Back to GetFilings.com
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, 2002 Commission File No. 333-96119
WRC MEDIA INC. WEEKLY READER CORPORATION
(Exact name of Registrant (Exact name of Registrant
as specified in its charter) as 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 (Primary Standard
Industrial Classification Number) Industrial Classification Number)
13-4066536 13-3603780
(I.R.S. Employer Identification Number) (I.R.S. Employer Identification Number)
COMPASSLEARNING, INC.
(Exact name of Registrant as specified in its charter)
2731
DELAWARE
(State or other jurisdiction of incorporation or organization)
7372
(Primary Standard Industrial Classification Number)
13-4066535
(I.R.S. Employer Identification Number)
WRC MEDIA INC. WEEKLY READER CORPORATION
512 7th AVENUE, 22nd FLOOR 512 7th AVENUE, 22nd FLOOR
NEW YORK, NY 10018 NEW YORK, NY 10018
(212) 768-1150 (212) 768-1150
COMPASSLEARNING, INC.
512 7th AVENUE, 22nd FLOOR
NEW YORK, NY 10018
(212) 768-1150
(Address,including zip code, and telephone number, including area
code, of each Registrant's principal executive offices)
Securities Registered Pursuant to Section 12 (b) of the Act:
None
Securities Registered Pursuant to Section 12 (g) of the Act:
12 3/4% Senior Subordinated Notes due 2009
15% Senior Preferred Stock due 2011
- --------------------------------------------------------------------------------
TITLE OF CLASS NAME OF EACH EXCHANGE ON
WHICH REGISTERED
- --------------------------------------------------------------------------------
12 3/4% Senior Subordinated Notes due 2009 NONE
15% Senior Preferred Stock due 2011 NONE
- --------------------------------------------------------------------------------
Page 2 of 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. [X]
PART I
ITEM 1 BUSINESS OVERVIEW
We are a 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
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 was acquired by 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. On
May 9, 2001, WRC Media Inc. and subsidiaries completed two acquisitions. WRC
entered into an Agreement and Plan of Merger with ChildU, Inc. ChildU was
incorporated on June 1, 1999 and is a leading provider of Internet-based
educational services to both individual and institutional consumers. Pursuant to
the agreement, each issued share of ChildU's common and preferred stock not
directly or indirectly owned by ChildU was converted into a contingent right to
receive a number of shares of WRC Media Inc. common stock. Concurrent with the
ChildU acquisition, on May 9, 2001, a subsidiary of the Company acquired the
assets of Lindy Enterprises, Inc. Lindy develops a curriculum-based skills
assessment and test preparation product that correlates to national and state
curriculum. Our operations, which consist of one
Page 3 of 3
business segment, are now conducted primarily through two operating groups
consisting of the following five operating subsidiaries, each of which is a
market leader in its respective product categories.
REFERENCE AND PERIODICALS GROUP
WEEKLY READER. Weekly Reader has been a leading publisher of classroom
periodicals for pre K-12 students for over 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 2001-2002 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
and CURRENT EVENTS, we publish distinct, grade-specific basic and life skills
workbooks. We also publish instructional materials paid for by various sponsors,
such as Six Flags Theme Parks, Inc, Ford Motor, Center for Disease Control 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, 2002, Weekly Reader, not including American Guidance or World
Almanac, had net revenue of $44.6 million, representing approximately 21% of our
total net revenue during this period.
AMERICAN GUIDANCE. AGS has been a leading publisher of individually administered
and group testing and assessment products, and supplemental instructional
materials for over 45 years. In May 2001, AGS acquired the operating assets of
Lindy Enterprises, Inc. (Lindy). Lindy develops curriculum-based skills
assessment and test preparation products on CD-ROM that correlate to national
and state curricula. AGS's testing and assessment products are primarily for
K-12 students and its supplemental instructional materials are primarily for
low-performing students in middle and secondary schools. One or more of AGS's
testing and assessment products or supplemental instructional materials are used
in over 12,000 school districts, or approximately 76% 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. AGS'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, 2002, AGS had net revenue of
$57.9 million, representing approximately 28% of our total net revenue during
this period.
