded to account for a non-recurring charge to inventory.
(d) For the year ended December 31, 1999, $600 of general and administrative
expenses were recorded to account for non-recurring litigation.
(e) Includes, through November 17, 1999, cost for: (1) amounts allocated as
corporate overhead to Weekly Reader by PRIMEDIA for services and
administrative functions shared with PRIMEDIA and its other operating
companies, such as, executive management costs, salaries and fringe
benefits for legal, financial, information technology and human resources
personnel, information technology expenses, real estate expenses and third
party costs; and (2) direct group overhead costs such as the salaries,
fringe benefits and expenses for PRIMEDIA staff directly involved in Weekly
Reader's operations.
(f) Includes depreciation of fixed assets, amortization of capitalized
software, prepublication costs, goodwill, other intangibles and deferred
financing costs.
(g) Ratio of earnings to fixed charges is calculated as earnings, which is
defined as income (loss) before income tax provision (benefit) plus fixed
charges, divided by fixed charges. Fixed charges are defined as interest
expensed and capitalized, amortized premiums, discounts and capitalized
expenses related to indebtedness and estimated interest included in rental
expense. Earnings were insufficient to cover fixed charges by $3,826 in
2000 and by $765 in 2001.
(h) EBITDA is defined as income (loss) before interest expense, income taxes,
depreciation and amortization. EBITDA for the year ended December 31, 1999
excludes $440 of non-recurring sales related to a discontinued contract,
$886 of cost of goods sold related to a non-recurring charge to inventory
and $600 of general and administrative expenses related to non-recurring
litigation. EBITDA for the year ended December 31, 2000 includes a
reduction of expenses of $250 resulting from a reversal of accrued expenses
originally accrued on the books of WRC Media in 1999. EBITDA data is
included because we understand that this information may be considered by
investors as an additional basis on which to evaluate Weekly Reader'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 prospectus is not necessarily comparable to similarly titled
measures of other companies. EBITDA does not represent and should not be
considered more meaningful than, or an alternative to, measures of
operating performance determined in accordance with generally accepted
accounting principles.
34
PART II.
ITEM 7. 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 December 31, 2001 of WRC Media Inc. ("WRC Media") and its
subsidiaries and their results of operations for the years ended December 31,
1999, 2000 and 2001. You should read the following discussion in conjunction
with the financial statements of WRC Media and Weekly Reader Corporation
("Weekly Reader") included elsewhere in this annual report. Unless the context
otherwise requires, references to "Weekly Reader" herein are to Weekly Reader
and its subsidiaries, including American Guidance Service, Inc. ("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 and their predecessor companies after giving effect to the
transactions related to the acquisition of CompassLearning, Inc.
("CompassLearning") and recapitalization of Weekly Reader effectuated on July
14, 1999 and November 17, 1999, respectively (the "Acquisition and
Recapitalization"). This discussion and analysis contains forward-looking
statements. Although we believe that our plans, intentions and expectations
reflected in or suggested by these forward-looking statements are reasonable, we
cannot assure you that these plans, intentions or expectations will be achieved.
These forward-looking statements are subject to risks, uncertainties and
assumptions about us.
OVERVIEW
We are a leading publisher of supplemental education materials for the Pre K-12
education market. Our portfolio of products includes a broad range of both print
and electronic supplemental instructional materials, testing and assessment
products and library materials, several of which have been published for over 40
years.
Our revenues consist primarily of:
- subscription revenues from our periodicals;
- revenues from sales of printed products including nonfiction and
fiction books, workbooks, worktexts, reference materials and test
preparation materials;
- computer courseware and hardware;
- professional development services; and
- technical support services.
35
Our operations are conducted primarily through the following four operating
subsidiaries:
- Weekly Reader;
- American Guidance;
- World Almanac; and
- CompassLearning.
In 2001, the Company acquired ChildU, Inc. a provider of Internet-based
educational services to both individual and institutional consumers. ChildU
revenues for the period from inception (May 9, 2001) through December 31, 2001
were $810 thousand representing only 0.3% of WRC Media total revenues.
