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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2003 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 organization) (State or other jurisdiction of incorporation or organization)
2731 2721
(Primary Standard Industrial Classification Number) (Primary Standard Industrial Classification Number)
13-4066536 13-3603780
(I.R.S. Employer Identification Number) (I.R.S. Employer Identification Number)
COMPASSLEARNING, INC.
(Exact name of Registrant as specified in its charter)
2731
DELAWARE
(State or other jurisdiction of incorporation or organization)
7372
(Primary Standard Industrial Classification Number)
13-4066535
(I.R.S. Employer Identification Number)
WRC MEDIA INC. WEEKLY READER CORPORATION
512 7th AVENUE, 22nd FLOOR 512 7th AVENUE, 22nd FLOOR
NEW YORK, NY 10018 NEW YORK, NY 10018
(212) 768-1150 (212) 768-1150
COMPASSLEARNING, INC.
512 7th AVENUE, 22nd FLOOR
NEW YORK, NY 10018
(212) 768-1150
(Address, including zip code, and telephone number, including area code, of each
Registrant's principal executive offices)
Securities Registered Pursuant to Section 12 (b) of the Act:
None
Securities Registered Pursuant to Section 12 (g) of the Act:
12 3/4% Senior Subordinated Notes due 2009
15% Senior Preferred Stock due 2011
- ------------------------------------------------------------------------------------------------------
TITLE OF CLASS | NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------------------------------------------------------------------------------------------
12 3/4% Senior Subordinated Notes due 2009 | NONE
15% Senior Preferred Stock due 2011 | NONE
- ------------------------------------------------------------------------------------------------------
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 _ No X
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
PART I
ITEM 1. BUSINESS OVERVIEW
We are a leading publisher of supplemental education materials for the Pre K-12
market. Our portfolio of products includes a broad range of print and electronic
supplemental instructional materials, testing and assessment products and
library materials. We believe our products have well-known brand names and that
they are recognized by our customers for their effectiveness and consistent,
high quality educational content.
On May 14, 1999, Ripplewood Holdings L.L.C., which specializes in private equity
investments, formed WRC Media Inc. (WRC Media or the Company) as a holding
company to pursue acquisitions in the media industry. WRC Media now serves as a
holding company for CompassLearning, Inc. (CompassLearning), Weekly Reader
Corporation and ChildU, Inc. (ChildU). Weekly Reader Corporation includes Weekly
Reader and its subsidiaries- Lifetime Learning Systems, Inc., American Guidance
Service, Inc. (AGS or American Guidance) and World Almanac Education Group
(World Almanac).
WRC Media acquired CompassLearning on July 14, 1999. Prior to this acquisition,
WRC Media had no material operations other than seeking acquisitions. On
November 17, 1999, WRC Media completed the recapitalization of the Supplemental
Education Group of PRIMEDIA Inc., consisting of the businesses of Weekly Reader,
American Guidance and World Almanac and their respective subsidiaries. As a
result of this transaction, Weekly Reader became a subsidiary of WRC Media. On
May 9, 2001, WRC Media Inc. and subsidiaries completed two acquisitions. WRC
Media entered into an Agreement and Plan of Merger with ChildU, Inc. ChildU is a
provider of Internet-based educational services to both individual and
institutional consumers. Pursuant to the agreement, each issued share of
ChildU's common and preferred stock not directly or indirectly owned by ChildU
was converted into a contingent right to receive a number of shares of WRC Media
Inc. common stock. Concurrent with the ChildU acquisition, on May 9, 2001, a
subsidiary of the Company acquired the assets of Lindy Enterprises, Inc.
("Lindy"). Lindy develops a curriculum-based skills assessment and test
preparation product that correlates to national and state curriculum. The
Company has four reporting segments: Weekly Reader, World Almanac, American
Guidance Service("AGS"), and Compass/ChildU.
WEEKLY READER. Weekly Reader has been a leading publisher of classroom
periodicals for Pre-K-12 students for over 100 years. Weekly Reader, or its
former parent or affiliates of its former parent, acquired Facts On File News
Services in 1996, Gareth Stevens, Inc. in 1997 and American Guidance in 1998.
Weekly Reader is a leading publisher of 16 classroom periodicals which had a
2002-2003 school year circulation of 7.0 million subscribers. In addition to our
well-recognized classroom periodicals, such as Weekly Reader, Teen Newsweek and
Current Events, we also publish distinct, grade-specific workbooks. We also
custom publish instructional materials paid for by various sponsors, such as
General Motors, Six Flags Theme Parks, Inc, Kimberly-Clark, Center for Disease
Control and the Home Safety Council, which are distributed primarily to K-12
students throughout the United States. For the year ended December 31, 2003,
Weekly Reader, excluding American Guidance and World Almanac, had net revenue of
$46.3 million, representing approximately 23% of our total net revenue during
this period.
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AMERICAN GUIDANCE SERVICE. AGS has been a leading publisher of individually
administered and group testing and assessment products, and supplemental
instructional materials for over 45 years. AGS's testing and assessment products
are primarily for K-12 students and its supplemental instructional materials are
primarily for low-performing students in middle and secondary schools. One or
more of AGS's testing and assessment products or supplemental instructional
materials are used in over 12,000 school districts, or approximately 80% of the
school districts in the United States. Our testing and assessment products are
used to diagnose learning disabilities and measure the cognitive ability,
educational achievement, or personal and social adjustment of individual
students. AGS's supplemental instructional materials include various textbooks
and worktexts, many of which we believe set the standard for quality in their
respective product categories, with full-color content and accompanying
extensive teacher support materials. In May 2001, AGS acquired the operating
assets of Lindy. Lindy develops curriculum-based skills assessment and test
preparation products on CD-ROM that correlate to national and state curricula.
For the year ended December 31, 2003, AGS had net revenue of $56.6 million,
representing approximately 28% of our total net revenue during this period.
