Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004 Commission File No. 333-96119
WRC MEDIA INC. WEEKLY READER CORPORATION
(Exact name of Registrant as specified in its charter) (Exact name of Registrant as specified in its charter)
DELAWARE DELAWARE
(State or other jurisdiction of incorporation or (State or other jurisdiction of incorporation or organization)
organization)
2731 2721
(Primary Standard Industrial Classification Number) (Primary Standard Industrial Classification Number)
13-4066536 13-3603780
(I.R.S. Employer Identification Number) (I.R.S. Employer Identification Number)
COMPASSLEARNING, INC.
(Exact name of Registrant as specified in its charter)
2731
DELAWARE
(State or other jurisdiction of incorporation or organization)
7372
(Primary Standard Industrial Classification Number)
7372
13-4066535
(I.R.S. Employer Identification Number)
WRC MEDIA INC. WEEKLY READER CORPORATION COMPASSLEARNING, INC.
512 7th AVENUE, 22nd FLOOR 512 7th AVENUE, 22nd FLOOR 512 7th AVENUE, 22nd FLOOR
NEW YORK, NY 10018 NEW YORK, NY 10018 NEW YORK, NY 10018
(212) 768-1150 (212) 768-1150 (212) 768-1150
(Address, including zip code, and telephone number, including area code, of
each Registrant's principal executive offices)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12-months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
|_| Yes |X| No
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act.
|_| Yes |X| No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
- -------------------------------------------------------------------------------
TITLE OF CLASS | NAME OF EACH EXCHANGE ON WHICH REGISTERED
- -------------------------------------------------------------------------------
12 3/4% Senior Subordinated Notes due 2009 | OVER-THE-COUNTER MARKET
- -------------------------------------------------------------------------------
2
PART 1.
ITEM 1. FINANCIAL STATEMENTS
3
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
(Unaudited)
December 31, March 31,
2003* 2004**
----------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,432 $ 6,372
Accounts receivable (net of allowance for doubtful accounts
and sales returns of $2,519 and $2,391, respectively) 30,027 25,758
Inventories, net 16,652 15,213
Prepaid expenses 3,367 3,165
Other current assets 1,889 1,564
--------- ---------
Total current assets 53,367 52,072
Property and equipment, net 5,526 4,824
Capitalized software, net 7,293 7,414
Goodwill 143,149 143,149
Deferred financing costs, net 4,939 8,856
Other intangible assets, net 92,610 89,479
Other assets 30,448 32,649
--------- ---------
Total assets $ 337,332 $ 338,443
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 16,963 $ 13,960
Accrued payroll, commissions and benefits 9,356 7,773
Current portion of deferred revenue 35,900 27,559
Other accrued liabilities 17,166 20,345
Current portion of long-term debt 8,477 -
--------- ---------
Total current liabilities 87,862 69,637
Deferred revenue, net of current portion 959 990
Deferred tax liability 12,700 13,200
15% Series B mandatorily redeemable preferred stock,
including accrued dividends and accretion of warrant value
(5,701,360 shares outstanding)
(Liquidation preference of $142,866) - 135,169
Long-term debt 262,925 292,844
--------- ---------
Total liabilities 364,446 511,840
--------- ---------
Commitments and contingencies
15% Series B mandatorily redeemable preferred stock,
including accrued dividends and accretion of warrant value
(5,508,000 shares outstanding) 129,767 -
Warrants on common stock of subsidiaries 11,751 11,751
--------- ---------
Common stock subject to redemption 940 940
--------- ---------
Stockholders' deficit:
Common stock, ($.01 par value, 20,000,000 shares authorized;
7,008,406 shares outstanding in 2003 and 2004) 70 70
18% convertible preferred stock, ($.01 par value, 750,000 shares
authorized, 547,980 and 572,639 outstanding, respectively) 21,919 22,905
Additional paid-in capital 131,753 131,753
Accumulated other comprehensive loss (1,899) (1,899)
Accumulated deficit (321,415) (338,917)
--------- ---------
Total stockholders' deficit (169,572) (186,088)
--------- ---------
Total liabilities and stockholders' deficit $ 337,332 $ 338,443
========= =========
* Condensed from audited financial statements.
** Unaudited.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
(Amounts in thousands)
2003 2004
------------ --------
(As Restated
See Note 16)
Revenue, net $ 47,220 $ 42,760
Cost of goods sold 13,273 12,920
-------- --------
Gross profit 33,947 29,840
-------- --------
Costs and expenses:
Sales and marketing 11,481 11,555
Research and development 711 747
Distribution, circulation and fulfillment 3,510 3,552
Editorial 2,579 2,873
General and administrative 5,642 7,121
Restructuring costs and other non-recurring expenses 480 65
Depreciation 616 425
Amortization of intangible assets 4,691 4,530
-------- --------
Total operating costs and expenses 29,710 30,868
-------- --------
Income (loss) from operations 4,237 (1,028)
Interest expense, including amortization
of deferred financing costs (7,082) (14,423)
Other income (expense), net (231) (250)
-------- --------
Loss before income tax provision (3,076) (15,701)
Income tax provision 588 577
-------- --------
Net loss $ (3,664) $(16,278)
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
(Amounts in thousands)
2003 2004
------------- ----------
(As Restated
See Note 16)
Cash flows from operating activities:
Net loss $ (3,664) $ (16,278)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income tax provision 500 500
Depreciation and amortization 6,030 5,468
Accretion of manditorily redeemable preferred stock dividends - 5,164
Accretion of debt discount 107 120
Amortization of deferred financing costs 305 2,222
Changes in operating assets and liabilities:
Accounts receivable 5,371 4,269
Inventories 945 1,439
Prepaid expenses and other current assets (1,177) 527
Other non-current assets (4,638) (3,601)
Accounts payable (5,481) (3,002)
Deferred revenue (8,491) (8,310)
Accrued liabilities 2,492 1,595
--------- ---------
Net cash used in operating activities (7,701) (9,887)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (112) (144)
Capitalized software (898) (634)
Landlord reimbursement for leasehold improvements - 421
Proceeds from the disposition of property and equipment 4 -
--------- ---------
Net cash used in investing activities (1,006) (357)
--------- ---------
Cash flows from financing activities:
Proceeds from revolving line of credit 7,000 18,000
Repayments of borrowings under revolving line of credit (2,000) (23,000)
Repayment of senior bank debt (1,834) (118,678)
Deferred financing fees - (6,138)
Proceeds from issuance of long-term debt - 145,000
Purchase of common stock subject to redemption (25) -
--------- ---------
Net cash provided by financing activities 3,141 15,184
--------- ---------
(Decrease) increase in cash and cash equivalents (5,566) 4,940
Cash and cash equivalents, beginning of period 9,095 1,432
--------- ---------
Cash and cash equivalents, end of period $ 3,529 $ 6,372
========= =========
The accompanying notes are anp integral part of these condensed
consolidated financial statements.
6
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share amounts)
1. DESCRIPTION OF BUSINESS
The accompanying condensed consolidated financial statements include the
accounts of WRC Media Inc. ("WRC Media") and its subsidiaries - Weekly Reader
Corporation ("Weekly Reader"), CompassLearning, Inc. ("CompassLearning") and
ChildU, Inc. ("ChildU"). WRC Media was incorporated on May 14, 1999. The term
"Company" refers to WRC Media and its subsidiaries.
The Company is in the business of developing, publishing and marketing print and
electronic supplemental education materials. Certain of the Company's products
have been sold in the education marketplace for as long as 100 years. The
Company's customers are primarily within the United States.
2. BASIS OF PRESENTATION
Under the terms of the indenture relating to the Company's 12 3/4% Senior
Subordinated Notes due 2009 (the "Notes"), the Company is required to furnish
"all quarterly and annual financial information that would be required to be
contained in a filing with the Securities and Exchange Commission (the `SEC') on
Forms 10-Q and 10-K if the Company were required to file such forms, including a
`Management's Discussion and Analysis of Financial Condition and Results of
Operations' and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants. . ." in each case within the
time periods specified in the SEC's rules and regulations.
The Company has restated its previously issued financial statements as of and
for the year ended December 31, 2001. Because the originally issued 2001
financial statements were audited by Arthur Andersen LLP, an audit firm that has
ceased operations, the restated financial statements for 2001 are unaudited at
this time pending a reaudit which is not yet complete. The Company believes that
upon furnishing its audited 2003 financial statements to the noteholders and
filing such statements with the SEC on its Form 8-K dated March 31, 2004, it was
in compliance with the indenture's information requirements. There is no
assurance, however, that the trustee or noteholders will not claim that the
Company is in breach of the indenture's information requirements, or that after
any such claim is made and the applicable cure period has expired, the trustee
or the noteholders will not send a notice to accelerate repayment of the Notes.
If the reaudit of the Company's 2001 financial statements is completed and a
report thereon issued by its independent auditors as required by the indenture
prior to any claim of breach being made, the potential for such a claim would be
eliminated. If a breach of the information requirements of the indenture were to
be claimed and the trustee or holders of at least 25% of the aggregate principal
amount of the Notes were to provide written notice of such breach, the Company
would vigorously defend against any such claim. Even if the claim of breach were
to prevail, the Company would have 60 days from the date of written notice of
such claim of breach to cure the breach and avoid an event of default under the
indenture. If the reaudit of the Company's 2001 financial statements is
completed and a report thereon issued by its independent auditors as required by
the indenture prior to the end of the 60 day cure period, the right to
accelerate the Notes or indebtedness under the credit facility as a result of
the alleged breach of the indenture's information requirements would be
eliminated. The Company has engaged its independent auditors to perform a
reaudit of the 2001 financial statements and expects to be able to provide its
auditors with the information necessary for them to complete their audit prior
to the end of the cure period, if any claim of breach of the indenture's
information requirements is made.
While the Company is diligently working to provide such information, there is no
assurance that the Company will be able to provide the information necessary to
complete the reaudit or that the reaudit of the 2001 financial statements will
be completed and a report thereon issued by the Company's certified independent
accountants as required by the indenture. If the trustee or holders representing
at least 25% of the aggregate principal amount of the Notes claim that the
Company will be in breach of the indenture, the Company is not successful in
defending against such claim of breach and such breach is not cured within the
cure period, there would be an event of default under the indenture, and the
trustee or holders of at least 25% of the aggregate principal amount of the
Notes would have the right to accelerate payment of the Notes, and the holders
of indebtedness under the Company's credit facility also would have the right to
accelerate payment thereunder. If any such acceleration occurred, the Company
would not be able to repay the amounts due and such acceleration would have a
material adverse effect on the Company's consolidated financial condition and
liquidity. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
7
The accompanying condensed consolidated financial statements of the Company as
of March 31, 2004 and for the three-month periods ended March 31, 2003 and 2004
have been prepared in accordance with accounting principles generally accepted
in the United States of America ("GAAP") for interim financial information and
the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments, consisting of only normal recurring adjustments
necessary to present fairly the financial position, the results of operations
and cash flows for the periods presented, have been made.
These condensed consolidated financial statements should be read in conjunction
with the Company's annual financial statements and related notes thereto as
reported in the Company's Form 8-K dated March 31, 2004. The operating results
for the three-month periods ended March 31, 2003 and 2004 are not necessarily
indicative of the results that may be expected for a full year.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variables Interest Entities ("FIN 46").
FIN 46 clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements" to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. In
December 2003, the FASB issued FIN No. 46 (Revised) ("FIN 46R") to address
certain FIN 46 implementation issues. This interpretation requires that the
assets, liabilities, and results of activities of a Variable Interest Entity
("VIE") be consolidated into the financial statements of the enterprise that is
the primary beneficiary of the VIE. FIN 46R also requires additional disclosures
by primary beneficiaries and other significant variable interest holders. This
interpretation is effective no later than the end of the first interim or
reporting period ending after March 15, 2004, except for those VIE's that are
considered to be special purpose entities, for which the effective date is no
later than the end of the first interim or annual reporting period ending after
December 15, 2003. The adoption of FIN 46R effective March 31, 2004, did not
have any effect on the Company's consolidated financial position or results of
operations.
In April 2003, the FASB issued Statements of Financial Accounting Standards
("SFAS") No. 149 "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"), which amends and clarifies accounting for
derivative instruments, and for hedging activities under SFAS 133. Specifically,
SFAS 149 requires that contracts with comparable characteristics be accounted
for similarly. Additionally, SFAS 149 clarifies the circumstances in which a
contract with an initial net investment meets the characteristics of a
derivative and when a derivative contains a financing component that requires
special reporting in the statement of cash flows. This Statement is generally
effective for contracts entered into or modified after June 30, 2003 and its
adoption did not have any effect on the Company's consolidated financial
position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. This statement was effective for the
Company beginning January 1, 2004. For financial instruments created before the
issuance date of this statement and still existing at the beginning of the
interim period of adoption, transition shall be achieved by reporting the
cumulative effect of a change in an accounting principle by initially measuring
the financial instruments at fair value or other measurement attribute required
by this statement. The adoption of this statement required the Company to
reclassify its 15% Series B Redeemable Preferred Stock from the mezzanine
section of the balance sheet to long-term liabilities at March 31, 2004.
Effective January 1, 2004 dividend payments for the 15% Series B Redeemable
Preferred Stock ("Series B Preferred") are recorded as interest expense in the
consolidated statement of operations. The adoption of this statement did not
result in any adjustment to the book value of its Series B Preferred as of
January 1, 2004 as book value approximated fair value at January 1, 2004. For
the three-months ended March 31, 2004 the Company recognized $5,164 of accrued
dividends on Series B Preferred as interest expense. Interest expense for the
three-months ended March 31, 2004 also includes amortization of deferred
financing costs related to the Series B Preferred in the amount of $30.
8
4. RESTRUCTURING COSTS AND OTHER NON-RECURRING EXPENSES
During the three-months ended March 31, 2004, the Company reviewed its
restructuring reserve established in 2002 and increased the reserve $65 for
lease terminations resulting from the updating of the assumptions used in
determining the fair value of the remaining lease obligations associated with
facilities vacated during 2002.
The restructuring reserve totaling approximately $2,893 at March 31, 2004, is
expected to be paid as follows: remaining nine months of 2004 - $727, 2005 and
beyond - $2,166. These charges are included in other accrued liabilities on the
condensed consolidated balance sheets.
Components of the Company's restructuring plan initiated in the fourth quarter
of 2002 are shown in the following table.
Balance at Additional Balance at
December 31, 2003 Charges Amounts Paid March 31, 2004
----------------- ----------- ----------- --------------
Severance and other benefits $ 32 $ - $ (32) $ -
Lease terminations 3,243 65 (415) 2,893
------ ------ ------ ------
Total $3,275 $ 65 $ (447) $2,893
====== ====== ====== ======
5. STOCK-BASED COMPENSATION
Stock based compensation arrangements with employees are accounted for using the
intrinsic value method in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). The Company applies SFAS No. 123, "Accounting for Stock-Based
Compensation and Related Interpretations" ("SFAS 123") for stock-based
compensation arrangements with non-employees. The Company applies the additional
disclosure requirements of SFAS 123, as amended by SFAS No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure," for employee stock
arrangements.