COMPASSLEARNING. CompassLearning is a research-based technology learning
solutions company that produces educational assessment, curriculum and
management tools for grades Pre-K through 12, all of which are aligned to local,
state and national standards. Offering more than 8,000 hours of interactive
standards-based managed curriculum that inspires educators and students to
explore and achieve success, CompassLearning has been serving the Pre-K to 12
market for over 25 years and its products are a significant 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, 2002,
CompassLearning had net revenue of $51.2 million, representing approximately 24%
of our total net revenue during this period.
4 of 4
CHILDU. ChildU, Inc. was incorporated on June 1, 1999 and is a provider of
Internet-based educational services to both individual and institutional
consumers. On May 9, 2001, the Company entered into an Agreement and Plan of
Merger with WRC Media. ChildU's expertise lies in the design of web-enabled
courseware. Teamed with the developers at CompassLearning, ChildU is
co-developing new web-enabled products for the Pre-K to 12 market. In 2002,
ChildU and CompassLearning co-developed the new on-line product, Odyssey.
Odyssey's online curriculum solutions, developed by educators and built on sound
instructional pedagogy, utilize engaging, self-paced, project-based activities.
For the year ended December 31, 2002, ChildU had revenue of $2.3 million,
representing approximately 1% of our total net revenue during this period.
WORLD ALMANAC. World Almanac has been a leading publisher of reference and
informational materials targeted to K-12 students, as well as other well-known
general reference and informational materials, for over 130 years. Over 55% of
the approximately 130,000 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 87% from
1997 through 2002. World Almanac also distributes third-party products that are
targeted for K-12 students through its World Almanac Education Library Services
("WAELS") catalogs. Revenue is recognized when the third-party products are
shipped to WAELS customers who are primarily public and school libraries. For
the year ended December 31, 2002, World Almanac had net revenue of $54.0
million, representing approximately 26% of our total net revenue during this
period.
COMPETITIVE STRENGTHS
We believe a number of competitive strengths that have contributed to our
leading market positions, include:
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 decades, including CURRENT EVENTS, a Weekly
Reader publication, which was first published in 1902, the PEABODY PICTURE
VOCABULARY TEST, which
5 of 5
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, the
teacher or administrator tends to purchase the same product year-after-year
leading to a high subscription renewal rate. 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 revenue - producing testing and
assessment products, have been published for over 25 years. Typically, these
products have undergone revisions to ensure that they reliably meet the existing
population's curriculum needs. Achievement tests generally require revisions
every 8 to 10 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.
SUBSTANTIAL ELECTRONIC DELIVERY PLATFORM. At CompassLearning, we have over 20
years of experience in developing and providing electronically delivered
supplemental instructional materials. We believe that we are well positioned to
capitalize on this rapidly growing market segment. 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. Most CompassLearning products can be
delivered in the school's platform of choice, LAN, WAN or Internet.
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 one-to-one relationships with teachers, school and
6 of 6
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.
7 of 7
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: 16 BASIC SKILLS: ELECTRONIC TEACHING KITS: Kits
INSTRUCTIONAL MATERIALS grade or Supplemental COURSEWARE: developed by World
subject-specific textbooks and Approximately 8,000 Almanac Education
periodicals for pre worktexts targeted hours of electronic Library Services
K-12 students and 2 for low-performing courseware for Pre-K used to teach a
subscription students in middle - 12 students, variety of skills
supplements, and secondary schools primarily for including research
including Weekly covering core reading, math and skills, map skills
Reader, Teen curriculum subjects. language arts, and Internet skills.
Newsweek and Current through the
Events. TEST PREPARATION: CompassLearning
Instructional Odyssey Product line.
SKILLS BOOKS: 168 materials to prepare
distinct, grade for three of the MANAGEMENT SYSTEM:
specific, workbooks leading achievement Odyssey management
for K-9 students tests for K-12 system enables
that build and students. teachers to track
reinforce basic student performance,
skills, including PERSONAL GROWTH: record grades,
the Map Skills Various personal report on progress
series, or focus on growth materials and prescribe
current topics such covering topics such lessons based on
as health issues or as drug use results.
upcoming prevention and
Presidential anti-violence
elections. training, self-esteem
and career education
SPONSORED
INSTRUCTIONAL
MATERIALS: A variety
of free 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 ASSEMENT TEST: N/A
PRODUCTS ADMINISTERED TESTS: CompassLearning
Assessment products Explorer assessment
for K-12 students and tool evaluates
adults, includes student performance,
Ability Assessment, meet the Assessment
Behavior & Social of educational
Skills Assessment, Progress (NAEP)
Language, Speech & objectives and is
Auditory Skills aligned with the
Assessment. core state standards.