COMPASSLEARNING. CompassLearning is a research-based technology learning
solutions company that produces educational assessment, curriculum and
management tools for grades Pre-K through 12, all of which are aligned to local,
state and national standards. Offering several thousand hours of interactive
standards-based managed curriculum that inspires educators and students to
explore and achieve success, CompassLearning has been serving the Pre-K to 12
market for over 30 years and its products have been a significant part of the
learning and teaching process in more than 21,000 schools, representing
approximately 24% of all the schools in the United States. For the year ended
December 31, 2003, CompassLearning had net revenue of $42.7 million,
representing approximately 21% of our total net revenue during this period.
CHILDU. ChildU's expertise lies in the design of web-enabled courseware. Teamed
with the developers at CompassLearning, ChildU co-develops web-enabled products
for the Pre-K to 12 market. In 2002, ChildU and CompassLearning began
co-development of the new on-line product, Odyssey, which had its first release
in May 2002. Odyssey's online curriculum solutions, developed by educators and
built on sound instructional pedagogy, utilize engaging, self-paced,
project-based activities. For the year ended December 31, 2003, ChildU had
revenue of $7.9 million, representing approximately 4% of our total net revenue
during this period.
WORLD ALMANAC. World Almanac has been a leading publisher of reference and
informational materials targeted to K-12 students, as well as other well-known
general reference and informational materials, for over 130 years. Over 58% of
the approximately 130,000 school and public libraries in the United States have
purchased products from World Almanac. World Almanac publishes well-known print
reference materials, such as The World Almanac and Book Of Facts, The World
Almanac For Kids and nonfiction and fiction books for K-12 students under three
Gareth Stevens imprints. In addition, World Almanac publishes electronic
reference materials such as the Funk & Wagnalls Encyclopedia database and an
Internet-based version of Facts On File World News Digest, which in its print
version is World Almanac's leading subscription-based product with renewal rates
averaging approximately 86% from 1997 through 2003. World Almanac also
distributes third-party products that are targeted for K-12 students through its
World Almanac Education Library Services ("WAELS") catalogs. For the year ended
December 31, 2003 World Almanac had net revenue of $49.2 million, representing
approximately 24% of our total net revenue during this period.
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COMPETITIVE STRENGTHS
We believe a number of competitive strengths that have contributed to our
leading market positions, include:
BROAD PRODUCT PORTFOLIO. We are a leading publisher in the supplemental
education materials market and one of the few companies with a comprehensive
portfolio of products covering all the major segments of this market. We offer a
wide range of products to our customers. This broad product portfolio allows us
to address the most attractive segments of the market and respond to emerging
trends and funding sources, including the rapidly developing market of parents
seeking to buy supplemental education materials. See "Products and Services" for
a detailed description of our product portfolio.
STRONG, WELL-ESTABLISHED BRAND NAMES. We believe that we have strong brand names
in each of the market segments we serve. Several of our most recognized print
titles have been in circulation for decades, including CURRENT EVENTS, a Weekly
Reader publication, which was first published in 1902, Weekly Reader, which was
first published in 1929, the PEABODY PICTURE VOCABULARY TEST, which was first
published in 1929, and THE WORLD ALMANAC AND BOOK OF FACTS, which was first
published in 1868. We believe that our products are well known and trusted by
teachers, other educational professionals and parents for their effectiveness
and consistent, high quality educational content. Brand name and reputation are
significant criteria in the purchasing decision process for supplemental
education materials as they are usually selected at the discretion of individual
teachers, school and school district-level administrators or parents.
STABLE REVENUE BASE. We have a significant base of long-term customers who have
exhibited substantial product loyalty, resulting in a consistent level of
revenues from recurring sales to these customers. In our experience, once a
teacher or administrator is familiar with and accustomed to using a supplemental
instructional product and has developed lesson plans using the product, the
teacher or administrator tends to purchase the same product year-after-year
leading to a high subscription renewal rate. In addition, we believe there is an
important component of trust in the quality, consistency and support of many of
our products which makes it difficult for a competitor to introduce new products
for the same subject area without significant investment and the support of key
opinion makers in the industry. As a result of this loyalty, many of our
products enjoy long customer histories with high renewal rates. About 75% of
schools purchasing Weekly Reader periodicals re-subscribe the following year. We
believe our school renewal rates are important because of the value we place on
ensuring that our periodicals remain available within any given school,
providing us with a base on which to further penetrate that school. In addition,
six of our top ten revenue - producing testing and assessment products, have
been published for over 25 years. Typically, these products have undergone
revisions to ensure that they reliably meet the existing population's curriculum
needs. Achievement tests generally require revisions every 8 to 10 years while
tests that measure personal and social adjustment or cognitive ability in some
cases do not require revision for as long as 15 years.
3
SUBSTANTIAL ELECTRONIC DELIVERY PLATFORM. At CompassLearning, we have over 30
years of experience in developing and providing electronically delivered
supplemental instructional materials. We believe that we are well positioned to
capitalize on this market segment. One or more of CompassLearning's products
have been sold to over 21,000 K-12 schools in the United States, more schools
than have been reached by any other publisher of comprehensive electronic
courseware. Most CompassLearning products can be delivered in the school's
platform of choice, LAN, WAN or Internet. Facts On File News Services of World
Almanac derives 60% of its revenues from on-line subscriptions and electronic
licensing.
Our primary operating subsidiaries have web sites that promote their respective
products, provide product information and, in some cases, enable users to order
products over the Internet. Given the importance of quality and name recognition
to the development of Internet-based business, we believe that the strength of
our brands and our direct distribution channels position us well for significant
growth in this area.
STRONG DISTRIBUTION CHANNELS. Our products are used in over 80,000 schools, by
over ten million students, and in over 68,000 school and public libraries. We
have an extensive network with direct distribution channels into these end user
markets. Some of our products are sold using direct field and telephone sales,
emphasizing one-to-one relationships with teachers, school and school
district-level administrators and other educational professionals.
CompassLearning, for example, uses a three-pronged approach that provides every
customer a sales contact, an educational consultant and a technology support
person, for comprehensive customer service. We also utilize sophisticated direct
mail campaigns, which at Weekly Reader and World Almanac are enhanced by our
proprietary databases. These databases track the purchasing habits of teachers,
schools and/or librarians for many of our products as well as specific
demographics and other factors we believe affect purchasing habits.