The following table details the effect on net loss had compensation expense for
stock-based compensation arrangements with employees been recorded based on the
fair value method under SFAS 123, as amended for the three-month periods ended
March 31, 2003 and 2004.
Three-Months Ended March 31,
2003 2004
-------- ---------
Net loss, as reported $ (3,664) $ (16,278)
Deduct: Total stock-based employee compensation
expense determined under the fair value based method
for all awards, net of related tax effects (46) (4)
-------- ---------
Pro forma net loss $ (3,710) $ (16,282)
======== =========
9
The Company has outstanding stock options issued to certain of its executives
that are required to be accounted for as variable options. During the
three-month periods ended March 31, 2003 and 2004 no compensation expense was
recognized for these options as the fair market value of the Company's common
stock, as estimated by the Company's Board of Directors, was less than the
exercise price of these options.
6. DEBT
On March 29, 2004, the Company refinanced all of its term loans under its Senior
Bank Credit Facilities (the "First-Lien Facility") with a $145,000 senior,
second-priority lien secured financing that was provided to the Company pursuant
to a term loan facility (the "Second-Lien Facility"). The proceeds of the
Second-Lien Facility were used (i) to refinance in full all term loans
outstanding under the First-Lien Facility, (ii) to pay fees and expenses related
to the Second-Lien Facility and all transactions contemplated in connection
therewith and (iii) for general corporate purposes of the Company.
All payment obligations under the Second-Lien Facility are secured by a
second-priority lien on the collateral securing the First-Lien Facility;
provided that all obligations under the Second-Lien Facility will rank equally
in right of payment with all payment obligations under the First-Lien Facility
and will not otherwise be subordinated in any respect to the First-Lien
Facility. The final maturity of the Second-Lien Facility is March 29, 2009. At
the Company's option, the loans will bear interest at either the Administrative
Agent's (i) alternate base rate ("base rate loans") or (ii) reserve-adjusted
LIBO rate ("LIBO rate loans") plus, in each case, the "Applicable Margin" (as
defined). "Applicable Margin" means, with respect to (i) Base Rate Loans, a rate
of 4.00% per annum and (ii) LIBO Rate Loans, a rate of 5.00% per annum.
The Second-Lien Facility is subject to mandatory prepayment with:
o the proceeds of the incurrence of certain indebtedness
o the proceeds of certain asset sales or other dispositions
o a change in control
o annually, 50% of the Company's excess cash flow (as defined) from the
prior year.
The Second-Lien Facility provide for certain restrictions, including
restrictions on asset sales, dividend payments, additional indebtedness payments
for restricted investments. In addition, the Second-Lien Facility provides for
the maintenance of a financial covenant, a maximum ratio (the "Senior Leverage
Ratio") of Senior Secured Debt to trailing four quarter EBITDA (as defined
therein) not to exceed 4.25:1.00 for any fiscal quarter, except the fiscal
quarter ended June 30, 2005 for which the Senior Leverage Ratio shall not exceed
4.50:1.00, in each case to be tested on the last day of each fiscal quarter and
computed for WRC Media (as defined within the agreement) and its consolidated
subsidiaries. In connection with entering into the Second-Lien Facility, the
Company entered into an amendment and restatement of its First-Lien Facility,
which now consists solely of a $30,000 revolving credit facility.
The First-Lien Facility, as amended and restated, has a maturity of December 29,
2008, and has one financial covenant, a Senior Leverage Ratio of senior secured
debt to trailing four quarter EBITDA (as defined therein) not to exceed
4.00:1.00 for any fiscal quarter, except the fiscal quarter ended June 30, 2005
for which the Senior Leverage Ratio may not exceed 4.25:1.00, in each case to be
tested on the last day of the fiscal quarter and computed for the Company and
its consolidated subsidiaries. Interest on revolving loan borrowings under the
First-Lien Facility bear interest at a rate per annum equal to the LIBO rate as
defined in the First-Lien Facility plus 3.5% or the alternate base rate as
defined in the First-Lien Facility plus 2.5%.
As a result of the refinancing of the Company wrote-off the remaining balances
of deferred financing costs associated with the First Lien Facility of
approximately $1,914. These costs are included in interest expense, including
amortization of deferred financing costs, on the condensed consolidated
statement of operations for the three-months ended March 31, 2004.
10
In connection with the refinancing the Company incurred costs and expenses,
primarily investment banking and legal fees, of approximately $6,138. These
amounts have been recorded as deferred financing fees at March 31, 2004 and will
be amortized over the term of the Second Lien Facility using the effective
interest method.
At March 31, 2004, there were no outstanding advances under the Company's
$30,000 revolving credit facility, which bears interest at approximately 4.6%
for Eurodollar rate advances and 6.4% for base rate advances as of March 31,
2004. The Company has stand-by letters of credit, renewable annually, in the
amount of $2,050 of which $2,000 serves as security for a real estate lease
entered into by the Company and $50 serves as security for certain surety bonds
issued on behalf of the Company. While these letters of credit are in effect,
the Company's available borrowing under the revolving credit facility is reduced
by $2,050.
7. FINANCIAL INSTRUMENTS
Pursuant to the terms of the First and Second-Lien Credit Agreements, the
Company is required to enter into or maintain interest rate protection
agreements (interest rate swaps, caps, collars or similar agreements) in a
notional amount that, when taken together with the aggregate principal amount of
Total Debt, as defined subject to a fixed interest rate, is at least equal to at
least 50% of the aggregate principal amount of all Total Debt. On November 15,
2003, the Company entered into a one year interest rate cap agreement with a
notional principal of $61,000, which caps the LIBOR based rate, as defined, on
those loans at 2.5%. The interest rate protection agreement did not qualify for
hedge accounting treatment and as such the Company marks to market the contract
at the end of each period. The fair value of the interest rate cap at March 31,
2004 is de-minimus.
8. INVENTORIES
Inventories as of December 31, 2003 and March 31, 2004 are as follows:
December 31, March 31,
2003 2004
----------- -----------
Finished goods $ 19,932 $ 18,739
Raw materials 119 101
Less - impaired, excess and obsolete inventory (3,399) (3,627)
----------- -----------
Inventory, net $ 16,652 $ 15,213
=========== ===========
9. GOODWILL AND TRADEMARKS
At December 31, 2003 and March 31, 2004, goodwill and indefinite lived
intangibles are as follows:
December 31, March 31,
2003 2004
----------- ----------
Goodwill $ 143,149 $ 143,149
Long Lived Assets - Trademarks 42,150 42,150
----------- ----------
$ 185,299 $ 185,299
=========== ==========
There were no changes in goodwill during the three-months ended March 31, 2004.
The Company recorded non-cash deferred income tax expense of $500 during the
three-months ended March 31, 2003 and 2004, for taxable temporary differences
that will not reverse prior to expiration of the Company's net operating loss
carryforward periods. Book amortization of tax-deductible goodwill and
trademarks ceased on January 1, 2002 upon the Company's adoption of SFAS
No. 142, however the Company continues to amortize these assets for tax
purposes. As a result, the Company will have deferred tax liabilities that will
arise each quarter as the taxable temporary differences related to the
amortization of these assets will not reverse prior to the expiration period of
the Company's deductible temporary differences unless the related assets are
sold or an impairment of the assets is recorded. The Company expects that it
will record an additional $1,500 to increase the valuation allowance during the
remaining nine months of 2004.
11
10. OTHER INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization of the Company's
intangible assets other than goodwill and indefinite lived intangible are as
follows:
December 31, 2003 March 31, 2004
-------------------------------- -------------------------------
Accumulated Accumulated
Useful Lives Gross Amortization Net Gross Amortization Net
------------ ---------- --------- -------- --------- ------------ ---------
Customer Lists 7-9 yrs $ 62,911 $ (27,770) $ 35,141 $ 62,911 $ (29,535) $ 33,376
Copyrights 8 yrs 21,053 (11,742) 9,311 21,053 (12,107) 8,946
Product Titles 7 yrs 13,475 (11,760) 1,715 13,475 (12,099) 1,376
Software 5 yrs 8,369 (4,320) 4,049 8,369 (4,738) 3,631
Trade name 5 yrs 3,520 (3,276) 244 3,520 (3,520) -
---------- --------- -------- --------- ---------- --------
Total: $ 109,328 $ (58,868) $ 50,460 $ 109,328 $ (61,999) $ 47,329
---------- --------- -------- --------- ---------- ---------
Included in other intangible assets, are trademarks not subject to amortization,
for which the total carrying amount was $42,150 at December 31, 2003 and March
31, 2004.
Amortization of intangibles for the three-months ended March 31, 2003 and 2004
was $3,488 and $3,131, respectively and is included in amortization of
intangibles assets on the condensed consolidated statement of operations. The
estimated amortization expense for intangible assets subject to amortization for
the next five years is as follows:
Remaining nine months of 2004 ......................... $ 7,830
Year ended 2005 ......................... $ 9,459
Year ended 2006 ......................... $ 6,671
Year ended 2007 ......................... $ 4,439
Year ended 2008 ......................... $ 4,420
Year ended 2009 ......................... $ 4,178
Thereafter ......................... $ 10,332
11. COMMITMENTS AND CONTINGENCIES
The Company is a party to litigation arising in the normal course of business.
Management regularly analyzes current information and, as necessary, provides
accruals for probable liabilities on the eventual disposition of these matters.
Management believes that the effect on its results of operations and financial
position, if any, for the disposition of these matters, will not be material.
The SEC is conducting a preliminary inquiry concerning the Company. The SEC has
requested that the Company voluntarily provide the SEC with various documents
and information, and that certain officers of the Company voluntarily give
testimony. The Company is cooperating fully with the SEC inquiry, and has
provided all documents, information and testimony requested by the SEC. The
Company cannot predict the final outcome of this inquiry at this time.
12. NOTES OFFERING AND GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
In connection with the recapitalization and purchase of Weekly Reader during
November 1999, the Company, Weekly Reader and CompassLearning as co-issuers,
completed an offering of $152.0 million 12 3/4% Senior Subordinated Notes due
2009 (the "Old Notes"). In June 2000, the Old Notes were exchanged in full for
$152.0 million of new 12 3/4% Senior Subordinated Notes due 2009 (the "Notes"),
which have terms that are substantially the same as Old Notes except that the
Notes were registered with the Securities and Exchange Commission. Interest on
the Notes is payable semi-annually, on May 15 and November 15 of each year. The
Notes are jointly, severally, fully and unconditionally guaranteed by certain
subsidiaries of the Company, including CompassLearning, a wholly-owned
subsidiary and Weekly Reader, a majority (94.9%) owned subsidiary of the Company
(collectively, the "Subsidiary Guarantors").
12
The following tables present condensed consolidating financial information for
WRC Media and the subsidiary guarantors as of and for the three-month periods
ended March 31, 2003 and 2004 for: (1) WRC Media, (2) Weekly Reader, a
non-wholly-owned guarantor subsidiary, (3) CompassLearning, Inc., a wholly-owned
guarantor subsidiary, (4) ChildU, Inc. a wholly-owned subsidiary, guarantor
subsidiary and (5) the Company on a consolidated basis.
Subsidiary Guarantors
----------------------------------------
Weekly Compass-
Reader Learning WRC Media Inc.
WRC Media Inc. Corporation Inc. ChildU Eliminations Consolidated
-------------- ----------- --------- --------- ------------ --------------
(In thousands)
Balance Sheet as of March 31, 2004
Assets:
Current assets $ 1,761 $ 73,782 $ 14,533 $ 9,196 $ (47,200) $ 52,072
Property and equipment, net - 4,131 555 138 - 4,824
Goodwill and other intangible assets, net 157,127 48,376 23,494 3,631 - 232,628
Other assets 108,781 32,464 5,136 2,463 (99,925) 48,919
--------- --------- --------- --------- --------- ---------
Total assets $ 267,669 $ 158,753 $ 43,718 $ 15,428 $(147,125) $ 338,443
========= ========= ========= ========= ========= =========
Liabilities and stockholders' deficit:
Current liabilities $ 109,838 $ 37,195 $ 44,369 $ 16,226 $(137,991) $ 69,637
Redeemable preferred stock, plus accrued
dividends 135,169 142,866 - - (142,866) 135,169
Long-term debt, less current portion 147,844 292,844 - - (147,844) 292,844
Other liabilities 10,400 2,800 990 - - 14,190
Warrants on common stock of subsidiaries 11,751 - - - - 11,751
Common stock subject to redemption 940 - - - - 940
Stockholders' deficit: (148,273) (316,952) (1,641) (798) 281,576 (186,088)
--------- --------- --------- --------- --------- ---------
Total liabilities and stockholders' deficit $ 267,669 $ 158,753 $ 43,718 $ 15,428 $(147,125) $ 338,443
========= ========= ========= ========= ========= =========
Subsidiary Guarantors
----------------------------------------
Weekly Compass-
Reader Learning WRC Media Inc.
WRC Media Inc. Corporation Inc. ChildU Eliminations Consolidated
-------------- ----------- --------- --------- ------------ --------------
(In thousands)
Statements of operations for the three months
ended March 31, 2004
Revenue, net $ - $ 34,428 $ 6,669 $ 1,663 $ - $ 42,760
Operating costs and expenses 1,044 29,822 10,202 2,720 - 43,788
Interest expense, net 11,839 12,713 - - (10,129) 14,423
Other (income) expense 253 (3) - - - 250
Provision for income taxes 399 143 35 - - 577
-------- -------- -------- -------- -------- --------
Net loss $(13,535) $ (8,247) $ (3,568) $ (1,057) $ 10,129 $(16,278)
======== ======== ======== ======== ======== ========
Cash flow for the three months
ended March 31, 2004
Cash flow provided by (used in) operations $ 22 $(10,400) $ (3,926) $ (428) $ 4,845 $ (9,887)
Cash flow used in investing activities - (119) (120) (118) - (357)
Cash flow provided by (used in) financing activities (37) 15,468 4,046 552 (4,845) 15,184
Cash and cash equivalents at beginning of period 100 1,267 4 61 - 1,432
-------- -------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ 85 $ 6,216 $ 4 $ 67 $ - $ 6,372
======== ======== ======== ======== ======== ========
Subsidiary Guarantors
----------------------------------------
Weekly Compass-
Reader Learning Non-guarantor WRC Media Inc.