GROUP TESTS GRADE:
Group testing, which
offers reliable
reading diagnostics
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.
Page 8 of 8
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 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 to 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.
2002-2003 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 2001-2002
school year represented approximately 39% of all elementary school periodical
subscriptions circulated in that year by the three major publishers of these
periodicals. We believe that three publishers account for virtually all
periodicals targeted for classrooms. According to publishers' Statements of
Ownership filed with the USPS in the fall of 2002 for average circulation for
the 2001-02 school year and issue nearest filing date for 2002-03 school year,
Weekly Reader's periodicals had the highest total circulation of elementary
school periodicals in the 2001-2002 school year, totaling approximately 5.7
million subscriptions (including approximately 0.25 million unpaid, promotional
or teacher reference subscriptions.
Page 9 of 9
Each edition of WEEKLY READER is specifically written and designed for a
particular grade level 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 2002
congressional mid-term elections, corporate corruption and the Mid-East
conflict. 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 nine subject-specific
periodicals covering six subject areas for students in middle and secondary
schools and a Sex Supplement publication offered to Current Health 2, with
between 6 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 tenth grades. The
following table lists each of our middle and secondary school periodicals
indicating target grades, issues per subscription, subject area and subscription
price.
2002-2003 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............................. 7-10 6 Language Arts 10.26
Know Your World Extra............... 5-9 12 Remedial Reading 11.34
Career World........................ 7-12 6 Career Guidance 10.75
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
2001-2002 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 2001-2002 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 renewed their subscription for the following year. To target
the growing sixth to ninth grade market, Weekly Reader entered into a
relationship 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 relationship 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.
Page 10 of 10
LIFETIME LEARNING SYSTEMS Our Lifetime Learning Systems 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 also produces sponsored supplemental
education materials targeted for the college and senior citizen markets.
Lifetime Learning Systems has created a variety of formats for supplemental
education materials over the years including:
- 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, Center for Disease Control, 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 for Today 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.
WEEKLYREADER.COM. In addition to our presence in the classroom through printed
materials, we redesigned and re-launched Weekly Reader's website, with the goal
of strengthening the brand image of our print products and positioning Weekly
Reader to capitalize on electronic distribution opportunities. In 2002 the
website was expanded to include the WRTOOLKIT which gives subscribers the
ability to research topics in a database of archived articles. Weekly Reader's
website is a free site with pages specifically addressing students, teachers and
parents needs. It offers materials, in the form of articles, puzzles,
experiments and games, which correlate with the content of Weekly Reader
periodicals. In addition, the web site informs users about our periodicals and
skills books allowing customers to subscribe over the Internet. For the year
ended December 31, 2002, the web site had approximately 10.5 million page views
with the average user spending approximately ten minutes on the site per visit.
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. Weekly Reader's licensed content is
generally recognized as revenue over the
Page 11 of 11
term of the license agreement. Advertising revenues are recognized as income on
the issue date, net of provisions for rebates, adjustments and discounts. Weekly
Reader continues to sell "Weekly Reader Editor's Choice" book selections
licensed from trade book publishers on QVC generating some of the largest
one-day sales totals in Weekly Reader's history. Weekly Reader expects this new
sales channel to continue to expand in future years. Sales of books, tests and
other items are generally recognized as revenue upon shipment, net of an
allowance for returns.
AGS
AGS has two principal product lines:
- testing and assessment products; and
- supplemental instructional materials.
TESTING AND ASSESSMENT PRODUCTS. AGS's testing and assessment products provide
educators with reliable individually-administered and group 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.
AGS currently publishes over 30 testing and assessment products. AGS's testing
and assessment products are generally sold as part of a test kit. Test kits
typically contain the test record forms, "easels" used to administer the test
items, and a manual describing the proper method to score and evaluate the
particular test. Four of AGS's top five testing products, based on sales, have
been published for over 25 years. AGS'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.
Educators and clinicians apply AGS'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. The goal of AGS is to increase its brand awareness in the
markets it serves - primarily specialists in the K-12 market. Our goal is to
establish the AGS name in association with our products and services. By
increasing our visibility as a company on a national and local level with
special educators, we will be able to help the customer connect our products
with our company name. To grow in our critical markets, AGS plans to
aggressively pursue four main areas for growing our product line:
Page 12 of 12
- Revisions - Many of our top-selling tests and curriculum are
on schedule to be revised over the next 5 years.