EXPERIENCED MANAGEMENT TEAM. We have assembled an experienced management team at
both the administrative and the operating levels. This management team is led by
Martin E. Kenney, Jr., our Chief Executive Officer, who has over 25 years of
experience in educational publishing and electronic courseware. Prior to joining
WRC Media, Mr. Kenney was Executive Vice President of the Educational Publishing
Group and President of the Education Technology Group at Simon & Schuster, the
world's largest educational publisher at that time.
COMPASSLEARNING /
WEEKLY READER AMERICAN GUIDANCE CHILDU WORLD ALMANAC
PRINT AND ELECTRONIC PERIODICALS: 16 BASIC SKILLS: ELECTRONIC TEACHING KITS: Kits
INSTRUCTIONAL MATERIALS grade or Supplemental COURSEWARE: Several developed by World
subject-specific textbooks and thousand hours of Almanac Education
periodicals for worktexts targeted electronic Library Services
Pre-K-12 students for low-performing courseware for used to teach a
and 2 subscription students in middle Pre-K-12 students, variety of skills
supplements, and secondary schools primarily for including research
including Weekly covering core reading, math and skills, map skills
Reader, Teen curriculum subjects. language arts, and Internet skills.
Newsweek and Current through the
Events. TEST PREPARATION: CompassLearning
Instructional Odyssey Product line.
SKILLS BOOKS: 142 materials to prepare
distinct, grade for three of the MANAGEMENT SYSTEM:
specific, workbooks leading achievement Odyssey management
for K-9 students tests for K-12 system enables
that build and students. teachers to track
reinforce basic student performance,
skills, including PERSONAL GROWTH: record grades,
the Map Skills Various personal report on progress
series, or focus on growth materials and prescribe
current topics such covering topics such lessons based on
as health issues or as drug use results.
upcoming prevention and
Presidential anti-violence
elections. training, self-esteem
and career education
SPONSORED
INSTRUCTIONAL
MATERIALS: A
variety of free
instructional
materials, including
print and video
products, paid for
by corporate, trade
association and/or
not-for-profit
sponsors primarily
for K-12 students.
4
COMPASSLEARNING /
WEEKLY READER AMERICAN GUIDANCE CHILDU WORLD ALMANAC
TESTING AND ASSESSMENT N/A INDIVIDUALLY ASSEMENT TEST: N/A
PRODUCTS ADMINISTERED TESTS: CompassLearning
Assessment products Explorer assessment
for K-12 students and tool evaluates
adults, includes student performance,
Ability Assessment, meet the Assessment
Behavior & Social of Educational
Skills Assessment, Progress (NAEP)
Language, Speech & objectives and is
Auditory Skills aligned with the
Assessment. core state standards.
GROUP ACADEMIC
TESTS: Classroom
testing, which offers
reliable reading and
math diagnostics for
individual students
and aggregate data
for tracking yearly
progress at the
school and district
levels.
LIBRARY MATERIALS N/A N/A N/A K-12 REFERENCE AND
OTHER INFORMATIONAL
MATERIALS:
Materials developed
by us targeted to
K-12 students such
as THE WORLD ALMANAC
FOR KIDS AND GARETH
STEVENS, INC.
products, as well as
materials developed
by third-parties and
distributed by us.
GENERAL REFERENCE
AND OTHER
INFORMATION
MATERIALS:
Materials developed
by us, such as THE
WORLD ALMANAC AND
BOOK OF FACTS, FUNK
& WAGNALLS
ENCYCLOPEDIA
database and FACTS
ON FILE WORLD NEWS
DIGEST.
WEEKLY READER
Weekly Reader has five primary product lines: elementary school periodicals;
middle and secondary school periodicals; sponsored instructional materials
published by its subsidiary, Lifetime Learning Systems, Inc.; educational
workbooks and licensing.
In addition, Weekly Reader licenses the content for commercial use by third
parties such as Houghton Mifflin, Holt Rinehart and Winston, EBSCO and The Gale
Group and also sells advertising space in its publications.
ELEMENTARY SCHOOL PERIODICALS. Weekly Reader, first published in 1928, has
established itself as a leading source for current events information for
students in grades Pre-K to 6. Weekly Reader features six grade-specific
editions for students, with between 25 and 32 issues per school year for each
edition. Within Elementary, Weekly Reader also offers one optional monthly
supplement, ScienceSpin.
Subscriptions to Weekly Reader elementary school periodicals in the 2002-2003
school year represented approximately 37% of all elementary school periodical
subscriptions circulated in that year by the three major publishers of these
periodicals. We believe that three publishers account for virtually all
periodicals targeted for classrooms. According to publishers' Statements of
Ownership filed with the USPS in the fall of 2003 for average circulation for
the 2002-03 school year and issue nearest filing date for 2003-04 school year,
Weekly Reader's periodicals had the highest total circulation of elementary
school periodicals in the 2002-2003 school year, totaling approximately 5.3
million subscriptions.
5
Each edition of Weekly Reader is specifically written and designed for a
particular grade level in order to bring information on current events to
elementary school students at a conceptually appropriate level. The editions for
younger audiences contain "soft" news focusing on topics such as fire prevention
and animals. Higher-grade level editions contain "hard" news concerning topics
such as world news and current events, including, for example, the 2004
presidential primary elections, corporate corruption and the Middle East
conflict. A teacher's guide with background information, discussion topics and
follow-up questions is included with each issue of each edition.
MIDDLE AND SECONDARY SCHOOL PERIODICALS. We publish nine subject-specific
periodicals covering six subject areas for students in middle and secondary
schools and a Sex Supplement Educational publication. These include Current
Events, Teen Newsweek, Current Science, Writing, Read, Current Health 1 and 2,
Career World and Know Your World Extra with between 6 and 26 issues published
per school year per periodical. For example, Current Events first published in
1902, one of our most popular periodicals for middle school students, provides
information on current events tailored to the reading levels and school
curriculum of students in the sixth through tenth grades.