WRC Media Inc. Corporation Inc. Subsidiary Eliminations Consolidated
-------------- ----------- --------- --------- ------------ --------------
(In thousands)
Statements of operations for the three months
ended March 31, 2003
Revenue, net $ - $ 35,001 $ 11,246 $ 973 $ - $ 47,220
Operating costs and expenses 1,524 28,092 12,006 1,361 - 42,983
Interest expense, net 5,212 6,822 - - (4,952) 7,082
Other (income) expense 237 (6) - - - 231
Provision for income taxes 398 175 15 - - 588
-------- -------- -------- -------- -------- --------
Net loss $ (7,371) $ (82) $ (775) $ (388) $ 4,952 $ (3,664)
======== ======== ======== ======== ======== ========
Cash flow for the three months
ended March 31, 2003
Cash flow provided by (used in) operations $ (537) $(12,739) $ 709 $ 23 $ 4,843 $ (7,701)
Cash flow used in investing activities - (105) (515) (386) - (1,006)
Cash flow provided by (used in) financing activities 318 7,493 (194) 367 (4,843) 3,141
Cash and cash equivalents at beginning of period 1,154 7,819 4 118 - 9,095
-------- -------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ 935 $ 2,468 $ 4 $ 122 $ - $ 3,529
======== ======== ======== ======== ======== ========
13
13. RELATED PARTY TRANSACTIONS
Management Agreements
In connection with the recapitalization of Weekly Reader and acquisition and
CompassLearning, the Company entered into management agreements with its
principal shareholder. In accordance with the management agreements, the
shareholder provides to Weekly Reader and CompassLearning management consulting
and advisory services. As a result, Weekly Reader and CompassLearning are
obligated to pay to the shareholder annual aggregate management fees for
services to both Weekly Reader and CompassLearning totaling $950 payable
quarterly.
In addition, the Company will reimburse the principal shareholder for reasonable
out-of-pocket costs and expenses incurred in connection with the performance of
its services. During the three-month periods ended March 31, 2003 and 2004, the
Company recognized general and administrative expense of $238 for management
fees. At March 31, 2004, other accrued liabilities includes approximately $888
of accrued management fees.
14. PENSION BENEFITS
The following table provides components of net periodic benefit cost for the
Company's defined benefit pension plan for the three-months ended March 31, 2003
and 2004:
Pension Benefits
----------------
2003 2004
----- -----
Service cost $ 229 $ 225
Interest Cost 221 238
Expected return on plan assets (169) (242)
Amortization of net loss 74 42
----- -----
Net periodic benefit cost $ 355 $ 263
===== =====
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Three-Months Ended March 31,
----------------------------
2003 2004
------ --------
Cash paid during the period for interest $2,053 $2,676
Cash paid during the period for income taxes $ 88 $ 114
Non-cash financing activities:
Preferred stock dividends accrued $5,284 $6,150 (1)
Accretion of preferred stock $ 235 $ 238
(1) During the quarter ended March 31, 2004, $5,164 of such preferred stock
dividends have been recorded as interest expense in the statement of
operations, resulting from the Company's adoption of SFAS 150 effective
January 1, 2004.
16. RESTATEMENT
In connection with the audit of the Company's 2003 consolidated financial
statements, management has restated its financial statements for the years ended
December 31, 2002 and 2001 because it had incorrectly accounted for certain
transactions.
14
As a result, the Company has restated its condensed consolidated financial
statements for the three-months ended March 31, 2003. After giving effect to the
restatement described below, the Company believes it was in compliance with the
financial covenants in its credit facility for the reporting period ended March
31, 2003.
Described below are the matters for which the Company has restated its condensed
consolidated financial statements for three-months ended March 31, 2003.
o Software and Services Sale. In December 2002, the Company recorded a
$1,860 receivable of revenue from the sale of educational software and
services to a school district. Of this amount, $1,169 was recognized
as revenue during the fiscal quarter ended December 31, 2002, and $691
was recorded as a deferred revenue liability as of December 31, 2002.
Accrued sales commissions of $342 also were recorded. In the first
quarter of 2003, this $1,169 of revenue previously recognized in
December 2002 was offset by recording a bad debt reserve of $920
and by retaining an excess of $250 in the Company's allowance for
doubtful accounts, which excess amount would have otherwise been
reversed. The Company has concluded that the sale did not meet the
criteria under GAAP for revenue recognition for the year ended
December 31, 2002, and that it incorrectly recorded the related bad
debt reserve and retained the excess allowance for doubtful accounts
in 2003. The Company has corrected these errors by reversing these
transactions. The net effect for the three-months ended March 31, 2003
was to decrease net loss by approximately $920. In addition, total
assets increased by approximately $920 as of March 31, 2003.
o ChildU Goodwill Reduction. The Company's subsidiary, ChildU, Inc., was
acquired in 2001. In connection with such acquisition, the Company
issued shares of its common stock to the holders of notes issued by
ChildU. The Company has determined that the value assigned to these
shares when the Company recorded the purchase price for this
acquisition in its historical financial statements for 2001 exceeded
the fair market value of these shares. Accordingly, the Company has
restated its financial statements to record correctly the fair market
value of these shares, which had the effect of reducing the purchase
price for ChildU, goodwill and additional paid-in capital, by
approximately $3,419 as of December 31, 2001. In addition, the Company
allocated the entire purchase price to goodwill, and had assigned that
goodwill an estimated life of 40 years. The asset acquired was
software technology and not goodwill. The Company has restated its
financial statements to record the software technology and to amortize
such acquired technology over its estimated useful life of five years,
which had the effect of increasing net loss by $418, and increasing
intangibles amortization expense by $418 in the three-months ended
March 31, 2003.
Following the determination to restate the Company's financial statements for
matters described above, the Company also determined that it would correct for
certain errors made in the application of GAAP that had not previously been
corrected because in each such case it believed that the amount of any such
error was not material to its condensed consolidated financial statements. These
matters are described below.
o Distributor Sales. Historically the Company recognized revenue under a
distribution contract between its subsidiary, World Almanac Education
Group, and a distributor at the time that the Company shipped its
products to the distributor rather than at the time those products
were resold by the distributor. The Company also recorded distribution
fees under this contract as operating costs and expenses, based on its
understanding of the distribution contract. The Company has determined
to recognize revenue only at the time the distributor ships these
products to its customer. The Company has restated its financial
statements which decreased its net loss and increased net assets by
$169 for the three-months ended March 31, 2003.
o Rent. The Company has two leases that have "free rent" incentives at
the commencement of the leases and also contain rent escalation
clauses (which clauses provide for rent increases over time) for which
it was required under GAAP to record the average rent expense ratably
over the lease term. In its historical 2001 financial statements,
however, the Company recorded the rent expense from these leases as it
was paid. In its historical 2002 financial statements, the Company
began correctly recording the average rent expense for these leases,
but it calculated the average rent using the remainder of the lease
term instead of the entire lease term. The Company has restated its
financial statements to correct these errors, which had the net effect
of decreasing its net loss by $158 and decreasing liabilities by $158
for the three-months ended March 31, 2003.
15
o Other. The Company also made an adjustment relating to the
amortization period for certain capitalized pre-publication costs
which had the effect of increasing net loss by $105 for the
three-months ended March 31, 2003 and it reclassified $465 of software
development amortization from amortization of intangibles to cost of
goods sold in the condensed consolidated statement of operations for
the three-months ended March 31, 2003.
Summarized below are the significant effects of the restatement of the Company's
condensed consolidated statement of operations for the three-months ended March
31, 2003.
March 31, 2003
---------------------------------------------------------
As Previously
Reported As Restated
-------------------------- --------------------------
Statement of Operations, for the three-months ended
Revenue, net $ 46,977 $ 47,220
Gross profit 34,243 33,947
Operating costs and expenses 30,730 29,710
Income from operations 3,513 4,237
Net loss $ (4,388) $ (3,664)
16
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
(Unaudited)
December 31, March 31,
2003* 2004**
------------ ---------
ASSETS
Current Assets:
Cash $ 1,267 $ 6,216
Accounts receivable (net of allowance for doubtful accounts
and sales returns of $2,179 and $2,205, respectively.) 20,880 19,387
Inventories, net 15,890 14,476
Due from related party 11,502 29,892
Prepaid expenses 2,882 2,600
Other current assets 1,889 1,211
--------- ---------
Total current assets 54,310 73,782
Property and equipment, net 4,399 4,131
Goodwill 35,018 35,018
Deferred financing costs, net 512 -
Other intangible assets, net 14,377 13,358
Other assets 30,263 32,464
--------- ---------
Total assets $ 138,879 $ 158,753
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 15,446 $ 12,372
Deferred revenue 17,565 12,307
Accrued expenses and other current liabilities 15,365 12,516
Current portion of long-term debt 8,477 -
--------- ---------
Total current liabilities 56,853 37,195
Deferred tax liability 2,640 2,800
15% Series B mandatorily redeemable preferred stock,
including accrued dividends and accretion of warrant value
(5,701,360 shares outstanding)
(Liquidation preference of $142,866) - 142,866
Long-term debt 262,925 292,844
--------- ---------
Total liabilities 322,418 475,705
--------- ---------
Commitments and contingencies
15% Series B mandatorily redeemable preferred stock,
including accrued dividends and accretion of warrant value
(5,508,000 shares outstanding) 137,702 -
Stockholders' deficit:
Common stock, ($.01 par value, 20,000,000 shares authorized;
2,830,000 shares outstanding in 2003 and 2004) 28 28
Additional paid-in capital 9,133 9,133
Due from parent (59,028) (46,492)
Accumulated other comprehensive loss (1,899) (1,899)
Accumulated deficit (269,475) (277,722)
--------- ---------
Total stockholders' deficit (321,241) (316,952)
--------- ---------
Total liabilities and stockholders' deficit $ 138,879 $ 158,753
========= =========
* Condensed from audited financial statements.
** Unaudited.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
17
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
(Amounts in thousands)
2003 2004
------------- --------
(As Restated
See Note 14)
Revenue, net $ 35,001 $ 34,428
Cost of goods sold 8,439 8,501
-------- --------
Gross profit 26,562 25,927
-------- --------
Costs and expenses:
Sales and marketing 6,327 7,025
Distribution, circulation and fulfillment 3,510 3,552
Editorial 2,579 2,873
General and administrative 4,439 5,065
Restructuring costs - 1
Depreciation 439 387
Amortization of intangible assets 2,359 2,418
-------- --------
Total operating costs and expenses 19,653 21,321
-------- --------
Income from operations 6,909 4,606
Other income (expense) :
Interest expense, including amortization
of deferred financing costs (6,822) (12,713)
Other income (expense), net 6 3
-------- --------
Income (loss) before income tax provision 93 (8,104)
Income tax provision 175 143
-------- --------
Net loss $ (82) $ (8,247)
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
18
WEEKLY READER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
(Amounts in thousands)
2003 2004
------------- ---------
(As Restated
See Note 14)
Cash flows from operating activities:
Net loss $ (82) $ (8,247)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income tax provision 160 160
Depreciation and amortization 2,798 2,805
Accretion of manditorily redeemable preferred stock dividends - 5,164
Accretion of debt discount 107 120
Amortization of deferred financing costs 45 512
Changes in operating assets and liabilities:
Accounts receivable 2,262 1,493
Inventories 994 1,414
Prepaid expenses and other current assets (853) 960
Other non-current assets (4,638) (3,601)
Accounts payable (5,160) (3,074)
Deferred revenue (6,513) (5,258)
Accrued liabilities (1,859) (2,848)
--------- ---------
Net cash used in operating activities (12,739) (10,400)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (109) (119)
Proceeds from the disposition of property and equipment 4 -
--------- ---------
Net cash used in investing activities (105) (119)
--------- ---------
Cash flows from financing activities:
Proceeds from revolving line of credit 7,000 18,000
Repayments of borrowings under revolving line of credit (2,000) (23,000)
Repayment of senior bank debt (1,834) (118,678)
Proceeds from issuance of long term debt - 145,000
Decrease in due from parent, net 5,865 12,536
Increase in due from related party (1,538) (18,390)
--------- ---------
Net cash provided by financing activities 7,493 15,468
--------- ---------
(Decrease) increase in cash and cash equivalents (5,351) 4,949
Cash and cash equivalents, beginning of period 7,819 1,267
--------- ---------
Cash and cash equivalents, end of period $ 2,468 $ 6,216
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
19
WEEKLY READER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share amounts)
1. DESCRIPTION OF BUSINESS
The condensed consolidated financial statements of Weekly Reader Corporation
("WRC") include the accounts of WRC and its subsidiary, Lifetime Learning
System, Inc. ("Lifetime Learning"), World Almanac Education Group ("WAE") and
its subsidiaries, Funk & Wagnalls Yearbook Corporation and Gareth Stevens, Inc.
("Gareth Stevens"), and American Guidance Service, Inc. and its subsidiaries,
AGS International Sales, Inc. and Lindy Acquisition Co., LLC (all are
collectively referred to as "Weekly Reader" or the "Company"). At December 31,
2003 and March 31, 2004, WRC Media Inc. (the "Parent") owns 94.9% and PRIMEDIA,
Inc. owns 5.1% of the common stock of Weekly Reader. On May 9, 2001 American
Guidance acquired through a subsidiary all of the operating assets of Lindy
Enterprises, Inc. ("Lindy") for approximately $7,500. The transaction was
accounted for as an asset purchase. Lindy develops curriculum-based skills
assessment and test preparation products that correlate to national and state
curriculum.
2. BASIS OF PRESENTATION
Under the terms of the indenture relating to the Company's 12 3/4% Senior
Subordinated Notes due 2009 (the "Notes"), the Company is required to furnish
"all quarterly and annual financial information that would be required to be
contained in a filing with the Securities and Exchange Commission (the `SEC') on
Forms 10-Q and 10-K if the Company were required to file such forms, including a
`Management's Discussion and Analysis of Financial Condition and Results of
Operations' and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants. . ." in each case within the
time periods specified in the SEC's rules and regulations.
The Company has restated its previously issued financial statements as of and
for the year ended December 31, 2001. Because the originally issued 2001
financial statements were audited by Arthur Andersen LLP, an audit firm that has
ceased operations, the restated financial statements for 2001 are unaudited at
this time pending a reaudit which is not yet complete. The Company believes that
upon furnishing its audited 2003 financial statements to the noteholders and
filing such statements with the SEC on its Form 8-K dated March 31, 2004, it was
in compliance with the indenture's information requirements. There is no
assurance, however, that the trustee or noteholders will not claim that the
Company is in breach of the indenture's information requirements, or that after
any such claim is made and the applicable cure period has expired, the trustee
or the noteholders will not send a notice to accelerate repayment of the Notes.
If the reaudit of the Company's 2001 financial statements is completed and a
report thereon issued by its independent auditors as required by the indenture
prior to any claim of breach being made, the potential for such a claim would be
eliminated. If a breach of the information requirements of the indenture were to
be claimed and the trustee or holders of at least 25% of the aggregate principal
amount of the Notes were to provide written notice of such breach, the Company
would vigorously defend against any such claim. Even if the claim of breach were
to prevail, the Company would have 60 days from the date of written notice of
such claim of breach to cure the breach and avoid an event of default under the
indenture. If the reaudit of the Company's 2001 financial statements is
completed and a report thereon issued by its independent auditors as required by
the indenture prior to the end of the 60 day cure period, the right to
accelerate the Notes or indebtedness under the credit facility as a result of
the alleged breach of the indenture's information requirements would be
eliminated. The Company has engaged its independent auditors to perform a
reaudit of the 2001 financial statements and expects to be able to provide its
auditors with the information necessary for them to complete their audit prior
to the end of the cure period, if any claim of breach of the indenture's
information requirements is made.