On July 14, 1999, WRC Media acquired 100% of the capital stock of
CompassLearning through a wholly-owned subsidiary. On August 13, 1999, WRC Media
entered into the recapitalization agreement providing for the recapitalization
of PRIMEDIA's Supplemental Education Group. In connection with the
recapitalization, PRIMEDIA contributed 100% of the outstanding capital stock of
American Guidance and World Almanac to Weekly Reader, prior to WRC Media's
acquisition of 94.9% of the outstanding common stock of Weekly Reader, with the
remaining 5.1% being retained by PRIMEDIA.
The financial statements for Weekly Reader included in this annual report and
used as a basis for the financial presentation and discussion of Weekly Reader's
results of operations below include a retroactive adjustment on Weekly Reader's
financial statements reflecting the contribution of 100% of the capital stock of
American Guidance and World Almanac by PRIMEDIA to Weekly Reader using the
historical carrying value of the stock.
REVENUES
For the year ended December 31, 2001, WRC Media and its subsidiaries had net
revenue of $231.5 million. On an separate company basis, for the year ended
December 31, 2001, Weekly Reader (excluding American Guidance and World Almanac)
had net revenue of $47.3 million, American Guidance had net revenue of $56.9
million, World Almanac had net revenue of $58.0 million, CompassLearning had net
revenue of $68.5 million and ChildU had net revenue of $0.8 million.
WEEKLY READER. Weekly Reader's revenues are derived from its own operations,
including those of its subsidiary Lifetime Learning Systems, Inc., as well as
from the operations of American Guidance and World Almanac. Weekly Reader, not
including American Guidance or World Almanac, derives revenues from three
primary sources:
- periodicals;
- skills books; and
- sponsored instructional materials published by Lifetime Learning
Systems, Inc.
36
Weekly Reader's periodicals are sold as subscriptions, the great majority of
which are for periods of twelve months or less, with a significant amount of
each year's revenues coming from subscription renewals. Lifetime Learning
Systems, Inc.'s sponsored supplemental educational materials are paid for by
corporate, trade association or not-for-profit sponsors and are distributed for
free primarily to K-12 students.
American Guidance derives revenues from two product lines:
- testing and assessment products; and
- supplemental instructional materials.
Testing and assessment products are typically sold in kits containing the test,
test record forms, easels used to administer the test, scoring sheets and a
manual describing the proper use of the test. Each test uses a different test
record form, which typically come in packages of 25 and must be purchased from
American Guidance for as long as the school uses the test. Some tests are used
for over 15 years. Approximately 38% of American Guidance's revenues from
testing and assessment products for the years ended December 31, 2001 and 2000
were from replenishment sales for these test record forms. American Guidance's
supplemental instructional materials consist of curriculum-based instructional
materials and are sold primarily to middle and secondary schools.
World Almanac derives revenues primarily from the sale of its reference and
informational materials, including:
- printed products and electronic databases;
- nonfiction and fiction books; and
- the distribution of third-party products targeted for K-12 students.
Weekly Reader's subscriptions are recorded as deferred revenue when received and
recognized as income over the term of the subscription, whereas sales of its
other products, including sponsored instructional materials, skills books, tests
and other supplemental instructional materials, are recognized as revenue upon
shipment, generally net of an allowance for returns.
COMPASSLEARNING. CompassLearning's revenues are derived from its:
- software products;
- professional development services;
- technical support services; and
- hardware sales.
37
Professional development services generally consist of a specific number of days
of training. Technical support service contracts are typically for one-year
periods and are provided at varying levels, from telephone help-line services to
priority systems engineer dispatching. CompassLearning's electronic courseware
customers purchase, on average, six days of professional development services
and a one-year technical support contract for help-line and systems engineer
services in connection with their software purchases. These service contracts
are frequently renewed following the expiration of the initial service period,
with approximately 50% of technical support services revenue and approximately
12% of professional development services revenue for the year ended December 31,
2001 coming from renewal sales. CompassLearning's services revenues,
particularly those attributable to renewals of existing services contracts, have
been decreasing recently as a result of:
- the improved quality of our software products, which require less
technical support; and
- more customers supplying their own training and support services
through in-house expertise.
Professional development services revenue is recognized as the services are
performed and technical support services revenue is recognized ratably over the
related contract.
CompassLearning's hardware business revenues are generally derived from
reselling hardware to customers who request that CompassLearning provide a
package of software and hardware. Currently, CompassLearning is a reseller for
Apple, IBM, Compaq and Dell computers in order to accommodate requests by
customers for complete hardware and software solutions. Rev