Weekly Reader's middle and secondary school periodical subscriptions in the
2002-2003 school year represented approximately 46% of all middle and secondary
school periodical subscriptions circulated that year by the two major publishers
which we believe account for virtually all middle and secondary school
periodicals targeted for classrooms. Weekly Reader's middle and secondary school
periodicals had the second highest total circulation of periodicals for these
schools in the 2002-2003 school year with approximately 1.7 million
subscriptions. In 2002 and 2003 approximately 75% middle and secondary schools
have renewed a subscription for the following year. To target the growing sixth
to eighth grade market, Weekly Reader entered into a relationship with Newsweek
magazine to create Teen Newsweek, which was launched in September 1999. Teen
Newsweek focuses on social studies and current events and contains
grade-appropriate news stories that link history, geography, government and
cultures to the news stories. The relationship is intended to capitalize on
Weekly Reader's expertise in publishing and marketing materials for classroom
use and Newsweek's strong news image.
LIFETIME LEARNING SYSTEMS. Lifetime Learning Systems is a leader in the creation
and distribution of a variety of supplemental education materials which are paid
for by corporate, trade association and/or not-for-profit sponsors and are
distributed free to a target audience. The materials produced focus on topics
chosen by the sponsor and are typically targeted for use in K-12 classrooms.
Lifetime Learning Systems also produces sponsored supplemental education
materials targeted for the college and senior citizen markets. Lifetime Learning
Systems has created a variety of multiple media education materials over the
years including: posters, teacher's guides and reproducible student activities
and additional audio, CD and video material.
Sponsors of Lifetime Learning Systems, Inc. projects have included corporate
sponsors such as General Motors, Kimberly Clark, Gillette and the New York Stock
Exchange as well as not-for-profit sponsors such as the Center for Disease
Control, Florida Department of Citrus and The Home Safety Council.
6
SKILLS BOOKS. We offer skills books, a line of workbooks and other supplemental
education materials that build and reinforce students' basic skills in
curriculum areas such as math or language arts as well as other titles, which
focus on life issues, such as current events or health. The skills book product
line includes 30 different series of workbooks including about 142 distinct,
grade-specific titles spanning K-9 grades. For example, the highly successful
Map Skills for Today series builds geographic literacy by teaching students
basic map-reading concepts and skills. The success of this series is
attributable to a sequential approach to teaching map skills that matches the
curriculum established by many school systems. Additional products include
series covering topics such as AIDS and anti-drug education.
WEEKLYREADER.COM. In addition to our presence in the classroom through printed
materials, we redesigned and re-launched Weekly Reader's website, with the goal
of strengthening the brand image of our print products and positioning Weekly
Reader to capitalize on electronic distribution opportunities. In 2002 the
website was expanded to include the WRTOOLKIT which gives subscribers the
ability to research topics in a database of archived articles. Weekly Reader's
website is a free site with pages specifically addressing students, teachers and
parents needs. It offers materials, in the form of articles, puzzles,
experiments and games, which correlate with the content of Weekly Reader
periodicals. In addition, the web site informs users about our periodicals and
skills books allowing customers to subscribe over the Internet.
LICENSING. Weekly Reader licenses the content of some of its publications,
promotes other products in its publications and provides its "seal of approval"
to various products. Weekly Reader's licensed content is generally recognized as
revenue over the term of the license agreement. Weekly Reader continues to sell
"Weekly Reader Editor's Choice" book selections licensed from trade book
publishers on the QVC Shopping Network Channel generating some of the largest
one-day sales totals in Weekly Reader's history.
AGS
AGS has two principal product lines: testing and assessment products; and core
curriculum and supplemental instructional materials.
TESTING AND ASSESSMENT PRODUCTS. AGS's testing and assessment products provide
educators with reliable individually-administered and group tests, and manuals
explaining how to administer our tests. Our testing and assessment products and
supplemental instructional materials are primarily used in K-12 schools, but are
also used in community health centers, clinics, hospitals, correctional
facilities, community colleges and other adult education programs. These
products are used to diagnose learning disabilities and measure the cognitive
ability, educational achievement and personal and social adjustment of students.
AGS currently publishes over 30 testing and assessment products. AGS's testing
and assessment products are generally sold as part of a test kit. Test kits
typically contain the test record forms, "easels" used to administer the test
items, and a manual describing the proper method to score and evaluate the
particular test. Three of AGS's top five testing products, based on sales, have
been published for over 25 years. AGS's tests are revised periodically to ensure
that they reliably measure existing populations. Achievement tests generally
require revisions every eight to ten years while tests that measure personal and
social adjustment or cognitive ability in some cases do not require revision for
as long as 15 years.
7
Educators and clinicians apply AGS's testing and assessment products on an
individual basis to understand a student's particular educational needs. In our
experience, once the validity and effectiveness of a test is established and
accepted in the educational community, educators', psychologists' and
clinicians' familiarity with the product grows along with their reluctance to
change suppliers and learn different assessment content, administration
approaches and scoring techniques. These professionals often prefer to use the
same tests over a long period of time in order to compare performance of their
student populations. The goal of AGS is to increase its brand awareness in the
markets it serves - primarily specialists in the K-12 market. Our goal is to
establish the AGS name in association with our products and services. By
increasing our visibility as a company on a national and local level with
special educators, we will be able to help the customer connect our products
with our company name. To grow in our critical markets, AGS plans to
aggressively pursue five main areas for growing our product line:
o Revisions - Many of our top-selling tests and curriculum are on schedule to
be revised over the next 5 years.
o New Product - AGS annually increases its new product offering through
internal development.
o Acquisitions - AGS historically has pursued acquisitions to enhance and
supplement its internal development efforts.
o Distribution - AGS has increased its emphasis on distributing complementary
products to its target markets. Gareth-Stevens and Weekly Reader titles (over
150) have been added to four of our main catalogs during the fall of 2003,
and we have added key reading assessments that will position us well to
capture Reading First, federally funded reading initiative, dollars.
o New Markets - AGS will seek new segments with the education industry in which
to participate where it can leverage core capabilities in new ways that
supports entry into growing education markets.