20
While the Company is diligently working to provide such information, there is no
assurance that the Company will be able to provide the information necessary to
complete the reaudit or that the reaudit of the 2001 financial statements will
be completed and a report thereon issued by the Company's certified independent
accountants as required by the indenture. If the trustee or holders representing
at least 25% of the aggregate principal amount of the Notes claim that the
Company will be in breach of the indenture, the Company is not successful in
defending against such claim of breach and such breach is not cured within the
cure period, there would be an event of default under the indenture, and the
trustee or holders of at least 25% of the aggregate principal amount of the
Notes would have the right to accelerate payment of the Notes, and the holders
of indebtedness under the Company's credit facility also would have the right to
accelerate payment thereunder. If any such acceleration occurred, the Company
would not be able to repay the amounts due and such acceleration would have a
material adverse effect on the Company's consolidated financial condition and
liquidity. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
The accompanying condensed consolidated financial statements of the Company as
of March 31, 2004 and for the three-month periods ended March 31, 2003 and 2004
have been prepared in accordance with accounting principles generally accepted
in the United States of America ("GAAP") for interim financial information and
the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for
complete financial statements In the opinion of management, all adjustments,
consisting of only normal recurring adjustments necessary to present fairly the
financial position, the results of operations and cash flows for the periods
presented, have been made.
These condensed consolidated financial statements should be read in conjunction
with Weekly Reader Corporation and Subsidiaries annual financial statements and
related notes thereto for the year ended December 31, 2003 included in the
Company's Form 8-K dated March 31, 2004. The operating results for the
three-month periods ended March 31, 2003 and 2004 are not necessarily indicative
of the results that may be expected for a full year.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variables Interest Entities ("FIN 46").
FIN 46 clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements" to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. In
December 2003, the FASB issued FIN No. 46 (Revised) ("FIN 46R") to address
certain FIN 46 implementation issues. This interpretation requires that the
assets, liabilities, and results of activities of a Variable Interest Entity
("VIE") be consolidated into the financial statements of the enterprise that is
the primary beneficiary of the VIE. FIN 46R also requires additional disclosures
by primary beneficiaries and other significant variable interest holders. This
interpretation is effective no later than the end of the first interim or
reporting period ending after March 15, 2004, except for those VIE's that are
considered to be special purpose entities, for which the effective date is no
later than the end of the first interim or annual reporting period ending after
December 15, 2003. The adoption of FIN 46R effective March 31, 2004 did not have
a significant impact on the Company's consolidated financial position or results
of operations.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149 "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"), which amends and clarifies accounting for
derivative instruments, and for hedging activities under SFAS 133. Specifically,
SFAS 149 requires that contracts with comparable characteristics be accounted
for similarly. Additionally, SFAS 149 clarifies the circumstances in which a
contract with an initial net investment meets the characteristics of a
derivative and when a derivative contains a financing component that requires
special reporting in the statement of cash flows. This statement is generally
effective for contracts entered into or modified after June 30, 2003 and did not
have a significant impact on the Company's consolidated financial position or
results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. This statement was effective for the
Company beginning January 1, 2004. For financial instruments created before the
issuance date of this statement and still existing at the beginning of the
interim period of adoption, transition shall be achieved by reporting the
cumulative effect of a change in an accounting principle by initially measuring
the financial instruments at fair value or other measurement attribute required
by this statement. The adoption of this statement required the Company to
reclassify its 15% Series B Redeemable Preferred Stock from the mezzanine
section of the balance sheet to long-term liabilities at March 31, 2004.
Effective January 1, 2004 dividend payments for the 15% Series B Redeemable
Preferred Stock ("Series B Preferred") are recorded as interest expense in the
consolidated statement of operations. The adoption of this statement did not
result in any adjustment to the book value of its Series B Preferred as of
January 1, 2004 as book value approximated fair value at January 1, 2004. For
the three-months ended March 31, 2004 the Company recognized $5,164 of accrued
dividends on Series B Preferred as interest expense. Interest expense for the
three-months ended March 31, 2004 also includes amortization of deferred
financing costs related to the Series B Preferred in the amount of $30.
21
4. RESTRUCTURING AND OTHER NON-RECURRING EXPENSES
During the three-months ended March 31, 2004, the Company reviewed its
restructuring reserve established in 2002 and adjusted the reserve by $1 due to
updating the assumptions used in determining the fair value of the remaining
lease obligations associated with facilities vacated during 2002.
The restructuring reserve totaling approximately $976 at March 31, 2004 is
expected to be paid as follows: remaining nine months of 2004 - $152 and 2005
and beyond - $824 and is included in accrued expenses and other current
liabilities in the condensed consolidated balance sheets.
Components of the Company's restructuring plan initiated in the fourth quarter
of 2002 are shown in the following table:
Balance at
December 31, Additional Balance at
2003 Adjustments Amounts Paid March 31, 2004
------------ ----------- ------------ --------------
Severance and other benefits $ 20 $ - $ (20) $ -
Lease terminations 988 1 (13) 976
------------- ---------- ---------- -------------
Total $ 1,008 $ 1 $ (33) $ 976
============= ========== ========== =============
5. DEBT
On March 29, 2004, the Company refinanced all of its term loans under its Senior
Bank Credit Facilities (the "First-Lien Facility") with a $145,000 senior,
second-priority lien secured financing that was provided to the Company pursuant
to a term loan facility (the "Second-Lien Facility"). The proceeds of the
Second-Lien Facility were used (i) to refinance in full all term loans
outstanding under the First-Lien Facility, (ii) to pay fees and expenses related
to the Second-Lien Facility and all transactions contemplated in connection
therewith and (iii) for general corporate purposes of the Company.
All payment obligations under the Second-Lien Facility are secured by a
second-priority lien on the collateral securing the First-Lien Facility;
provided that all obligations under the Second-Lien Facility will rank equally
in right of payment with all payment obligations under the First-Lien Facility
and will not otherwise be subordinated in any respect to the First-Lien
Facility. The final maturity of the Second-Lien Facility will be March 29, 2009.
At the Company's option, the loans will bear interest at either the
Administrative Agent's (i) alternate base rate ("base rate loans") or (ii)
reserve-adjusted LIBO rate ("LIBO rate loans") plus, in each case, the
"Applicable Margin" (as defined). "Applicable Margin" means, with respect to (i)
Base Rate Loans, a rate of 4.00% per annum and (ii) LIBO Rate Loans, a rate of
5.00% per annum.
22
The Second-Lien Facility is subject to mandatory prepayment with:
o the proceeds of the incurrence of certain indebtedness
o the proceeds of certain asset sales or other dispositions
o a change in control
o annually, 50% of the Company's excess cash flow (as defined) from the
prior year.
The Second-Lien Facility provide for certain restrictions, including
restrictions on asset sales, dividend payments, additional indebtedness payments
for restricted investments. In addition, the Second-Lien Facility provides for
the maintenance of a financial covenant, a maximum ratio (the "Senior Leverage
Ratio") of Senior Secured Debt to trailing four quarter EBITDA (as defined
therein) not to exceed 4.25:1.00 for any fiscal quarter, except the fiscal
quarter ended June 30, 2005 for which the Senior Leverage Ratio shall not exceed
4.50:1.00, in each case to be tested on the last day of each fiscal quarter and
computed for WRC Media (as defined within the agreement) and its consolidated
subsidiaries. In connection with entering into the Second-Lien Facility, the
Company entered into an amendment and restatement of its First-Lien Facility,
which now consists solely of a $30,000 revolving credit facility.
The First-Lien Facility, as amended and restated, has a maturity of December 29,
2008, and has one financial covenant, a Senior Leverage Ratio of senior secured
debt to trailing four quarter EBITDA (as defined therein) not to exceed
4.00:1.00 for any fiscal quarter, except the fiscal quarter ended June 30, 2005
for which the Senior Leverage Ratio may not exceed 4.25:1.00, in each case to be
tested on the last day of the fiscal quarter and computed for the Company and
its consolidated subsidiaries. Interest on revolving loan borrowings under the
First-Lien Facility bear interest at a rate per annum equal to the LIBO rate as
defined in the First-Lien Facility plus 3.5% or the alternate base rate as
defined in the First-Lien Facility plus 2.5%.
As a result of the refinancing, the Company wrote-off the remaining balances of
deferred financing costs associated with the First Lien Facility of
approximately $467. These costs are included in interest expense, including
amortization of deferred financing costs on the condensed consolidated statement
of operations for the three-months ended March 31, 2004.
In connection with the refinancing the Company incurred costs and expenses,
primarily investment banking and legal fees, of approximately $6,138. These
amounts have been recorded as deferred financing fees at March 31, 2004 and will
be amortized over the term of the Second Lien Facility using the effective
interest method.
At March 31, 2004, there were no outstanding advances under the Company's
$30,000 revolving credit facility, which bears interest at approximately 4.6%
for Eurodollar rate advances and 6.4% for base rate advances as of March 31,
2004. The Company has stand-by letters of credit, renewable annually, in the
amount of $2,050 of which $2,000 serves as security for a real estate lease
entered into by the Company and $50 serves as security for certain surety bonds
issued on behalf of the Company. While these letters of credit are in effect,
the Company's available borrowing under the revolving credit facility is reduced
by $2,050.
6. FINANCIAL INSTRUMENTS
Pursuant to the terms of the First and Second-Lien Credit Agreements, the
Company is required to enter into or maintain interest rate protection
agreements (interest rate swaps, caps, collars or similar agreements) in a
notional amount that, when taken together with the aggregate principal amount of
the Company's Total Debt subject to a fixed interest rate, is at least equal to
at least 50% of the aggregate principal amount of all Total Debt. On November
15, 2003, the Company entered into a one year interest rate cap agreement with a
notional principal of $61,000, which caps the LIBOR based rate, as defined, on
those loans at 2.5%. The interest rate protection agreement did not qualify for
hedge accounting treatment and as such the Company marks the contract to market
at the end of each period. The fair value of the interest rate cap at March 31,
2004 is de-minimus.
23
7. INVENTORIES
Inventories are comprised of the following:
December 31, March 31,
2003 2004
------------- ----------
Finished goods $ 19,090 $ 17,995
Raw materials 37 24
Less - impaired, excess and obsolete inventory (3,237) (3,543)
------------- ----------
Inventory, net $ 15,890 $ 14,476
============= ==========
8. GOODWILL AND TRADEMARKS
At December 31, 2003 and March 31, 2004, Goodwill and indefinite lived
intangibles are as follows:
December 31, March 31,
2003 2004
---- ----
Goodwill $ 35,018 $ 35,018
Long Lived Assets - Trademarks 9,955 9,955
----------- ----------
$ 44,973 $ 44,973
=========== ==========
There were no changes to goodwill and indefinite lived intangibles during the
three-months ended March 31, 2004.
WRC recorded non-cash deferred income tax expense of $160 during the
three-months ended March 31, 2003 and 2004, for taxable temporary differences
that will not reverse prior to expiration of the Company's net operating loss
carryforward periods. Book amortization of tax-deductible goodwill and
trademarks ceased on January 1, 2002 upon the Company's adoption of SFAS No.
142, however, WRC will continue to amortize these assets for tax purposes. As a
result, WRC will have deferred tax liabilities that will arise each quarter
because the taxable temporary differences related to the amortization of these
assets will not reverse prior to the expiration period of WRC's deductible
temporary differences unless the related assets are sold or an impairment of the
assets is recorded. The Company expects that it will record an additional $480
to increase the valuation allowance during 2004.
9. OTHER INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization of the WRC's intangible
assets other than goodwill and indefinite lived intangible assets are as
follows:
December 31, 2003 March 31, 2004
------------------------------------ ------------------------------------
Accumulated Accumulated
Useful Lives Gross Amortization Net Gross Amortization Net
------------ -------- ------------ -------- -------- ------------ --------
Customer Lists 7-9 yrs $ 36,748 $(34,755) $ 1,993 $ 36,748 $(34,900) $ 1,848
Copyrights 8 yrs 17,520 (16,806) 714 17,520 (17,341) 179
Product Titles 7 yrs 22,400 (20,685) 1,715 22,400 (21,024) 1,376
-------- -------- -------- -------- -------- --------
Total $ 76,668 $(72,246) $ 4,422 $ 76,668 $(73,265) $ 3,403
======== ======== ======== ======== ======== ========
For trademarks not subject to amortization, which is included in other
intangible assets, the total carrying amount was $9,955 as of December 31, 2003
and March 31, 2004.
Amortization of intangibles for the three-months ended March 31, 2003 and 2004
was $1,156 and $1,019, respectively, and is included in amortization of goodwill
and intangible assets on the condensed consolidated statement of operations. The
estimated amortization expense for intangible assets still subject to
amortization for the next five years is as follows:
24
Remaining nine months ended 2004 ....................... $ 1,493
Year ended 2005 ....................... $ 1,009
Year ended 2006 ....................... $ 398
Year ended 2007 ....................... $ 261
Year ended 2008 ....................... $ 242
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to litigation arising in the normal course of business.
Management regularly analyzes current information and, as necessary, provides
accruals for probable liabilities on the eventual disposition of these matters.
Management believes that the effect on its results of operations and financial
position, if any, for the disposition of these matters, will not be material.
The SEC is conducting a preliminary inquiry concerning the Company. The SEC has
requested that the Company voluntarily provide the SEC with various documents
and information, and that certain officers of the Company voluntarily give
testimony. The Company is cooperating fully with the SEC inquiry, and has
provided all documents, information and testimony requested by the SEC. The
Company cannot predict the final outcome of this inquiry at this time.
11. RELATED PARTY TRANSACTIONS
In connection with its recapitalization, the Company entered into a management
agreement with WRC Media's principal shareholder. In accordance with the
management agreement, the shareholder provides Weekly Reader management
consulting and advisory services. As a result, the Company is obligated to pay
to the shareholder annual aggregate management fees for services totaling $800
payable quarterly.
In addition, the Company will reimburse the principal shareholder for reasonable
out-of-pocket costs and expenses incurred in connection with the performance of
its services. During the three-month periods ended March 31, 2003 and 2004, the
Company recognized general and administrative expense of $200 for management
fees.