- New Product - AGS annually increases its new product offering
through internal development.
- Acquisitions - AGS historically has pursued acquisitions to
enhance and supplement its internal development efforts.
- Distribution - AGS has increased its emphasis on distributing
complementary products to its target markets. Gareth-Stevens
and Weekly Reader titles (over 150) have been added to four of
our main catalogs this fall, and we have added key reading
assessments that will put us in a good position to capture
Reading First, federally funded reading initiative, dollars.
SUPPLEMENTAL INSTRUCTIONAL MATERIALS. AGS'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 three types of instructional
materials:
- supplemental hardcover textbooks in core curriculum areas for
low-performing students, with related products such as
workbooks;
- soft cover worktexts in core curriculum areas for
low-performing students; and
- test preparation materials which can be used to prepare all
students for leading achievement tests.
AGS'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 AGS'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 AGS's supplemental hardcover textbooks have related soft cover
workbooks, activity books and study guide programs including videos available in
print and on CD-ROM for self-guided learning.
Page 13 of 13
AGS's soft cover 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 soft cover worktexts cover smaller portions of any given
curriculum area other than our supplemental hardcover textbooks.
Approximately 10% of AGS's net revenue for the year ended December 31, 2002 was
from sales of testing and assessment products and supplemental instructional
materials in which the end users were not K-12 schools.
AGS 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 (SAT), 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.
AGS's test preparation materials are sold in package format.
COMPASSLEARNING
CompassLearning is a research-based technology learning solutions company that
produces educational assessment, curriculum, and management tools for grades
Pre-K through 12, all of which are aligned to local, state, and national
standards. The CompassLearning solutions are easily integrated into classroom
activities that support curricular goals. CompassLearning derives most of its
revenue from the sale of solution products and related professional development
and technical support services.
CompassLearning's Learning Odyssey(R) product line is a comprehensive library of
over 8,000 hours of interactive, standards-based, managed curriculum. The
Odyssey curriculum focuses on reading, math, and data management tools designed
for grades Pre-K through 12. Use of stimulating graphics, interactive animation,
and audio technology for all types of learning instruction help motivate
students to learn. Assessment products assign lessons based on each student's
needs. Products cover a full range of development, from basic skill instruction,
to critical thinking exercises, to project-based learning. Management tools are
designed to reduce the time teachers spend on administrative tasks and increase
one-on-one work with students. The Odyssey product line is delivered in the
school's platform of choice including LAN, WAN and Internet access.
CompassLearning Explorer is an assessment tool designed to help evaluate student
performance. It covers the National Assessment of Educational Progress (NAEP)
objectives and is aligned with the core state standards. CompassLearning
Explorer offers criterion-referenced tests, prescriptive learning paths with the
flexibility to integrate third-party products, as well as allowing for
customization to meet individual students' and teachers' needs. It can be
delivered via the Internet with computer-based and print components. Curriculum
options vary, letting students navigate with the program at their own pace or on
a timed basis.
Page 14 of 14
A typical CompassLearning sale consists of software products packaged with
professional development and technical support services for an average price of
$30,000 per school per year. The curriculum sells for an average of $120 per
subject per grade level plus $100 per workstation for simultaneous access. The
Odyssey management system sells for $3,500 and CompassLearning Explorer sells
for $5,000. Professional development services range in price from $1,000 per day
for a standard course to $1,230 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 $3,950 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 65 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.
Several of the Company's customers are subject to fiscal funding requirements.
If the funding requirements are subject to governmental approval, the likelihood
of cancellation is assessed. If the likelihood of cancellation is assessed as
remote, revenue is recognized. If the likelihood of cancellation is assessed as
other than remote, revenue is deferred. If the funding requirements are subject
to non-governmental approval, revenue is deferred and recognized in accordance
with the remaining provisions of SOP 97-2.
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(R) 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(R) 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(R) AND BOOK OF FACTS perennially makes the NEW YORK
TIMES' bestseller list. World Almanac Books also licenses the content of THE
WORLD ALMANAC(R) 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 2,000,000 copies sold to date.
Page 15 of 15
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 2.1 million catalogs
in 2002. World Almanac Education Library Services also publishes a small amount
of 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.