SUPPLEMENTAL INSTRUCTIONAL MATERIALS. AGS's supplemental instructional materials
consist of curriculum-based instructional materials, many of which are for
low-performing students. Low-performing students are defined as those students
scoring in the lower 50th percentile of the student population at a particular
grade level. We focus primarily on serving middle and secondary schools with
additional sales to post-secondary markets, such as community colleges and
correctional facilities. We generally produce three types of instructional
materials: supplemental hardcover textbooks in core curriculum areas for
low-performing students, with related products such as workbooks; soft cover
worktexts in core curriculum areas for low-performing students; and test
preparation materials which can be used to prepare all students for leading
achievement tests.
AGS's supplemental hardcover textbooks are designed to provide comprehensive
coverage of skills and concepts in short, concise lessons. They are geared to a
fourth grade reading level or below with photography and content that are
appropriate for middle and secondary school students as well as adults.
We believe AGS's supplemental hardcover textbooks set the standard for quality
in the market, with full-color content and accompanying extensive teacher
support materials. Each textbook has a wrap-around teacher's edition that
reproduces the student edition with notes for the teacher indicated next to the
text such as overviews for each new lesson, alternative questions a teacher may
ask and answers to questions in the text. Each textbook has available a set of
quizzes, worksheets, problem sets and other materials that teachers are
permitted to reproduce for their classes. These materials also are available on
CD-ROM. Most of AGS's supplemental hardcover textbooks have related soft cover
workbooks, activity books and study guide programs including videos available in
print and on CD-ROM for self-guided learning.
8
AGS's soft cover worktexts also cover core curriculum areas. These worktexts are
designed as stand-alone products so that a teacher may use them to supplement
any textbook. These soft cover worktexts cover smaller portions of any given
curriculum area other than our supplemental hardcover textbooks.
Approximately 12% of AGS's net revenue for the year ended December 31, 2003 was
from sales of testing and assessment products, curriculum and supplemental
instructional materials in which the end users were not K-12 schools.
AGS also publishes a line of test-preparation materials developed to assist
students preparing to take three of the leading achievement tests: Stanford
Achievement Test (SAT), Iowa Test of Basic Skills (ITBS), and TERRANOVA
(Comprehensive Test of Basic Skills (CTBS) and Multiple Assessments tests).
Additional preparation materials for state specific tests are also published.
AGS's test preparation materials are sold in package format.
COMPASSLEARNING
CompassLearning is a research-based technology learning solutions company that
produces educational assessment, curriculum, and management tools for grades
Pre-K through 12, all of which are aligned to local, state, and national
standards. The CompassLearning solutions are easily integrated into classroom
activities that support curricular goals. CompassLearning derives most of its
revenue from the sale of solution products and related professional development
and technical support services.
The CompassLearning solutions are focused on the following: comprehensive
assessment that diagnoses individual students based on state/national standards;
comprehensive curriculum in reading, mathematics, science and social studies
that is prescribed to each student based on our assessment system diagnosis or
based on teachers' assessment; learning management system that allows teachers
to track student performance and intervene as and when necessary and
administrators to track teacher/student progress; parent involvement through
access to the system allowing them to view student performance and progress at
school and being more involved; and professional development for teachers to
integrate this type of a system into their classroom.
CompassLearning's Learning Odyssey(R) product line is a comprehensive library of
over 8,000 hours of interactive, standards-based, managed curriculum. The
Odyssey curriculum focuses on reading, mathematics, science, social studies and
data management tools designed for grades Pre-K through 12. Use of stimulating
graphics, interactive animation, and audio technology for all types of learning
instruction help motivate students to learn. Assessment products assign lessons
based on each student's needs. Products cover a full range of development, from
basic skill instruction, to critical thinking exercises, to project-based
learning. Management tools are designed to reduce the time teachers spend on
administrative tasks and increase one-on-one work with students. The Odyssey
product line is delivered in the school's platform of choice including LAN, WAN
and Internet access.
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CompassLearning Explorer is an assessment tool designed to help evaluate student
performance. It covers the National Assessment of Educational Progress (NAEP)
objectives and is aligned with the core state standards. CompassLearning
Explorer offers criterion-referenced emulated tests, prescriptive learning paths
with the flexibility to integrate third-party products, as well as allowing for
customization to meet individual students' and teachers' needs. It can be
delivered via the Internet with computer-based and print components. Curriculum
options vary, letting students navigate with the program at their own pace or on
a timed basis.
CompassLearning provides professional development services and technical support
services. CompassLearning has a team of educational consultants providing
professional development services to teachers, ranging from basic software
training to services designed to assist teachers in implementing and integrating
technology into the classroom.
CompassLearning offers various technical support services in connection with the
purchase and ongoing use of its software products. An initial buyer of our
software products typically purchases one year of toll-free telephone help line
services, on-site system engineer services and software updates.
A typical CompassLearning sale consists of software products packaged with
professional development and technical support services for an average price of
$30,000 per school per year. The curriculum sells for an average of $120 per
subject per grade level or $80 if included in a bundle plus $100 per workstation
for simultaneous access. The Odyssey management system sells for $3,500 and
CompassLearning Explorer sells for $5,000. Professional development services
price is $1,230 per day. These services are typically purchased under a contract
for specific number of days of service. Technical support services are typically
purchased under one-year contracts for an average cost of $3,990 per year. After
the expiration of any service contract, services can be purchased on an ongoing
basis.
WORLD ALMANAC
World Almanac's operations are divided into the following five divisions: World
Almanac Books, World Almanac Education Library Services, Gareth Stevens, Inc.,
Facts On File News Services and Funk & Wagnalls.