12. PENSION BENEFITS
The following table provides components of net periodic benefit cost for the
Company's defined benefit pension plan for the three-months ended March 31, 2003
and 2004:
Pension Benefits
-----------------------------
2003 2004
------ ------
Service cost $ 229 $ 225
Interest Cost 221 238
Expected return on plan assets (169) (242)
Amortization of net loss 74 42
------ ------
Net periodic benefit cost $ 355 $ 263
====== ======
25
13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Three-Months Ended March 31,
---------------------------
2003 2004
---- ----
Cash paid during the period for interest $ 2,053 $ 2,676
Cash paid during the period for income taxes $ 15 $ 20
Non-cash financing activity:
Preferred stock dividends accrued $ 4,457 $ 5,164 (1)
(1) During the quarter ended March 31, 2004, $5,164 of such preferred stock
dividends have been recorded as interest expense in the statement of
operations, resulting from the Company's adoption of SFAS 150 effective
January 1, 2004.
14. RESTATEMENT
In connection with the audit of the Company's 2003 consolidated financial
statements, management has restated its financial statements for the years ended
December 31, 2002 and 2001 because it had incorrectly accounted for certain
tranactions.
As a result, the Company has restated the condensed consolidated financial
statements for the three-months ended March 31, 2003. After giving effect to the
restatement described below, the Company believes it was in compliance with the
financial covenants in its credit facility for the reporting period ended March
31, 2003.
Described below are the matters for which the Company has restated its condensed
consolidated statement of operations for the three-months ended March 31, 2003.
o Distributor Sales. Historically the Company recognized revenue under a
distribution contract between its subsidiary, World Almanac Education
Group, and a distributor at the time that the Company shipped its
products to the distributor rather than at the time those products
were resold by the distributor. The Company also recorded distribution
fees under this contract as operating costs and expenses, based on its
understanding of the distribution contract. The Company has determined
to recognize revenue only at the time the distributor ships these
products to its customer. The Company has restated its financial
statements which decreased its net loss and increased net assets by
$169 for the three-months ended March 31, 2003.
o Rent. The Company has two leases that have "free rent" incentives at
the commencement of the leases and also contain rent escalation
clauses (which clauses provide for rent increases over time) for which
it was required under GAAP to record the average rent expense ratably
over the lease term. In its historical 2001 financial statements,
however, the Company recorded the rent expense from these leases as it
was paid. In its historical 2002 financial statements, the Company
began correctly recording the average rent expense for these leases,
but it calculated the average rent using the remainder of the lease
term instead of the entire lease term. The Company restated its
financial statements to correct these errors. The Company has restated
its financial statements to correct these errors, with the net effect
being to decrease its net loss by $158 and decrease liabilities by
$158 for the three-months ended March 31, 2003.
o Other. The Company also made an adjustment relating to the
amortization period for certain capitalized pre-publication costs
which had the effect of increasing net loss by $105 for the
three-months ended March 31, 2003.
26
Summarized below are the significant effects of the restatement of the Company's
condensed consolidated statement of operations for the three-months ended March
31, 2003.
March 31, 2003
-------------------------------
As Previously
Reported As Restated
-------- -----------
Statement of Operations, for the three-months ended
Revenue, net $ 34,758 $ 35,001
Gross profit 26,393 26,562
Operating costs and expenses 19,706 19,653
Income from operations 6,687 6,909
Net loss $ (304) $ (82)
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results of
Operation set forth in this Item 2 has been revised to reflect the restatement
of the Company's condensed consolidated financial statements as of and for the
three months ended March 31, 2003. For a discussion of the restatement
adjustments, see "Item 1. Condensed Consolidated Financial Statements -WRC Media
Inc. and Subsidiaries--Note 16. Restatement" and "Item 1. Condensed Consolidated
Financial Statements - Weekly Reader Corporation and Subsidiaries - Note 14.
Restatement."
The following discussion is intended to assist in understanding the financial
condition as of March 31, 2004 of WRC Media Inc. ("WRC Media") and its
subsidiaries, and Weekly Reader Corporation and its subsidiaries, and their
results of operations for the three-months ended March 31, 2003 and 2004. You
should read the following discussion in conjunction with the Condensed
Consolidated Financial Statements of WRC Media and its subsidiaries and Weekly
Reader Corporation and its subsidiaries ("Weekly Reader") attached to this
discussion and analysis. Unless the context otherwise requires, the terms "we,"
"our," and "us" refer to WRC Media and its subsidiaries and their predecessor
companies. This discussion and analysis contains forward-looking statements.
These forward-looking statements are subject to certain risks and uncertainties,
including the Company's ability to continue to produce successful supplemental
education material and software products; reductions in state and local funding
for educational spending materials resulting, among other things, from
increasing state budget deficits; uncertainty in the current operating
environment which makes it difficult to forecast future results; and other risks
and factors identified in this report and in the Company's Report on Form 8-K as
filed with the Securities and Exchange Commission (the "SEC") dated March 31,
2004. Although we believe that our plans, intentions and expectations reflected
in or suggested by these forward-looking statements are reasonable, we cannot
assure you that these plans, intentions or expectations will be achieved. These
forward-looking statements are subject to risks, uncertainties and assumptions
about us.
Consolidated Results of Operations For the Three-Months Ended March 31, 2004--
WRC Media Inc. and Subsidiaries
The results of operations of WRC Media and its subsidiaries encompass the
operations of Weekly Reader and its subsidiaries, including AGS and World
Almanac, CompassLearning, and ChildU, Inc. ("ChildU"). The results of operations
of WRC Media and its subsidiaries should be read together with the separate
discussion of the results of operations of Weekly Reader.
In analyzing WRC Media's results for the three-months ended March 31, 2003 and
2004, the seasonal nature of WRC Media's business should be considered. As a
result of seasonality, approximately 20% of WRC Media's publication and related
service revenues usually occur in its first quarter, 20% in its second quarter,
and 60% in the third and fourth quarters combined. However, unlike this revenue
stream, many of WRC Media's expenses are incurred evenly throughout the year.
28
WRC Media analyzes its revenues, expenses and operating results on a percentage
of net revenue basis. The following table sets forth, for the periods indicated,
consolidated statements of operations data for WRC Media and its subsidiaries,
expressed in millions of dollars and as a percentage of net revenue.
Three months ended March 31,
2003 2004
-------------------------- -------------------------------
Amount % of Net Revenue Amount % of Net Revenue
------- ---------------- -------- ----------------
(Dollars in millions)
Revenue, net $ 47.2 100.0% $ 42.8 100.0%
Cost of goods sold 13.3 28.2% 13.0 30.4%
----- ----- ----- -----
Gross profit 33.9 71.8% 29.8 69.6%
Costs and expenses:
Sales and marketing 11.5 24.4% 11.6 27.1%
Research and development 0.7 1.5% 0.7 1.6%
Distribution, circulation and fulfillment 3.5 7.4% 3.5 8.2%
Editorial 2.6 5.5% 2.9 6.8%
General and administrative 5.6 11.9% 7.1 16.6%
Restructuring costs and other non-recurring expenses 0.5 1.1% 0.1 0.2%
Depreciation 0.6 1.3% 0.4 0.9%
Amortization of intangible assets 4.7 10.0% 4.5 10.5%
----- ----- ----- -----
Total costs and expenses 29.7 62.9% 30.8 72.0%
----- ----- ----- -----
Income (loss) from operations 4.2 8.9% (1.0) (2.4%)
----- ----- ----- -----
Interest expense, including amortization
of deferred financing costs (7.1) (15.0%) (14.4) (33.6%)
Other income (expense), net (0.2) (0.4%) (0.3) (0.7%)
----- ----- ----- -----
Loss before income tax provision (3.1) (6.5%) (15.7) (36.7%)
Income tax provision 0.6 1.3% 0.6 1.4%
----- ----- ----- -----
Net loss $ (3.7) (7.8%) $ (16.3) (38.1%)
===== ===== ===== =====
Adjusted EBITDA (a) $ 10.5 22.2% $ 4.3 10.0%
===== ===== ===== =====
(a) Adjusted EBITDA represents (loss) before interest expense, taxes,
depreciation, amortization and other (income) charges including
restructuring costs of $0.3 million and non-recurring costs of $0.2 million
for the three-months ended March 31, 2003 and restructuring expenses of
$0.1 million for the three-months ended March 31, 2004. Adjusted EBITDA
data is a non-GAAP measure and is included in our discussion because we
believe that this information may be considered by investors as an
additional basis on which to evaluate WRC Media's performance. Because all
companies do not calculate Adjusted EBITDA identically, the presentation of
Adjusted EBITDA in this report is not necessarily comparable to similarly
titled measures of other companies. Adjusted EBITDA is not intended to
represent cash flow from operating activities and should not be considered
an alternative to net income or loss (as determined in conformity with
GAAP) as an indicator of our operating performance or to cash flow as a
measure of liquidity. It is presented herein as we evaluate and measure
each business unit's performance based on their Adjusted EBITDA results. We
also use Adjusted EBITDA to evaluate management performance. Adjusted
EBITDA may not be available for our discretionary use as there are
requirements to repay debt, among other payments.
Three-Months Ended March 31, 2004 Compared to Three-Months Ended March 31, 2003
Revenue, net. For the three-months ended March 31, 2004, net revenue decreased
$4.4 million, or 9.3%, to $42.8 million from $47.2 million for the same period
in 2003. This decrease was primarily due to a decrease in net revenue at
CompassLearning of $4.5 million, or 40.2% to $6.7 million from $11.2 million
from the same period in 2003 combined with a decrease in net revenue at Weekly
Reader of $0.6 million, or 1.7%, to $34.4 million from $35.0 million for the
same period in 2003. These revenue decreases were partially offset by an
increase in net revenue at ChildU of $0.7 million, or 70% to $1.7 million from
$1.0 million for the same period in 2003.
29
This increase in revenue was driven by greater revenue from ChildU's on-line
software products.
For the three-months ended March 31, 2004, net revenue at CompassLearning
decreased $4.5 million or 40.2% to $6.7 million from $11.2 million from the same
period in 2003. This decrease was primarily due to a decrease in software
revenue of $4.3 million, or 79.6%, to $1.1 million from $5.4 million, and a
decrease in technical support revenue of $0.3 million, or 9.4%, to $2.9 million
from $3.2 million from the same period in 2003. Together with ChildU, net
revenue from sales of educational software product decreased $3.8 million or
59.4% to $2.6 million from $6.4 million from the same period in 2003. The
software shortfall was primarily attributable to delayed purchasing decisions
resulting from the weak education funding environment. The K-12 funding
environment continues to be impacted by growing state budget deficits, which
have been causing reductions in state and local educational spending, including
spending for teachers, training and supplemental educational materials. Even
though the economy appears to be on the road to recovery, state revenues appear
to be lagging and the benefits have not yet been realized. While we believe WRC
Media will benefit from the provisions in the Federal No Child Left Behind Act
(the "NCLB Act"), most of the increase in Federal educational funding for the
2003-2004 school year was offset by lower state and local education funding for
the same period. These cuts and delayed purchases have negatively affected our
top-line net revenue and may continue to affect our top-line performance at
least through the first half of fiscal year 2004. The uncertainty in the current
operating environment makes it difficult to forecast future results.
The decrease in net revenue at Weekly Reader was primarily due to (1) a decrease
in net revenue at World Almanac of $0.9 million, or 7.0% to $11.9 million from
$12.8 million from the same period in 2003. This decrease was due to lower net
revenue of $0.4 million or 77.0% at World Almanac Books that resulted from a
timing difference related to consignment sales for the World Almanac and Book of
Facts and the World Almanac for Kids, lower net revenue of $0.2 million or 3.2%
at WAE Library Services as a result of the elimination of their Prospect catalog
and lower net revenue of $0.2 million or 15.6%, at Funk and Wagnalls due to the
attrition in their customer base; (2) a decrease in net revenue at Weekly
Reader, not including World Almanac and AGS, of $0.4 million, or 3.8%, to $10.1
million from $10.5 million from the same period in 2003. This decrease was due
to lower periodical net revenue of $0.6 million or 7.2%. The decline is
primarily a result of a weak educational funding environment and competitive
pressures in the school magazine market. This decrease at Weekly Reader was
partially offset by increased net revenue at Lifetime Learning Systems, Inc., a
subsidiary of Weekly Reader of $0.1 million or 5.5% related to increased custom
publishing shipments and increased licensing net revenue at Weekly Reader of
$0.1 million or 126.8% from the same period in 2003 as a result of increased on
air March net revenue from exposure on the QVC channel. The revenue decreases at
World Almanac and Weekly Reader were partially offset by (3) $0.7 million or
6.0% higher revenue at AGS. AGS revenue increased to $12.4 million for the
three-months ended March 31, 2004 from $11.7 million from the same period in
2003. AGS Assessment net revenue increased by $1.0 million or 16.3% from the
same period in 2003 as a result of: increases in net revenue of KABC II (Kaufman
Assessment Battery for Children) of $0.5 million released in the first quarter
of 2004; higher PPVT (Picture Peabody Vocabulary Test) revenue of $0.5 million
due to large orders in the state of Florida, and higher revenue of GRADE (Group
Reading Assessment & Diagnostic Evaluation) and GMADE (Group Math Assessment &
Diagnostic Evaluation) of $0.2 million over the same period in 2003. These 4
assessment products combined were up $1.2 million or 169.2% over the same period
in 2003. All other assessment products had reduced net revenue of $0.2 million
or 5.0% over the same period in 2003. The overall increase in Assessment net
revenue was partially offset by a decrease in curriculum net revenue $0.3
million or 4.9% due to a market driven decline in test prep of $0.4 million or
35.7% and a planned decline of $0.1 million or 14.4% in backlist net revenue
partially offset by an increase in Textbooks/Worktexts of $0.2 or 4.3% driven by
growth associated with the Algebra revision and a literature adoption in the
State of Florida.
30
Gross profit. For the three-months ended March 31, 2004, gross profit decreased
by $4.1 million or 12.1%, to $29.8 million from $33.9 million from the same
period in 2003. This decrease was due to the revenue decrease discussed above.
At CompassLearning gross profit decreased $4.1 million, or 62.1%, to $2.5
million from $6.6 million from the same period in 2003 driven by fixed cost of
sales components applied to a lower revenue base and a low margin sale to the
Los Angeles School District. Gross profit at CompassLearning as a percent of
revenue decreased to 37.3% from 58.9% from the same period in 2003. At ChildU,
gross profit increased $0.7 million, or 100% to $1.4 million from $0.7 million
for the same period in 2003 due to the higher revenue discussed above. Gross
profit at Weekly Reader decreased $0.7 million or 2.6% to $25.9 million from
$26.6 million from the same period in 2003 primarily as a result of (1) a
decrease in gross profit at World Almanac of $0.9 million, or 10.2%, to $7.9
million from $8.8 million from the same period in 2003. Gross profit at World
Almanac as a percent of revenue decreased to 66.4% from 68.8% from the same
period in 2003 due to a write off of inventory at WA Books and the impact of a
discount offer at WAE Library Services that was not in effect for the same
period in 2003; (2) a decrease in gross profit at Weekly Reader, not including
AGS and World Almanac of $0.3 million, or 3.4%, to $8.5 million from $8.8
million from the same period in 2003 driven by the volume decrease described
above. Gross profit as a percent of revenue increased slightly to 84.2% from
83.8% from the same period in 2003. The revenue decreases at World Almanac and
Weekly Reader, not including AGS and World Almanac, were partially offset by (3)
an increase in gross profit at AGS of $0.5 million, or 5.6% to $9.5 million from
$9.0 million from the same period in 2003 driven by the AGS volume increase
described above. Gross profit as a percent of revenue decreased slightly to
76.6% from 76.9% from the same period in 2003 as a result of change in revenue
mix. Overall, WRC Media consolidated gross profit as a percent of revenue
decreased to 69.6% from 71.8% from the same period in 2003 mainly due to the
factors discussed above.