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 79% 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 (Pre-K-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. usually holds at a minimum exclusive
distribution rights for K-12 school and public libraries in North America.
Royalty advances are generally paid on titles sourced in this manner and then
earned out over the life of the title. Sales made in the wholesale channel are
recognized when books are shipped to wholesalers net of estimated sales returns.
Sales made through the telemarketing preview channel are recorded upon return of
unwanted preview product. In the World Almanac Library and Weekly Reader Early
Learning Library imprints, the majority of titles are created by Gareth Stevens
and in most of the cases in which Gareth Stevens, Inc. does not own the title,
we hold the worldwide rights to the titles. The remaining approximately 21% 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.
Page 16 of 16
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 1999 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 $915, which is discounted
for public and school libraries. The print edition of FACTS ON FILE WORLD NEWS
DIGEST sold over 2,900 subscriptions in 2002 and continues to meet with great
acceptance, as evidenced by renewal rates averaging approximately 87% from 1997
through 2002. Subscriptions to the print edition, however, are expected to
decline gradually as it is replaced by Internet-based versions of the product
described below.
To take advantage of accelerated library spending on electronic delivery of
reference materials, World Almanac launched FACTS.com in 1999, an on-line
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 $1,595 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. Revenue for
the on-line version of Facts On File products is recognized ratably over the
term of the subscription. FACTS.com subscriptions are sold primarily through
telemarketing.
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 yearbooks (general and science) are licensed from World Book
Encyclopedia, 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 47,100 for the general yearbook and
17,700 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 2002.
Page 17 of 17
PRODUCT AND CONTENT DEVELOPMENT
WEEKLY READER. Weekly Reader has a team of 48 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.
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 specific 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.
Page 18 of 18
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.
AGS. AGS's new and revised testing and assessment products are developed
internally by in-house personnel, most of who are trained in one or more
specialties including psychology, education, early childhood development and
speech/language, among other disciplines. In some cases the in-house personnel
revise existing products under the direction of well known external authors who
control the original copyright or content of the test and who receive royalties
from the sale of these tests.
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 external author with a new test concept, which we will then
evaluate in terms of its overall market potential. AGS also distributes a few
select assessments from other publishers.
After we have created or revised 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.
Page 19 of 19
Most of these instructional 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 60 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 Pre-K through 8 web-enabled curricula,
- developing a state-of-the-art instructional management system,
and
- creating a national-standards-based assessment product.
WORLD ALMANAC. World Almanac has a 37 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(R) 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: Issues & 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.
Page 20 of 20
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 2001-2002 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.
Customers of AGS's assessment products generally are guidance counselors, school
psychologists, speech pathologists, special education teachers and other similar
school district-level specialists.
Customers of AGS's supplemental instructional materials generally are teachers
and school-level administrators as well as school district-level administrators.
AGS 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 AGS's testing and assessment or supplemental instructional
products are used in over 12,000 school districts, or approximately 76% 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.
Page 21 of 21
In 2002, 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(R) 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.
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 55 113
Number of Mailings in Total mail quantity N/A N/A Facts On File News
2002 of 9.0 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/ Over 110,000 schools; 250,000 customer N/A Approximately
Teachers/Libraries in 3.4 million teachers locations 106,516 schools,
Database 16,664 school
districts, 15,847
public libraries,
3,985 academic
libraries
Estimated Number of Over 60,000 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
Page 22 of 22
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 3.4 million individual teachers and
administrators and approximately 110,000 schools over the past five years as
well as various demographic factors in each locale. In 2002, Weekly Reader
mailed over 0.6 million catalogs and 9.0 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.
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 2.7
million direct mail pieces in 2002, including 2.1 million catalogs.
American Guidance printed and mailed more than 1.5 million promotional materials
and catalogs in 2002, 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.
Page 23 of 23
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 48% 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.
CompassLearning's inside sales group, comprised of six people, assists its
direct sales force by qualifying sales leads in conjunction with funding
eligibility 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 internal telemarketing
group consists of nine individuals, targeting new subscribers. Weekly Reader
also conducts telemarketing campaigns, 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, AGS pursues a
strategy of developing strong relationships with its current and prospective
customers primarily by using its sales organization.
Page 24 of 24
These representatives work closely with schools to determine which of AGS's
products best serve the needs of a specific school's student body. Unlike
traditional telemarketing, AGS's telephone (inside) sales representatives
develop relationships with customers and occasionally make field visits. All of
AGS'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, AGS 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 55 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.