WORLD ALMANAC BOOKS. The World Almanac(R) and Book Of Facts is, we believe, one
of the most widely used and well-respected general reference publications in the
United States. In 1999, the Library Journal ranked us as the number two best
reference source of the millennium (after Merriam-Webster's Third International
Dictionary. We believe The World Almanac(R) and Book Of Facts provide more
complete and up-to-date information than competing almanacs. Its
comprehensiveness and brand identity are critical assets. In print for over 130
years, The World Almanac(R) and Book Of Facts perennially makes the New York
Times' bestseller list. World Almanac Books also licenses the content of The
World Almanac(R) and Book Of Facts to third parties for inclusion in their
products. Since 1995, World Almanac Books has also published The World Almanac
For Kids, with over 2,000,000 copies sold to date.
WORLD ALMANAC EDUCATION LIBRARY SERVICES. World Almanac Education Library
Services is a niche distributor of reference and informational materials, which
it targets primarily to K-12 school and public libraries. There are
approximately 112,000 K-12 school libraries and 16,000 public libraries in the
United States. World Almanac Education Library Services reviews and selects
materials from third-party publishers for inclusion in its twelve catalogs. The
catalogs also include The World Almanac(R) and Book Of Facts, The World Almanac
For Kids and several best selling series from Gareth Stevens, Inc. World Almanac
Education Library Services mailed a total of approximately 2.3 million catalogs
in 2003. World Almanac Education Library Services also publishes a small amount
of proprietary teaching kits, including kits covering research skills, map
skills and Language Arts skills, which include items such as lesson plans for
books we believe are appropriate for classroom use to encourage multiple-copy
sales.
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GARETH STEVENS, INC. Gareth Stevens, Inc. publishes nonfiction and fiction books
for K-12 students. These books cover a broad spectrum of topics including
nature, science, social studies, reference, and language arts, all closely
related to curriculum standards. Approximately 79% of Gareth Stevens, Inc.'s
sales derive from books published under the three Gareth Stevens' imprints:
Gareth Stevens Publishing (K-6), World Almanac Library (4-8), and Weekly Reader
Early Learning Library (Pre-K-3). In the Gareth Stevens Publishing imprint, a
majority of these titles are sourced from domestic and international third
parties for which Gareth Stevens, Inc. usually holds, at a minimum, exclusive
distribution rights for K-12 school and public libraries in North America.
Royalty advances are generally paid on titles sourced in this manner and then
earned out over the life of the title. In the World Almanac Library and Weekly
Reader Early Learning Library imprints, the majority of titles are created by
Gareth Stevens and in most of the cases in which Gareth Stevens, Inc. does not
own the title, we hold the worldwide rights to the titles. The remaining
approximately 21% of Gareth Stevens, Inc.'s sales result from the telesales
distribution of books from other publishers, primarily two lines from Rosen
publishing (a K-3 line and a 6-12 line), and books from a handful of other
publishers, including Capstone, Heinemann Library, Crabtree, and Compass Point,
sold on consignment through the LibraryOne Direct division.
FACTS ON FILE NEWS SERVICES. World Almanac, through Facts On File News Services,
publishes and sells subscription news reference products in print and Internet
formats. There are five print products: Facts On File World News Digest; Issues
And Controversies On File; Today's Science On File; Editorials On File; and
Software And CD-ROM Reviews On File.
Its core product, Facts On File World News Digest, is a highly respected
publication used by libraries as a comprehensive index of world events dating
back to 1940 in both the print and electronic version. Librarians, journalists
and library patrons typically use Facts On File News Services products to
research historical events. The in-house editorial staff of Facts On File World
News Digest distills key news information from more than 100 different
newspapers, periodicals, journals and government Internet sources and uses it to
update the product weekly in the print and Internet formats. The core print
product has an annual subscription list price of $960, which is discounted for
public and school libraries. The print edition of Facts On File World News
Digest sold over 2,400 subscriptions in 2003 and continues to meet with great
acceptance, as evidenced by renewal rates averaging approximately 86% from 1997
through 2003. Subscriptions to the print edition have gradually declined as it
is replaced by Internet-based versions of the product described below.
To take advantage of accelerated library spending on electronic delivery of
reference materials, World Almanac launched FACTS.com in 1999, an on-line
version of Facts On File World News Digest. The increased functionality of the
Internet version allows World Almanac to price this product higher than the
print version. The Internet version has a list price of $1,695 for a single-site
installation, with price discounts per site for multiple-site installation. In
2000, we launched three additional World Almanac databases as part of the
Reference Suite @ Facts.com web service: Issues and Controversies On File,
Today's Science On File and the World Almanac Reference Database. In 2003, we
launched Facts For Learning, an elementary school reference and research
product. FACTS.com subscriptions are sold primarily through telemarketing.
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FUNK & WAGNALLS. World Almanac operates in the electronic encyclopedia business
through Funk & Wagnalls. Although the Funk & Wagnalls Encyclopedia is no longer
published in print format, Funk & Wagnalls licenses an electronic version of its
encyclopedic database to various third parties and is delivered via FACTS.com.
Funk & Wagnalls also annually sells a general yearbook containing a review of
the major news events that transpired in the previous year and a science
yearbook containing a review of the major scientific events in the previous
year. The yearbooks (general and science) are licensed from World Book
Encyclopedia, Inc. The active subscriber list for these two publications, which
primarily consists of former subscribers to the print edition of the Funk &
Wagnalls Encyclopedia, is approximately 40,000 for the general yearbook and
13,000 for the science yearbook. Most science yearbook subscribers are also
general yearbook subscribers. We do not target new subscribers for these
yearbooks; however, renewal rates have averaged approximately 82% for the
general yearbook and 78% for the science yearbook from 1997 through 2003.
PRODUCT AND CONTENT DEVELOPMENT
WEEKLY READER. Weekly Reader has a team working in product and content
development. This team includes: editors and writers, who are typically grade
and subject specialists with journalism or teaching experience; and designers,
who are responsible for the "look and feel" of the products, including the
layout of each publication.