Costs and expenses. For the three-months ended March 31, 2004, operating costs
and expenses increased by $1.1 million, or 3.7%, to $30.8 million from $29.7
million from the same period in 2003. Costs and expenses as a percentage of net
revenue increased to 72.0% from 62.9% from the same period in 2003. This
increase was primarily the result of: (i) $1.5 million or 26.8% increase in
general and administrative expenses due to increases in legal, audit, tax and
consulting professional fees primarily related to the previously disclosed SEC
inquiry of $0.9 million; (ii) higher editorial expenses of $0.3 million or 11.5%
due in part to testing expenditures at AGS associated with a high stakes test
developed for the NY City Department of Education and at Weekly Reader as a
result of amortizing prepaid editorial costs over the shorter period of time of
when the related shipments occurred rather than over the entire school year.
These higher expenses were partially offset by (iii) lower restructuring and
non-recurring costs of $0.4 or 80.0%; (iv) lower depreciation costs of $0.2
million and (v) lower amortization of intangible assets of $0.2 million.
31
Income (loss) from operations. For the three-months ended March 31, 2004, income
from operations decreased by $5.2 million, or 123.8%, to a loss of $1.0 million
from income of $4.2 million from the same period in 2003. This decrease was
primarily due to lower gross profit and the higher costs and expenses described
above.
Interest expense, including amortization of deferred financing costs. For the
three-months ended March 31, 2004, interest expense, including amortization of
deferred financing costs, increased by $7.3 million, or 102.8%, to $14.4 million
from $7.1 million for the same period in 2003 as a result of writing off
deferred financing fees of $1.9 million attributable to the First-Lien Credit
Facility that was refinanced in part by the Second-Lien Credit Facility, which
closed on March 29, 2004. In addition, the adoption of SFAS 150 requires
dividends on the 15% Series B Redeemable Preferred Stock to be recorded as
interest expense in the condensed consolidated statement of operations for all
periods starting January 1, 2004. The dividends on the 15% Series B Redeemable
Preferred Stock for the three-months ended March 31, 2004 increased interest
expense by $5.2 million. Interest expense as a percentage of net revenue
increased to 33.6% from 15.0% for the same period in 2003.
Net loss. For the three-months ended March 31, 2004, net loss increased by $12.6
million, or 340.5%, to $16.3 million from $3.7 million for the same period in
2003. This increase in net loss was primarily attributable to the factors
described above. Net loss as a percentage of net revenue increased to negative
38.1% from negative 7.8% for the same period in 2003.
Adjusted EBITDA. For the three-months ended March 31, 2004, Adjusted EBITDA
decreased $6.2 million, or 59.0%, to $4.3 million from $10.5 million for the
same period in 2003. This decrease was primarily attributable to the factors
described above. Adjusted EBITDA represents (loss) before interest expense,
taxes, depreciation, amortization and other (income) charges including
restructuring costs and other non-recurring expenses of $0.5 million for the
three-months ended March 31, 2003 and restructuring costs of $0.1 million for
the three-months ended March 31, 2004. Adjusted EBITDA is a non-GAAP measure and
is included in our discussion because we believe that this information may be
considered by investors as an additional basis on which to evaluate WRC Media's
performance. Because all companies do not calculate Adjusted EBITDA identically,
the presentation of Adjusted EBITDA in this report is not necessarily comparable
to similarly titled measures of other companies. Adjusted EBITDA is not intended
to represent cash flow from operating activities and should not be considered an
alternative to net income or loss (as determined in conformity with GAAP) as an
indicator of our operating performance or to cash flow as a measure of
liquidity. It is presented herein as we evaluate and measure each business
unit's performance based on their Adjusted EBITDA results. We also use Adjusted
EBITDA to evaluate management performance. Adjusted EBITDA may not be available
for our discretionary use as there are requirements to repay debt, among other
payments. The reconciliation of Adjusted EBITDA to net loss is as follows:
32
For the three months ended
March 31,
---------------------------
Adjusted EBITDA reconciliation to Net Loss 2003 2004
--------- ----------
Net Loss $ (3,664) $(16,278)
Depreciation and amortization of intangibles** 6,031 5,468
Income taxes 588 577
Interest expense 7,082 14,423
Restructuring costs 288 65
Non-recurring expenses 192 -
-------- --------
Adjusted EBITDA $ 10,517 $ 4,255
======== ========
** Amount includes amortization of capitalized software costs of $724 and $513
for 2003 and 2004, respectively which are included in operating costs and
expenses above.
Results of Operations for the Three-Months Ended March 31, 2004 -- Weekly Reader
Corporation and Subsidiaries
The following table sets forth, for the periods indicated, combined statements
of operations data for Weekly Reader and its subsidiaries expressed in millions
of dollars and as a percentage of net sales.
Three months ended March 31,
2003 2004
-------------------------- -----------------------------
Amount % of Net Revenue Amount % of Net Revenue
------- ---------------- ------- ----------------
(Dollars in millions)
Revenue, net $ 35.0 100.0% $ 34.4 100.0%
Cost of goods sold 8.4 24.0% 8.5 24.7%
------- ----- ------- -----
Gross profit 26.6 76.0% 25.9 75.3%
Costs and expenses:
Sales and marketing 6.3 18.0% 7.0 20.4%
Distribution, circulation and fulfillment 3.5 10.0% 3.5 10.2%
Editorial 2.6 7.4% 2.9 8.4%
General and administrative 4.5 12.9% 5.1 14.8%
Depreciation 0.4 1.1% 0.4 1.2%
Amortization of intangible assets 2.4 6.9% 2.4 7.0%
------- ----- ------- -----
Total costs and expenses 19.7 56.3% 21.3 61.9%
------- ----- ------- -----
Income from operations 6.9 19.7% 4.6 13.4%
Interest expense (6.8) (19.4%) (12.7) (36.9%)
Other income (expense), net - 0.0% - 0.0%
------- ----- ------- -----
Income (loss) before income tax provision 0.1 0.3% (8.1) (23.5%)
Income tax provision 0.2 0.6% 0.1 0.3%
------- ----- ------- -----
Net loss $ (0.1) (0.3%) $ (8.2) (23.8%)
======= ===== ======= =====
Adjusted EBITDA(a) $ 9.7 27.7% $ 7.4 21.5%
======= ===== ======= =====
(a) Adjusted EBITDA represents (loss) before interest expense, taxes,
depreciation, amortization and other (income) charges for the three-months
ended March 31, 2004. Adjusted EBITDA data is a non-GAAP measure and is
included in our discussion because we believe that this information may be
considered by investors as an additional basis on which to evaluate WRC
Media's performance. Because all companies do not calculate Adjusted EBITDA
identically, the presentation of Adjusted EBITDA in this report is not
necessarily comparable to similarly titled measures of other companies.
Adjusted EBITDA is not intended to represent cash flow from operating
activities and should not be considered an alternative to net income or
loss (as determined in conformity with GAAP) as an indicator of our
operating performance or to cash flow as a measure of liquidity. It is
presented herein as we evaluate and measure each business unit's
performance based on their Adjusted EBITDA results. We also use Adjusted
EBITDA to evaluate management performance. Adjusted EBITDA may not be
available for our discretionary use as there are requirements to repay
debt, among other payments.
33
Three-Months Ended March 31, 2004 Compared to Three-Months Ended March 31, 2003
Revenue, net. For the three-months ended March 31, 2004, net revenue decreased
$0.6 million, or 1.7%, to $34.4 million from $35.0 million for the same period
in 2003. The decrease in net revenue at Weekly Reader was primarily due to (1) a
decrease in net revenue at World Almanac of $0.9 million, or 7.0% to $11.9
million from $12.8 million from the same period in 2003. This decrease was due
to lower net revenue of $0.4 million or 77.0% at World Almanac Books that
resulted from a timing difference related to consignment sales for the World
Almanac and Book of Facts and the World Almanac for Kids, lower net revenue of
$0.2 million or 3.2% at WAE Library Services as a result of the elimination of
their Prospect catalog and lower net revenue of $0.2 million or 15.6%, at Funk
and Wagnalls due to the natural attrition of their customer base; (2) a decrease
in net revenue at Weekly Reader, not including World Almanac and AGS, of $0.4
million, or 3.8%, to $10.1 million from $10.5 million from the same period in
2003. This decrease was due to lower periodical net revenue of $0.6 million or
7.2%. The decline is a result of a weak educational funding environment. This
decrease at Weekly Reader was partially offset by increased net revenue at
Lifetime Learning Systems, Inc., a subsidiary of Weekly Reader of $0.1 million
or 5.5% related to increased custom publishing shipments and increased licensing
net revenue at Weekly Reader of $0.1 million or 126.8% from the same period in
2003 as a result of increased March net revenue from the QVC channel. The
revenue decreases at World Almanac and Weekly Reader were partially offset by
(3) $0.7 million or 6.0% higher net revenue at AGS. AGS revenue increased to
$12.4 million for the three-months ended March 31, 2004 from $11.7 million from
the same period in 2003. AGS assessment net revenue of $1.0 million or 16.3%
from the same period in 2003 as a result of: increases in net revenue of KABC II
(Kaufman Assessment Battery for Children) of $0.5 million released in the first
quarter of 2004, higher PPVT (Picture Peabody Vocabulary Test) of $0.5 million
due to large orders in the state of Florida, and higher revenue of GRADE (Group
Reading Assessment & Diagnostic Evaluation) and GMADE (Group Math Assessment &
Diagnostic Evaluation) of $0.2 million over the same period in 2003. These 4
assessment products combined were up $1.2 million or 169.2% over the same period
in 2003. All other assessment products had reduced net revenue of $0.2 million
or 5.0% over the same period in 2003. The increase in Assessment net revenue was
partially offset by a decrease in curriculum net revenue $0.3 million or 4.9%
due to a market driven decline in test prep of $0.4 million or 35.7% and a
planned decline of $0.1 million or 14.4% in backlist net revenue partially
offset by an increase in Textbooks/Worktexts of $0.2 or 4.3% driven by growth
associated with the Algebra revision and a literature adoption in the State of
Florida.
The K-12 funding environment continues to be impacted by growing state budget
deficits, which have been causing reductions in state and local educational
spending, including spending on supplemental educational materials. While we
believe Weekly Reader Corporation will benefit from the provisions in the
Federal No Child Left Behind Act (the "NCLB Act"), most of the increase in
Federal educational funding in 2003 was offset by lower state and local
education funding in 2003. Although we expect that Federal educational funding
will increase in 2004 as a result of the NCLB Act, we do not believe this
funding improvement will be sufficient to offset cuts in state and local
education funding. These cuts and delayed purchases have negatively affected our
top-line net revenue and may continue to affect our top-line performance at
least through the first half of fiscal year 2004. The uncertainty in the current
operating environment makes it difficult to forecast future results.
34
Gross profit. Gross profit at Weekly Reader decreased $0.7 million or 2.6% to
$25.9 million from $26.6 million from the same period in 2003 primarily as a
result of (1) a decrease in gross profit at World Almanac of $0.9 million, or
10.2%, to $7.9 million from $8.8 million from the same period in 2003. Gross
profit at World Almanac as a percent of revenue decreased to 66.4% from 68.8%
from the same period in 2003 due to a write off of inventory at WA Books and the
impact of a discount offer at WAE Library Services that was not in effect for
the same period in 2003; (2) a decrease in gross profit at Weekly Reader, not
including AGS and World Almanac of $0.3 million, or 3.4%, to $8.5 million from
$8.8 million from the same period in 2003 driven by the volume decrease
described above. Gross profit as a percent of revenue decreased slightly to
84.2% from 83.8% from the same period in 2003. The revenue decreases at World
Almanac and Weekly Reader, not including AGS and World Almanac, were partially
offset by (3) an increase in gross profit at AGS of $0.5 million, or 5.6% to
$9.5 million from $9.0 million from the same period in 2003 driven by the AGS
volume increase described above. Gross profit as a percent of revenue decreased
slightly to 76.6% from 76.9% from the same period in 2003, as a result of change
in revenue mix. Overall, Weekly Reader consolidated gross profit as a percent of
revenue decreased to 75.3% from 76.0% from the same period in 2003 due to the
factors described above.
Costs and expenses. For the three-months ended March 31, 2004, operating costs
and expenses increased by $1.6 million, or 8.1%, to $21.3 million from $19.7
million from the same period in 2003. Costs and expenses as a percentage of net
revenue increased to 61.9% from 56.3% from the same period in 2003. This
increase was primarily the result of: (i) $0.7 million or 11.1% increase in
sales and marketing expenses due in to a sales reorganization and the timing of
marketing initiatives related to product launches at AGS and to a change in
amortizing new business promotion expenses at Weekly Reader, not including AGS
or World Almanac (ii) $0.6 million or 13.3% increase in general and
administrative expenses due to increases in legal, audit, tax and consulting
professional fees; and (iii) higher editorial expenses of $0.3 million or 11.5%
due in part to testing expenditures at AGS associated with a high stakes test
developed for the NY City Department of Education and at Weekly Reader, not
including AGS or World Almanac, as a result of amortizing prepaid editorial
costs over the shorter period of time of when the related shipments occurred
rather than over the entire school year.
Income from operations. For the three-months ended March 31, 2004, income from
operations decreased by $2.3 million, or 33.3%, to $4.6 million from $6.9
million from the same period in 2003. This increase was primarily due to lower
gross profit and the higher costs and expenses described above.
35
Interest expense. For the three-months ended March 31, 2004, interest expense,
including amortization of deferred financing costs, increased by $5.9 million,
or 86.8%, to $12.7 million from $6.8 million from the same period in 2003 as a
result of writing off the deferred financing fees of $0.5 million attributable
to the First-Lien Credit Facility that was replaced by the Second-Lien Credit
Facility, which closed on March 29, 2004. In addition the adoption of SFAS 150
requires dividends on the 15% Series B Redeemable Preferred Stock to be
recorded as interest expense in the condensed consolidated statement of
operations for all periods starting after January 1, 2004. The dividends on the
Series B Redeemable Preferred Stock for the three-months ended increased
interest expense by $5.2 million. Interest expense as a percentage of net
revenue increased to 36.9% from 19.4% for the same period in 2003.