Weekly Reader's Lifetime Learning Systems, Inc. has a dedicated marketing and
sales team of ten 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 69% of World Almanac Books' revenue
is generated from product 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. Weekly Reader, American Guidance and World Almanac all have
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 AGS 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. AGS had approximately
$4.9 million in web site sales in 2002.
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
Page 25 of 25
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.
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 publish 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
Page 26 of 26
- 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.
Although we have developed a strong niche in map skills books and geography
books, 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
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' 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.
AGS. 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 referenced 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.
Page 27 of 27
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 45 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.
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; and
- Lightspan.
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.
WORLD ALMANAC. World Almanac Education Library Services is a niche player in the
school and public library distribution business. Competitors 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.
Page 28 of 28
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:
- Reed Elsevier (Heinemann Library, Raintree Steck Vaughn)
- Scholastic (Children's Press, Franklin Watts)
- The Gale Group (Lucent, Greenhaven, KidsHaven, Blackbirch)
- Capstone Publishing
- Haights Cross (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.;
- ProQuest, Inc.; and
- SIRS, Inc.
Products sold to school and public libraries tend to be less price sensitive
than in a consumer market. The WORLD ALMANAC(R) AND BOOK OF FACTS competes
primarily with the three other almanacs currently available:
- THE TIME/INFORMATION PLEASE ALMANAC;
- THE NEW YORK TIMES ALMANAC; and
- ENCYCLOPEDIA BRITTANICA 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
Page 29 of 29
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.
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 and Shoreview, Minnesota for AGS;
- 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.
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
Page 30 of 30
intellectual property rights in the materials produced by Lifetime Learning
Systems, Inc. are negotiated on a case-by-case basis with each sponsor.
AGS. Our tests, the accompanying score sheets and test record forms, and
supplemental instructional materials are protected by copyrights. Some material
from third parties is reprinted with permission. In addition, some products use
registered trademarks.
COMPASSLEARNING. CompassLearning's computer software products are copyrighted by
CompassLearning, but incorporate software under license from other entities,
such as Microsoft. 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 owns copyrights for each edition of THE WORLD
ALMANAC(R) 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 commissioned, 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 an environmental indemnity from PRIMEDIA delivered with the 1999
recapitalization transactions by which WRC Media acquired its interest in Weekly
Reader and World Almanac, 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
At December 31, 2002, we had a total of approximately 898 full-time and 70
part-time employees. None of our employees are represented by any union or other
labor organization. We have had no recent strikes or work stoppages and believe
our relations with our employees are good.
Page 31 of 31
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 is investigating consolidation
and subleasing possibilities for more economic and efficient operation. The
Company also leases an aggregate of approximately 450,000 square feet of office,
warehouse and mixed use space in New York, Connecticut, California, Arizona,
Minnesota, Florida, New Jersey, Ohio, Illinois and Wisconsin.
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.
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 as of and from the date of
inception (May 14, 1999) to December 31, 1999 and selected historical
consolidated financial information for WRC Media and its
Page 32 of 32
subsidiaries as of and for the years ended December 31, 2000, 2001 and 2002. The
selected historical consolidated financial information presented in the table
below is derived from the historical consolidated financial statements of WRC
Media and its subsidiaries as of and for the period May 14, 1999 (inception)
through December 31, 1999 and as of December 31, 2000, which are not included
elsewhere in this annual report and the historical consolidated financial
statements of WRC Media and its subsidiaries as of December 31, 2001 and 2002
and for the years ended December 31, 2000, 2001 and 2002, 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.