Editors, writers and designers work in teams on any particular project including
planning meetings used for determining content and educational focus, the
selection of appropriate graphics and photographs and final editing before
submission for printing. The time it takes to develop our products varies
substantially according to the type of product. Product development for a new
periodical typically takes approximately nine months from concept to initial
marketing, whereas new issues of our existing periodicals typically take
approximately one to two weeks from conception to printing. Our skills books
typically take approximately eight to twelve months from concept to initial
marketing for an entirely new title, and approximately four to six months for
updated versions of existing titles. Development times for Lifetime Learning
Systems, Inc.'s products vary substantially depending upon the scope of work
considered, however, the average contract takes approximately three to four
months from concept to distribution.
Weekly Reader's periodicals are written by a combination of staff and freelance
writers. Our staff of editors, writers and designers determines the subject
matter for the particular edition after which the content is primarily written
and edited by Weekly Reader's employees. For ScienceSpin, however, once the
content and educational focus for a particular issue is determined internally,
the writing is contracted out to third parties with the relevant scientific
knowledge and the ability to write for the applicable target audience. Teen
Newsweek is written internally based upon content from upcoming stories in
Newsweek made available to our writers prior to Newsweek's publication, and our
own internally created content. The Teen Newsweek writers determine which
stories are appropriate for the targeted audience and then rewrite the stories
with age appropriate information and language. Teen Newsweek's content is
subject, in all cases, to Newsweek's approval.
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Weekly Reader's skills books are typically written by freelance writers at the
direction of Weekly Reader's editors. Lifetime Learning Systems, Inc.'s programs
are developed in a variety of multiple media by an in-house editorial and design
staff with varying degrees of direction provided by the applicable sponsor. In
the past, some sponsors of Lifetime Learning Systems, Inc. projects have
approached Lifetime Learning Systems, Inc. with a specific concept for which
they are seeking implementation and production, while other sponsors simply have
a message they wish to get across to a target audience and request proposals as
how best to accomplish that goal.
Prior to distribution, whether created internally or externally, all of Weekly
Reader and Lifetime Learning Systems' products are reviewed by a senior editor
for their age and content appropriateness.
AGS. AGS's new and revised testing and assessment products are developed
internally by in-house personnel, most of who are trained in one or more
specialties including psychology, education, early childhood development and
speech/language, among other disciplines. In some cases the in-house personnel
revise existing products under the direction of well known external authors who
control the original copyright or content of the test and who receive royalties
from the sale of these tests.
Our testing and assessment products are firmly rooted in established
psychological and pedagogic theory, and our product development philosophy is
customer focused. New test concepts are usually derived from the marketplace,
often from our sales representatives who are in contact with teachers, guidance
counselors, school psychologists, school administrators and other professionals
who identify a testing need.
We also develop new products through a systematic review of industry trends,
including emerging trends in the education community, or in conversations with
educators and other professionals who attend various trade and professional
conferences where we are an exhibitor or attendee. Occasionally, we will be
approached by an external author with a new test concept, which we will then
evaluate in terms of its overall market potential. AGS also distributes a few
select assessments from other publishers.
After we have created or revised a test, we then subject it to field tests. Once
field-testing and any indicated adjustments are complete, the test undergoes
standardization, generally being tested on 200 students per age year targeted by
the test and covering a broad range of demographic characteristics. In addition,
we seek support for the test from key opinion makers in the subject area of the
test. Only at this stage do we begin to market the test. The process is similar
for most revisions of existing tests because when a test is updated, the new
content similarly must be field-tested and then the revised test must undergo
standardization. The development cycle for a new test or to make revisions to an
existing test is typically five years from concept through the launch of the new
or revised test. The life cycle for the new or revised test can be up to 15
years or more.
We develop supplemental instructional products internally and externally with
developers and in close consultation with outside authors, on a royalty basis or
on a fee-for-service arrangement. New product concepts are derived from various
sources, including in-house development staff, outside authors and our sales
force based on their regular meeting with educators and administrators.
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Most of these instructional products have a development cycle of approximately
one year. In general, we solicit bids for our new products from outside
developers and award the contract based on price and other factors relating to
the developer's ability to deliver the finished product according to our exact
specifications.
COMPASSLEARNING AND CHILDU. CompassLearning and ChildU have a combined product
development team of about 57 employees. Product development expertise consists
of software engineers, programmers, quality assurance analysts, technical
writers, instructional designers, and project managers. Their co-development
efforts focus on three primary objectives: delivering a Pre-K through 12
web-enabled curricula; developing a state-of-the-art instructional management
system; and creating a national-standards-based assessment product.
CompassLearning and ChildU are leveraging off-shore software and content
development resources to reduce cost and expedite delivery. This initiative has
helped the Company increase productivity significantly.
WORLD ALMANAC. World Almanac has a in-house editorial staff that: in the case of
the World Almanac Books and Funk & Wagnalls, works in conjunction with outside
work-for-hire editors to develop its content; in the case of the Facts On File
New Services products, develops the content of these products; in the case of
Gareth Stevens, editorial and creative staff work with outside work for-hire
editors and licensors to develop content as well as develop content internally.
Individual members of the in-house editorial staff are generally responsible for
only one of the product lines. The contents of our Funk & Wagnalls yearbooks are
licensed from third parties. The Gareth Stevens, Inc. nonfiction and fiction
books are comprised of either content licensed from third parties and then
repackaged and/or rewritten for the K-12 market in the United States or,
especially in the case of books for the World Almanac Library and Weekly Reader
Early Learning Library imprints, original content developed by in-house staff,
freelance writers, and other providers of editorial services. World Almanac
Education Library Services has a three-person creative staff which designs the
layout for the catalogs and selects the reference and informational materials
which will be included in the catalogs.
World Almanac Education Library Services updates its catalogs twice each year.
New editions of The World Almanac(R) and Book Of Facts and The World Almanac For
Kids are published each year. New product development is currently focused on
offering products through Internet delivery. In 2000, we launched the following
three additional World Almanac databases as part of the Facts On File News
Services web service: Issues & Controversies On File, Today's Science On File
and the World Almanac Reference Database. In 2003, we launched Facts For
Learning, an elementary school reference and research product. Also, in 2003 our
Facts On File archives available through the Internet were updated back to 1940.
CUSTOMERS
Our targeted customers, who vary depending on the product line, are teachers,
school and school district-level administrators, librarians, other educational
professionals and parents.