Net loss. For the three-months ended March 31, 2004, net loss increased by $8.1
million, or 8100.0%, to $8.2 million from $0.1 million for the same period in
2003. This increase is primarily attributable to the factors described above.
Net loss as a percentage of net revenue increased to negative 23.8% from
negative 0.3% for the same period in 2003.
Adjusted EBITDA. For the three-months ended March 31, 2004, Adjusted EBITDA
decreased $2.3 million, or 23.7%, to $7.4 million from $9.7 million for the same
period in 2003. This decrease is primarily attributable to the factors described
above. Adjusted EBITDA represents (loss) before interest expense, taxes,
depreciation, amortization and other (income) charges. Adjusted EBITDA is a
non-GAAP measure and is included in our discussion because we believe that this
information may be considered by investors as an additional basis on which to
evaluate WRC Media's performance. Because all companies do not calculate
Adjusted EBITDA identically, the presentation of Adjusted EBITDA in this report
is not necessarily comparable to similarly titled measures of other companies.
Adjusted EBITDA is not intended to represent cash flow from operating activities
and should not be considered an alternative to net income or loss (as determined
in conformity with GAAP) as an indicator of our operating performance or to cash
flow as a measure of liquidity. It is presented herein as we evaluate and
measure each business unit's performance based on their Adjusted EBITDA results.
We also use Adjusted EBITDA to evaluate management performance. Adjusted EBITDA
may not be available for our discretionary use as there are requirements to
repay debt, among other payments. The reconciliation of Adjusted EBITDA to net
loss is as follows:
For the three months ended March 31,
Adjusted EBITDA reconciliation to Net Loss 2003 2004
--------- --------
Net loss $ (82) $ (8,247)
Depreciation and amortization of intangibles 2,798 2,805
Income taxes 175 143
Interest expense 6,822 12,713
Restructuring costs - 1
-------- ---------
Adjusted EBITDA $ 9,713 $ 7,415
======== =========
36
LIQUIDITY AND CAPITAL RESOURCES
General
At March 31, 2004, WRC Media's sources of cash were its (1) operating
subsidiaries, Weekly Reader Corporation, CompassLearning, Inc., and ChildU, Inc.
and (2) a $30.0 million revolving credit facility. As of March 31, 2004, there
were no outstanding advances under the revolving credit facility. Additionally,
the Company has stand-by letters of credit, renewable annually, in the amount of
$2.1 million, which serve as security for a real estate lease entered into by
the Company and certain surety bonds issued on behalf of the Company. While
these letters of credit are in effect, it reduces available borrowing capacity
under the revolving credit facility by $2.1 million.
For the January through June time period, WRC Media and its subsidiaries usually
experience negative cash flow due to the seasonality of its business. As a
result of this business cycle, borrowings usually increase during the period
January through June time period, and borrowings generally will be at its lowest
point in the fourth quarter.
On March 29, 2004, we refinanced all of our term loans under our Senior Bank
Credit Facilities (the "First-Lien Credit Facility") with a $145.0 million
senior, second-priority lien secured financing that was provided to the Company
pursuant to a term loan facility (the "Second-Lien Facility"). The proceeds of
the Second-Lien Facility were used (i) to refinance in full all term loans
outstanding under the First-Lien Facility, (ii) to pay fees and expenses related
to the Second-Lien Facility and all transactions contemplated in connection
therewith and (iii) for general corporate purposes of the Company.
All payment obligations under the Second-Lien Facility are secured by a
second-priority lien on the collateral securing the First-Lien Facility;
provided that all obligations under the Second-Lien Facility will rank equally
in right of payment with all payment obligations under the First-Lien Facility
and will not be subordinated in any respect to the First-Lien Facility. The
final maturity of the Second-Lien Facility is March 29, 2009. At the Company's
option, the loans will bear interest at either the Administrative Agent's (i)
alternate base rate ("base rate loans") or (ii) reserve-adjusted LIBO rate
("LIBO rate loans") plus, in each case, the "Applicable Margin" (as defined).
"Applicable Margin" means, with respect to (i) Base Rate Loans, a rate of 4.00%
per annum and (ii) LIBO Rate Loans, a rate of 5.00% per annum.
The Second-Lien Facility has one financial covenant, a maximum ratio (the
"Senior Leverage Ratio") of Senior Secured Debt to trailing four quarter EBITDA
not to exceed 4.25:1.00 for any fiscal quarter, except the fiscal quarter ended
June 30, 2005 for which the Senior Leverage Ratio not exceed 4.50:1.00, in each
case to be tested on the last day of each fiscal quarter and computed for the
Company and its consolidated subsidiaries. We were in compliance with this
financial covenant for the period ended March 31, 2004. The Company's senior
leverage ratio was 3.25:1:00 for the period ended March 31, 2004.
37
In connection with entering into the Second-Lien Credit Facility, we entered
into an amendment and restatement of our First-Lien Credit Facility, which now
consists solely of a $30.0 million revolving credit facility. The cash available
under our First-Lien Credit Facility, together with the cash from our operating
subsidiaries, Weekly Reader Corporation, CompassLearning, Inc. and ChildU, Inc.,
is considered adequate for the Company's needs for the foreseeable future.
The First-Lien Credit Facility, as amended and restated, has a maturity of
December 29, 2008, and has one financial covenant, a Senior Leverage Ratio of
senior secured debt to trailing four quarter EBITDA not to exceed 4.00:1.00 for
any fiscal quarter, except the fiscal quarter ended June 30, 2005 for which the
Senior Leverage Ratio may not exceed 4.25:1.00, in each case to be tested on the
last day of the fiscal quarter and computed for the Company and its consolidated
subsidiaries. We were in compliance with this financial covenant for the period
ended March 31, 2004. As discussed above, the Company's senior leverage ratio
was 3.25:1:0 for the period ended March 31, 2004. Interest on revolving loan
borrowings under the First-Lien Credit Facility will bear interest at a rate per
annum equal to the LIBO rate as defined in the First-Lien Credit Facility plus
3.5% or the alternate base rate as defined in the First-Lien Credit Facility
plus 2.5%.
The credit agreement for our First-Lien Credit Facility is secured by liens on
substantially all of our assets, and the credit agreement for our Second-Lien
Credit Facility is secured by second-priority liens on all the assets securing
the First-Lien Facility.
38
Under the terms of the indenture for our 12 3/4% Senior Subordinated Notes due
2009 (the "Notes"), we are required to furnish "all quarterly and annual
financial information that would be required to be contained in a filing with
the Securities and Exchange Commission (the "SEC") on Forms 10-Q and 10-K if the
Company were required to file such forms, including a `Management's Discussion
and Analysis of Financial Condition and Results of Operations' and, with respect
to the annual information only, a report thereon by the Company's certified
independent accountants. . ." in each case within the time periods specified in
the SEC's rules and regulations. Because our 2001 financial statements were
audited by Arthur Andersen LLP, an audit firm that has ceased operations, the
restatement of our 2001 financial statements requires a reaudit of such
financial statements. The reaudit of our 2001 financial statements has not been
completed at this time. We believe that upon furnishing our audited 2003
financial statements to the holders of our Notes and filing such statements with
the SEC, we were in compliance with the information requirements of the
indenture for our Notes. We cannot assure you, however, that the trustee or
noteholders will not claim that we are in breach of the indenture's information
requirements, or that after any such claim is made and the applicable cure
period has expired, the trustee or noteholders will not send a notice to
accelerate repayment of the Notes.
If the reaudit of our 2001 financial statements is completed and a report
thereon issued by our independent auditors as required by the indenture prior to
any claim of breach being made, the potential for such a claim would be
eliminated. If a breach of the information requirements of the indenture were to
be claimed and the trustee or holders of at least 25% of the aggregate principal
amount of the Notes were to provide written notice of such breach, we would
vigorously defend against any such claim. Even if such claim of breach were to
prevail, we would have 60 days from the date of written notice of such claim of
breach to cure the breach and avoid an event of default under the indenture. If
the reaudit of our 2001 financial statements is completed and a report thereon
issued by our independent auditors as required by the indenture prior to the end
of the 60 day cure period, the right to accelerate our Notes or the indebtedness
under our credit agreements as a result of the alleged breach of the indenture's
information requirements would be eliminated. We have engaged our independent
auditors to perform a reaudit of the 2001 financial statements and expect to be
able to provide our auditors with the information necessary for them to complete
their reaudit prior to the end of the cure period, if any claim of breach of the
indenture's information requirements is made.
While we are diligently working to provide such documentation, we cannot assure
you that we will be able to provide the information necessary to complete the
reaudit or that the reaudit of the 2001 financial statements will be completed
and a report thereon issued by our independent auditors as required by the
indenture. If there is an event of default under the indenture, the trustee or
holders of at least 25% of the aggregate principal amount of the Notes would
have the right to accelerate payment of our Notes, and the lenders under our
First-Lien Facility and our Second-Lien Facility also would have the right to
accelerate payment thereunder. As of March 31, 2004, $152,000,000 in aggregate
principal amount of the Notes was outstanding. If repayment of the First-Lien
Facility, the Second-Lien Facility or the Notes were to be accelerated, we would
not be able to repay such amounts and such acceleration would have a material
adverse effect on our financial condition and liquidity.
39
Liquidity, Working Capital and Capital Resources
As of March 31, 2004, WRC Media and its subsidiaries had negative working
capital of $17.6 million. WRC Media's cash and cash equivalents were
approximately $6.4 million at March 31, 2004. WRC Media and its subsidiaries'
operations used approximately $9.9 million in cash for the three-months ended
March 31, 2004. WRC Media and its subsidiaries' principal uses of cash are for
debt service and working capital.
WRC Media and its subsidiaries' investing activities for the year ended March
31, 2004, included investments in software development of approximately $0.6
million and capital expenditures of approximately $0.1 million.
WRC Media and its subsidiaries' financing activities consist of making drawings
from, and repayments to, our revolving credit facility and retiring amounts due
under our senior secured term loans. For the three-months ended March 31, 2004,
financing activities provided net cash of $15.2 million, which primarily
resulted from proceeds of $145.0 million from the Second-Lien Credit Facility
which were used in part to repay $118.7 million of the First Lien Credit
Facility. The Second Lien Credit Facility does not amortize and we do not expect
our financing activities going forward to include regular periodic retirement of
term loans prior to maturity. The Second Lien Credit Facility matures on March
29, 2009.
Accounting Policies and Estimates
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
is based upon our condensed 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 condensed consolidated financial statements.
Revenue Recognition
The Company's revenue recognition policies for its principal businesses are as
follows:
o Periodicals - Revenue is deferred and recognized ratably over the subscription
period, as the periodicals are delivered.
o 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 reported shipments from the
depositories to the schools. Likewise, shipments to the distributor of the
World Almanac and Book Of Facts and the World Almanac For Kids books are
treated similar to a consignment sale. Revenue is recognized based on
reported shipments from the distributor to its customers (primarily retail
book stores). 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.
o 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. Historically, the sale
of children's books to bookstores and mass merchandisers primarily were
recognized by the Company at the time of shipment, when title transfers to
the customer and a reserve for estimated returns was established at the time
of sale and recorded as a reduction to revenue. Actual returns were charged
to the reserve as received. The Company delivered the books through a
distributor to the bookstores and mass merchandisers under a distribution
contract between its subsidiary, World Almanac Education Group, and a
distributor at the time that the Company shipped its products to the
distributor rather than at the time those products were resold by the
distributor.
o Educational Software And Related Products And Services - Software revenues are
recognized in accordance with the provisions of Statement of Position (SOP)
97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of
SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions.
Under SOP 97-2, we recognize revenue for hardware and software sales upon
shipment of the product, provided collection of the receivable is probable,
payment is due within one year and the fee is fixed or determinable. If an
acceptance period is required, revenues are recognized upon the earlier of
customer acceptance or the expiration of the acceptance period. If
significant post-delivery obligations exist or if a product is subject to
customer acceptance, revenues are deferred until no significant obligations
remain or acceptance has occurred. Revenue from service contracts,
instruction and user training is recognized as the services are performed and
post-contract support is recognized ratably over the related contract.
Deferred revenue represents the Company's obligation to perform under signed
contracts. For contracts with multiple elements (e.g., deliverable and
undeliverable products, maintenance and other post-contract support), the
Company allocates revenue to each undelivered element of the contract based
on vendor specific objective evidence of its fair value, which is specific to
the Company. The Company recognizes revenue allocated to delivered products
on the residual method when the criteria for product revenue set forth above
are met. 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.
o Licensing - Licensing revenue is recorded in accordance with royalty
agreements at the time licensed materials are available to the licensee and
collections are reasonably assured.
o Advertising - Revenue is recognized when the periodicals are shipped and
available to the subscribers.
Allowance For Doubtful Accounts
Allowances for doubtful accounts are estimated losses resulting from our
customers' failure to make required payments. The Company continually monitors
collections from customers and provides a provision for estimated credit losses
based upon historical experience. The Company aggressively pursues collection
efforts on these overdue accounts and upon collection reverses the write-off in
future periods. If future payments by our customers were to differ from our
estimates, we may need to increase or decrease our allowances for doubtful
accounts.
Reserve For Sales Returns
Reserves for sales returns and allowances are primarily related to our printed
publications. The Company estimates and maintains these reserves based primarily
on its distributors' historical return practices and our actual return
experience. If actual sales returns and allowances differ from the estimated
return and allowance rates used, we may need to increase or decrease our reserve
for sales returns and allowances.
Impairment Of Long-Lived Assets
The Company periodically evaluates the recoverability of our long-lived assets,
including property and equipment, and finite lived intangible assets, whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable or in connection with its annual financial review process. Our
evaluations include analyses based on the undiscounted cash flows generated by
the underlying assets, profitability information, including estimated future
operating results and/or trends. If the value of the asset determined by these
evaluations is less than its carrying amount, impairment is recognized for the
difference between the fair value and the carrying value of the asset. Future
adverse changes in market conditions or poor operating results of the related
business may indicate an inability to recover the carrying value of the assets,
thereby possibly requiring an impairment charge to the carrying value of the
asset, in the future.
Goodwill And Other Identified Intangible Assets
We test goodwill for impairment annually and whenever events or circumstances
make it more likely than not that an impairment may have occurred, such as a
significant adverse change in the business climate or a decision to sell or
dispose of a reporting unit. Determining whether an impairment has occurred
requires valuation of the respective reporting unit, which we estimate using a
discounted cash flow methodology. In applying this methodology, we rely on a
number of factors, including actual operating results, future business plans,
economic projections and market data.
If this analysis indicates goodwill is impaired, measuring its impairment
requires a fair value estimate of each identified tangible and intangible asset.