- -----------------------------------------------------------------------------------------------------------------------
Period from For the For the For the
May 14, 1999- year ended year ended year ended
December 31, December 31, December 31, December 31,
1999 2000 2001 2002
- -----------------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
SALES, NET $ 50,570 $ 218,847 $ 231,469 $ 209,958
GROSS PROFIT 34,468 152,375 165,787 150,947
SALES AND MARKETING 14,030 48,879 54,658 49,096
RESEARCH AND DEVELOPMENT 3,861 4,708 5,751 1,728
GENERAL AND ADMINISTRATIVE EXPENSES 8,904 48,600 51,339 49,931
OTHER OPERATING COSTS:
RESTRUCTURING COSTS AND OTHER NON-RECURRING EXPENSE (a) -- -- -- 8,594
GOODWILL AND INTANGIBLE ASSET
AMORTIZATION AND DEPRECIATION (b) 7,233 76,519 66,984 21,853
WRITE-OFF ON IN-PROCESS RESEARCH AND DEVELOPMENT (c) 9,000 -- -- --
INCOME (LOSS) FROM OPERATIONS (7,570) (26,331) (12,945) 19,745
INTEREST EXPENSE, NET 7,902 35,315 33,319 29,844
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (d) -- -- -- 72,022
NET LOSS (19,331) (62,015) (48,505) (95,444)
BALANCE SHEET DATA:
(END OF YEAR)
WORKING CAPITAL (DEFICIT) (9,990) (27,830) (23,760) (32,656)
TOTAL ASSETS 572,229 504,464 478,862 374,252
LONG TERM OBLIGATIONS (Long term debt, short term debt and
Redeemable preferred stock) 341,323 351,735 372,475 383,906
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 105,283 30,248 (13,286) (129,084)
OTHER DATA:
CAPITAL EXPENDITURES, including pre-publication costs 700 8,836 11,194 11,146
RATIO OF EARNINGS TO FIXED CHARGES (e) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
(a) For the year ended December 31, 2002 $8,594 of restructuring costs and
other non-recurring expense was recorded to account for the Company's
2002 Plan of Restructuring. The major integration and cost reduction
initiatives included in the 2002 Plan of Restructuring consisted of:
closure of facilities and a reduction in work force. One hundred and
seven positions were eliminated throughout WRC Media. The workforce
reduction involved each of the four operating units of the Company.
(b) Includes depreciation of fixed assets, amortization of capitalized
software, prepublication costs, goodwill, and other intangibles
(c) WRC Media and its subsidiaries wrote off purchased in-process research
and development on July 14, 1999 after its purchase of CompassLearning.
(d) On January 1, 2002, the Company adopted SFAS No. 142 for its goodwill
and identifiable intangible assets. As a result, the Company recorded a
transitional goodwill and indefinite lived intangible asset impairment
charge of $72,022 at American Guidance Service, Inc. a subsidiary of
Weekly Reader Corporation. This charge is reported as a cumulative
effect of accounting change, as of January 1, 2002, in the Condensed
Consolidated Statements of Operations.
(e) 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, $47,847 for the
year ended December 31, 2001 and $12,442 for the year ended December
31, 2002.
Page 33 of 33
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
WEEKLY READER
The following table presents selected historical consolidated financial
information for Weekly Reader and its subsidiaries as of and for each of the
five years in the period ended December 31, 2002. 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 derived from the historical
consolidated financial statements of Weekly Reader as of December 31, 1998, 1999
and 2000 and for the years ended December 31, 1998 and 1999, which are not
included in this annual report, as well as the historical consolidated financial
statements of Weekly Reader as of December 31, 2001 and 2002 and for the years
ended December 31, 2000, 2001 and 2002 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.
For the years ended December 31, (a)
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
- ----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
SALES, NET (b) $ 118,236 $ 148,287 $ 154,819 $ 162,165 $ 156,498
GROSS PROFIT (c) 30,646 108,076 113,493 118,474 116,938
SALES AND MARKETING 17,636 24,316 27,060 29,255 28,345
GENERAL AND ADMINISTRATIVE EXPENSES (d, e) 42,335 45,374 42,214 43,803 43,638
OTHER OPERATING COSTS:
RESTRUCTURING COSTS AND OTHER NON-RECURRING EXPENSE (f) - - - - 4,280
GOODWILL AND INTANGIBLE
AMORTIZATION AND DEPRECIATION (g) 12,212 15,345 13,983 13,944 10,709
INCOME FROM OPERATIONS 15,407 23,041 30,236 31,472 29,966
INTERCOMPANY INTEREST EXPENSE 9,232 10,133 - - -
INTEREST EXPENSE, NET - 4,690 34,293 32,403 28,849
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (h) - - - 72,022
NET INCOME (LOSS) 1,865 3,189 (4,418) (1,046) (71,241)
BALANCE SHEET DATA:
(END OF YEAR)
WORKING CAPITAL (DEFICIT) (1,766) 218 (2,525) (3,410) (6,577)
TOTAL ASSETS 237,276 236,341 220,973 220,830 144,087
LONG TERM OBLIGATIONS (Long term debt and
Redeemable preferred stock) - 352,962 362,485 382,288 392,786
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 167,392 (191,375) (208,605) (222,375) (308,657)
OTHER DATA:
CAPITAL EXPENDITURES (including prepublication costs) 4,299 5,870 7,251 10,965 10,834
RATIO OF EARNINGS TO FIXED CHARGES (i) 1.62x 1.52x - - 0.1x
- ----------------------------------------------------------------------------------------------------------------------------------
Page 34 of 34
(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 include sales of American Guidance following 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) For the year ended December 31, 2002 $4,280 of restructuring costs and
other non-recurring expense was recorded to account for the Company's 2002
Plan of Restructuring. The major integration and cost reduction initiatives
included in the 2002 Plan of Restructuring consisted of: closure of
facilities and a reduction in work force. Fifty-one positions were
eliminated throughout Weekly Reader Corporation. The workforce reduction
involved each of the three operating units of Weekly Reader Corporation.