We test other identified intangible assets with defined useful lives and that
are subject to amortization by comparing the carrying amount to the sum of
undiscounted cash flows expected to be generated by the asset. We test
intangible assets with indefinite lives annually for impairment using a fair
value methodology such as discounted cash flows.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variables Interest Entities ("FIN 46").
FIN 46 clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements" to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. In
December 2003, the FASB issued FIN No. 46 (Revised) ("FIN 46R") to address
certain FIN 46 implementation issues. This interpretation requires that the
assets, liabilities, and results of activities of a Variable Interest Entity
("VIE") be consolidated into the financial statements of the enterprise that is
the primary beneficiary of the VIE. FIN 46R also requires additional disclosures
by primary beneficiaries and other significant variable interest holders. This
interpretation is effective no later than the end of the first interim or
reporting period ending after March 15, 2004, except for those VIE's that are
considered to be special purpose entities, for which the effective date is no
later than the end of the first interim or annual reporting period ending after
December 15, 2003. The adoption of FIN 46R effective March 31, 2004, did not
have any effect on the Company's consolidated financial position or results of
operations.
In April 2003, the FASB issued Statements of Financial Accounting Standards
("SFAS") No. 149 "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"), which amends and clarifies accounting for
derivative instruments, and for hedging activities under SFAS 133. Specifically,
SFAS 149 requires that contracts with comparable characteristics be accounted
for similarly. Additionally, SFAS 149 clarifies the circumstances in which a
contract with an initial net investment meets the characteristics of a
derivative and when a derivative contains a financing component that requires
special reporting in the statement of cash flows. This Statement is generally
effective for contracts entered into or modified after June 30, 2003 and its
adoption did not have any effect on the Company's consolidated financial
position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. This statement was effective for the
Company beginning January 1, 2004. For financial instruments created before the
issuance date of this statement and still existing at the beginning of the
interim period of adoption, transition shall be achieved by reporting the
cumulative effect of a change in an accounting principle by initially measuring
the financial instruments at fair value or other measurement attribute required
by this statement. The adoption of this statement required the Company to
reclassify its 15% Series B Redeemable Preferred Stock from the mezzanine
section of the balance sheet to long-term liabilities. Effective January 1, 2004
dividend payments for the 15% Series B Redeemable Preferred Stock (Series B
Preferred) are recorded as interest expense in the consolidated statement of
operations. The adoption of this statement did not result in any adjustment to
the book value of its Series B Preferred as of January 1, 2004 as book value
approximated fair value at January 1, 2004. For the three-months ended March 31,
2004 the Company recognized $5,164 of accrued dividends on Series B Preferred as
interest expense. Interest expense for the three-months ended March 31, 2004
also includes amortization of deferred financing costs related to the Series B
Preferred in the amount of $30.
40
Seasonality
Operating results have varied and are expected to continue to vary from quarter
to quarter as a result of seasonal patterns. Weekly Reader and CompassLearning's
net revenue are significantly affected by the school year. Weekly Reader's net
revenue in the third, and to a lesser extent the fourth, quarters are generally
the strongest as products are shipped for delivery during the school year.
CompassLearning's net revenues were historically strongest in the second
quarter, and to a lesser extent the fourth quarter. However, due to tight
funding environment in the last couple of year, the trend is shifting towards
the fourth quarter being the strongest, followed by the second quarter. The
strength in the second quarter is generally attributed to the end of the school
fiscal year (June 30th) and the need for the schools to spend the money prior to
year end. In addition, by purchasing in the second quarter, schools are able to
have the software products purchased and installed over the summer and ready to
train teachers when they return from summer vacation. CompassLearning's fourth
quarter revenue is strong as a result of sales patterns driven by new school
year money being appropriated and funded, CompassLearning's commissioned sales
force seeking to meet year-end sales goals as well as schools purchasing
software to be installed in time to take advantage of it during the second half
of the school year.
Inflation
We do not believe that inflation has had a material impact on our financial
position or results of operations for the periods discussed above. Although
inflationary increases in paper, postage, labor or operating costs could
adversely affect operations, we have generally been able to offset increases in
costs through price increases, labor scheduling and other management actions.
Factors That May Affect The Future Results And Financial Condition
This Quarterly Report on Form 10-Q contains forward-looking statements.
Additional written and oral forward-looking statements may be made by the
Company from time to time in SEC filings and otherwise. The Company cautions
readers that results predicted by forward-looking statements, including, without
limitation, those relating to the Company's future business prospects, revenues,
working capital, liquidity, capital needs, interest costs and income, are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those indicated in the forward-looking statements, due to
factors including the following and other risks and factors identified from time
to time in the Company's filings with the SEC:
The Company's ability to continue to produce successful supplemental education
material and software products;
Reductions in state and local funding for educational spending materials
resulting, among other things, from increasing state budget deficits;
41
Uncertainty in the current operating environment which makes it difficult to
forecast future results;
The ability of the Company's print and electronic supplemental instructional
materials to continue to successfully meet market needs;
The Company's ability to maintain relationships with its creative talent;
Changes in purchasing patterns in and the strength of educational, trade and
software markets;
Competition from other supplemental education materials companies;
Significant changes in the publishing industry, especially relating to the
distribution and sale of supplemental educational materials;
The effect on the Company of volatility in the price of paper and periodic
increases in postage rates;
The Company's ability to effectively use the Internet to support its existing
businesses and to launch successful new Internet initiatives;
The general risks inherent in the market and the impact of rising interest rates
with regard to its variable debt facilities; and
The terms of our First-Lien Facility and Second-Lien Facility require us on an
ongoing basis to meet certain maximum secured leverage ratio covenants. A
default under either credit agreement could result in acceleration of payment
obligations and would impact our ability to finance our business through other
debt agreements.
The preliminary SEC inquiry we previously disclosed in our Form 8-K filed with
the SEC on December 15, 2003, is ongoing, and we cannot predict the final
outcome of the inquiry at this time.
The Company's ability to provide the information necessary to complete the
reaudit of our 2001 financial statements and the risk of default and
acceleration under our indenture in connection with the timing for furnishing of
the reaudited 2001 financial statements.
42
If the reaudit of our 2001 financial statements is completed and a report
thereon issued by our independent auditors as required by the indenture prior to
any claim of breach being made, the potential for such a claim would be
eliminated. If a breach of the information requirements of the indenture were to
be claimed and the trustee or holders of at least 25% of the aggregate principal
amount of the Notes were to provide written notice of such breach, we would
vigorously defend against any such claim. Even if such claim of breach were to
prevail, we would have 60 days from the date of written notice of such claim of
breach to cure the breach and avoid an event of default under the indenture. If
the reaudit of our 2001 financial statements is completed and a report thereon
issued by our independent auditors as required by the indenture prior to the end
of the 60 day cure period, the right to accelerate our Notes or the indebtedness
under our credit facility as a result of the alleged breach of the indenture's
information requirements would be eliminated. We have engaged our independent
auditors to perform a reaudit of the 2001 financial statements and are providing
our auditors with the information necessary for them to complete their reaudit
prior to the end of the cure period, if any claim of breach of the indenture's
information requirements is made.
While we are diligently working to provide such documentation, we cannot assure
you that we will be able to provide the information necessary to complete the
reaudit or that the reaudit of the 2001 financial statements will be completed
and a report thereon issued by our independent auditors as required by the
indenture. If there is an event of default under the indenture, the trustee or
holders of at least 25% of the aggregate principal amount of the Notes would
have the right to accelerate payment of our Notes, and the holders of
indebtedness under our credit facility also would have the right to accelerate
payment thereunder. If any such acceleration occurred, we would not be able to
repay the amounts due and such acceleration would have a material adverse effect
on our financial condition and liquidity.
The foregoing list of factors should not be construed as exhaustive or as any
admission regarding the adequacy of disclosures made by the Company prior to the
date hereof. The Company disclaims any intention or obligation to update or
revise forward-looking statements, whether as a result of new information,
future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk. Market risk, with respect to our business, is the
potential loss arising from adverse changes in interest rates. We manage our
exposure to this market risk through daily operating and financing activities
and, when deemed appropriate, through the use of derivatives. We use derivatives
as risk management tools and not for trading purposes.
We were subject to market risk exposure related to changes in interest rates on
our $145.0 million senior secured term loans under our Second Lien Credit
Facility. Interest on revolving loan borrowings under our First Lien Credit
Facility maturing in December 2008 will bear interest at a rate per annum equal
to the LIBO rate as defined in the First Lien Credit Facility plus 3.5% or the
alternate base rate as defined in the First Lien Credit Facility plus 2.5%.
Interest on the term loans under our Second Lien Credit Facility maturing in
March 2009 will bear interest at a rate per annum equal to the LIBO rate as
defined in the Second Lien Credit Facility plus 5.0% or the alternate base rate
as defined in the Second Lien Credit Facility plus 4.0%. A 1% increase in
interest rates would result in an increase in our annual interest costs of
approximately $1.45 million.
The First Lien Credit Facility and the Second Lien Credit Facility require us to
obtain interest rate protection that, when taken together with the aggregate
principal amount of the Company's indebtedness subject to a fixed interest rate,
will result in at least 50% of our total indebtedness being either fixed, hedged
or capped for the duration of the applicable facility. On November 15, 2003, we
entered into an arrangement with a notional value of $61.0 million, which
terminates on November 15, 2004 and requires us to pay a floating rate of
interest based on the three-month LIBO rate as defined in that arrangement with
a cap rate of 2.5%. The fair value of the interest rate cap as of March 31, 2004
was de-minimus.
43
The following table sets forth information about the Company's debt instruments
as of March 31, 2004:
Debt Lesss Than After
Obligations Total 1 year 2-3 years 4-5 years 5 years
- ---------------------------- ----------- ----------- --------- ---------- ---------
Revolving Credit $ - $ - $ - $ - $ -
Average Interest Rate
Second Lien Credit Facility 145,000 - - 145,000 -
Average Interest Rte 6.09% (A)
Senior Subordinated Notes 152,000 - - - 152,000
Average Interest Rate 12.75%
(A) Interest rate through 4/29/04.
ITEM 4. CONTROLS AND PROCEDURES
WRC Media management, including the Chief Executive Officer and Chief Financial
Officer, have conducted an evaluation of the effectiveness of disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective in ensuring that all
material information to be filed in this quarterly report has been made known to
them in a timely fashion. There have been no significant changes in the
Company's internal controls, or in other factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation. In making this evaluation, WRC
Media management considered the "material weaknesses" (as defined under
standards established by the American Institute of Audited Public Accountants)
that were identified and communicated to us in connection with the audit of our
consolidated financial statements for the year ended December 31, 2003, by our
independent auditors. Our independent auditors identified the following two such
"material weaknesses": (1) numerous adjusting entries proposed as a result of
our 2003 audit were recorded by the Company to correct the underlying books and
records, including previously reported results for 2002 and 2001, and (2) there
were an insufficient number of qualified accounting personnel appropriate for
their positions, specifically within the external financial reporting area.
Prior to the identification of these "material weaknesses" by our independent
auditors, the Company began implementing various policies and procedures in
connection with its own review of its accounting and external reporting
functions, including by improving its recordkeeping functions, adding an
additional level or review, hiring an Assistant Treasurer/Controller in February
2004 to increase resources in our external reporting area and adopting a formal,
written disclosure policy. The Company is currently searching for an internal
auditor and a new Chief Operating Officer.
We are further evaluating the material weaknesses identified by our independent
auditors as part of the ongoing evaluation of our disclosure controls and
procedures and consulting with our auditors regarding improvements to our
external reporting process. We will disclose the conclusion of our evaluation
when we file our Form 10-K for the year ended December 31, 2003.
44
ITEM 5. OTHER INFORMATION
Pre-approval of Non-Audit Services
In accordance with Section 10A(i) of the Exchange Act, the Audit Committee of
the Board of Directors of the Company will pre-approve the provision of all
non-audit services to be provided to the Company by its independent auditors,
Deloitte & Touche LLP, as permitted by Section 10A.
Investor Relations
The Company posts on its Web site, www.wrcmedia.com, the date of its upcoming
financial press releases and telephone investor calls at least five days prior
to the event. The Company's investor calls are open to the public and remain
available to the public through the Company's Web site for at least five days
thereafter.
45
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Martin E. Kenney, Jr., Chief Executive Officer of WRC
Media Inc., CompassLearning, Inc. and Weekly Reader Corporation,
pursuant to Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange
Act of 1934, as amended, dated May 14, 2004.
31.2 Certification of Richard Nota, Senior Vice President of Finance and
Principal Financial Officer of WRC Media Inc., CompassLearning, Inc.
and Weekly Reader Corporation dated May 14, 2004.
32 Certification of Chief Executive Officer and Principal Financial
Officer of WRC Media Inc. and Subsidiaries and Weekly Reader
Corporation pursuant to 18 U.S.C. ss. 1350, dated May 14, 2004.
99.1 Credit agreement dated as of March 29, 2004 among Weekly Reader
Corporation and CompassLearning, Inc. as the Borrowers, WRC Media Inc.,
as a Guarantor, and Various Financial Institutions from time to time
parties hereto, as the Lenders.
99.2 Second-Lien Credit agreement dated as of March 29, 2004 among Weekly
Reader Corporation and CompassLearning, Inc. as the Borrowers, WRC
Media Inc., as a Guarantor, and Various Financial Institutions from
time to time parties hereto, as the Lenders.
(b) Reports on Form 8-K
1. Form 8-K, filed May 6, 2004, reporting date and time of investor call
discussing first quarter results for the period ended March 31, 2004.
2. Form 8-K, filed April 14, 2004, reporting investor conference call, Martin
E. Kenney, Jr., WRC Media Inc.'s Chief Executive Officer.
3. Form 8-K, filed April 5, 2004, reporting WRC Media Inc. announced the date
and time of its year-end investor conference call which is set forth in the
press release in an Exhibit hereto.
4. Form 8-K, filed April 1, 2004, reporting WRC Media Inc., A Leading
Supplemental Education Publisher, Secures Financial Liquidity By Closing
$145 Million Senior Second-Lien Credit Facility.
5. Form 8-K, filed March 31, 2004, reporting our audited consolidated balance
sheets as of December 31, 2002 and 2003, and the related statements of
stockholders' deficit and operations for the years ended December 31, 2002
and 2003.
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
/s/ Martin E. Kenney, Jr. Date: May 14, 2004
- ----------------------------------------------------- ---------------------
Martin E. Kenney, Jr.
Director: WRC Media Inc., Weekly Reader Corporation
and CompassLearning, Inc.; Chief Executive Officer:
WRC Media Inc. and CompassLearning, Inc.;
Principal Executive Officer and Executive Vice President:
Weekly Reader Corporation
/s/ Richard Nota Date: May 14, 2004
- ----------------------------------------------------- ---------------------
Richard Nota
Senior Vice President-Finance: WRC Media Inc.;
Principal Financial Officer WRC Media Inc.,
CompassLearning, Inc., Weekly Reader Corporation
47