(g) Includes depreciation of fixed assets, amortization of capitalized
software, prepublication costs, goodwill, and other intangibles.
(h) On January 1, 2002, the Company adopted SFAS No. 142 for its goodwill and
identifiable intangible assets. As a result, the Company recorded a
transitional goodwill and indefinite lived intangible asset impairment
charge of $72,022 at American Guidance Service, Inc. a subsidiary of Weekly
Reader Corporation. This charge is reported as a cumulative effect of
accounting change, as of January 1, 2002, in the Condensed Consolidated
Statements of Operations.
(i) 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 $765 in 2001.
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, 2002 of WRC Media Inc. ("WRC Media") and its
subsidiaries, Weekly Reader Corporation and its subsidiaries, and their results
of operations for the years ended December 31, 2000, 2001 and 2002. You should
read the following discussion in conjunction with the Consolidated Financial
Statements of WRC Media and Weekly Reader Corporation and its subsidiaries
("Weekly Reader") and the Notes thereto included in Item 8, consolidated
financial statements. Unless the context otherwise requires, references to
"Weekly Reader" herein are to Weekly Reader and its subsidiaries, including
American Guidance Service, Inc. ("American Guidance" or "AGS") 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
Page 35 of 35
expectations will be achieved. These forward-looking statements are subject to
risks, uncertainties and assumptions about us.
OVERVIEW
We are a leading publisher of supplemental education materials for the Pre K-12
education market. Our portfolio of products includes a broad range of both print
and electronic supplemental instructional materials, testing and assessment
products and library materials, several of which have been published for over
100 years.
Our revenues consist primarily of:
- subscription revenues from our periodicals;
- revenues from sales of printed products including nonfiction
and fiction books, workbooks, worktexts, reference materials
and test preparation materials;
- computer courseware and hardware;
- professional development services; and
- technical support services.
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 net
revenue for the year ended December 31, 2002 was $2.3 million representing only
1.1% 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.
Page 36 of 36
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements require us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosures of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to allowances for doubtful accounts, reserves for sales returns
and allowances and the recoverability of long-lived assets. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances. These form the basis of our
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates, which would affect our reported results from operations. We believe
the following is a description of the critical accounting policies and estimates
used in the preparation of our consolidated financial statements.
REVENUE RECOGNITION
The Company's revenue recognition policies for its principal businesses are as
follows:
- - MAGAZINES - Revenue is deferred and recognized ratably over the
subscription period, as the magazines are delivered.
- - EDUCATIONAL PUBLISHING - For shipments to schools, revenue is
recognized on passage of title, which occurs upon shipment. Shipments
to depositories are on consignment. Revenue is recognized based on
actual shipments from the depositories to the schools. For certain
software-based product, the Company offers new customers installation
and training. In such cases, revenue is recognized when installation
and training are complete.
- - REFERENCE AND TRADE - Revenue from the sale of children's books through
the wholesale channel are recognized when books are shipped to
wholesalers. Sales to school and public libraries made through the
telemarketing preview channel are recorded upon return of unwanted
preview product. Sale of children's books to bookstores and mass
merchandisers primarily is recognized at the time of shipment, when
title transfers to the customer. A reserve for estimated returns is
established at the time of sale and recorded as a reduction to revenue.
Actual returns are charged to the reserve as received. The calculation
for the reserve for estimated returns is based on historical return
rates and sales patterns. Actual retu