Weekly Reader's periodicals and other instructional materials are purchased
mainly by teachers, as well as by school and school district-level
administrators. In addition, schools sometimes ask parents of students to pay
for their children's subscriptions to Weekly Reader periodicals.
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Customers of Lifetime Learning System, Inc.'s products generally are:
corporations; trade associations; not-for-profit organizations; and government
agencies.
Customers of AGS's assessment products generally are guidance counselors, school
psychologists, speech pathologists, special education teachers and other similar
school district-level specialists.
Customers of AGS's supplemental instructional materials generally are teachers
and school-level administrators as well as school district-level administrators.
AGS also has customers outside of K-12 schools for its testing and assessment
products and supplemental instructional materials, which includes clinical
psychologists, community colleges, adult educational programs and correctional
facilities.
One or more of AGS's testing and assessment or supplemental instructional
products are used in over 12,000 school districts, or approximately 80% of the
school districts in the United States.
CompassLearning's customers consist primarily of school and school
district-level administrators, including: superintendents; curriculum directors;
technology directors; and principals.
Although individual teachers do not typically make final purchasing decisions,
they frequently have substantial input in the decision making process. One or
more of CompassLearning's products has been sold to more than 21,000 K-12
schools, representing approximately 19% of all schools in the United States.
In 2003, approximately 87% of World Almanac's sales were to schools and
libraries. The remaining 13% of its sales consisted of sales of yearbooks to
former encyclopedia purchasers and sales of The World Almanac(R) and Book Of
Facts and The World Almanac For Kids to consumers.
Funk & Wagnalls licenses its electronic encyclopedia database to various
licensees and sells its yearbooks primarily to former print encyclopedia
purchasers. Facts On File News Services sells Facts On File World News Digest
and its other products to libraries of all types. World Almanac Education
Library Services and Gareth Stevens, Inc. sell their products primarily to
school libraries and to a lesser extent to public libraries. Over 58% of the
approximately 130,000 school and public libraries in the United States have
purchased products from World Almanac.
SALES, MARKETING AND DISTRIBUTION
We have an extensive network with direct distribution channels to reach our
primary customers. Our primary operating subsidiaries use one or more of the
following methods to sell and market our products: direct mail, direct sales,
telemarketing and distribution through retail channels. The chart set forth
below contains information regarding sales, marketing and distribution by Weekly
Reader, American Guidance, CompassLearning/ChildU and World Almanac, including
their primary distribution channels.
15
COMPASSLEARNING/
WEEKLY READER AMERICAN GUIDANCE CHIDLU WORLD ALMANAC
Primary Method of Direct Mail Direct Sales Force Direct Sales Force Direct Mail: World
Sales and Marketing (field and telesales) Almanac Education
Library Services and
Funk & Wagnalls
Telemarketing:
Gareth Stevens,
Inc., World Almanac
Library Services and
Facts On File News
Services Retail
Marketing: World
Almanac Books
Number of Mailings in Total mail quantity N/A N/A World Almanac
2003 of 9.0 million pieces Education Library
Services generally
mails four times a
year; Yearbook mail
campaigns once a year
Number of Schools/ Over 114,000 schools; 233,000 customer N/A Approximately
Teachers/Libraries in 3.70 million teachers locations 112,000 schools,
Database 16,300 school
districts, 15,900
public libraries,
3,900 academic
libraries
Estimated Number of Over 55,000 schools Over 12,000 school Over 21,000 schools Over 76,000 school
Schools/School districts and public libraries
Districts/Libraries have purchased
with our products products from World
Almanac
DIRECT MAIL. Direct mail consists mainly of well-planned mailings that target
current and prospective customers, often with enclosed product samples and
catalogs, which are used to generate product sales. This marketing technique is
utilized to a significant extent by Weekly Reader, World Almanac's World Almanac
Education Library Services, and to a lesser extent by American Guidance,
CompassLearning and World Almanac's Funk & Wagnalls.
Weekly Reader's classroom periodicals are marketed primarily through the use of
direct mailings. Its experienced and skilled marketing staff has developed
detailed mailing schedules and marketing strategies to reach current and
prospective customers. In the marketing of its classroom periodicals, Weekly
Reader has developed and maintained a valuable and proprietary database tracing
the purchasing habits of approximately 3.7 million individual teachers and
administrators and approximately 114,000 schools over the past five years as
well as various demographic factors in each locale. In 2003, Weekly Reader
mailed over 0.7 million catalogs and 9.0 million direct mail pieces primarily to
teachers as well as to school and school district-level administrators.
World Almanac also uses direct mail to generate sales. World Almanac's World
Almanac Education Library Services also uses direct mail to sell its products.
This division of World Almanac has developed a sophisticated database that
tracks customers and purchasing habits, including monetary value of an average
purchase and other relevant factors, which it uses to target customers with the
appropriate catalogs. Most of World Almanac Education Library Services' sales
are generated from mailings of its main catalog, which is sent to existing
customers, and its prospect catalog, which is mailed to prospective customers.
World Almanac mailed approximately 6.0 million direct mail pieces in 2003, and
including 2.3 million catalogs.
AGS printed and mailed more than 2.0 million promotional materials and catalogs
in 2003, aimed at developing customer leads, spurring direct-response sales and
building overall marketplace awareness of its brand and products.
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World Almanac's Funk & Wagnalls primarily markets its yearbooks to former
subscribers of its previously published print format encyclopedia using direct
mail.
TELEMARKETING. Telemarketing involves the use of the telephone to contact
current and prospective customers as a means of generating sales. World
Almanac's Gareth Stevens, Inc. World Almanac Education Library Services and
Facts On File News Services utilize this marketing technique to a significant
extent, while CompassLearning and Weekly Reader use it to a lesser extent.
Gareth Stevens, Inc.'s marketing strategy consists primarily of selling products
through its active and growing telemarketing program. The telemarketing division
generates approximately 49% of all Gareth Stevens, Inc. sales by contacting
existing and prospective accounts to solicit commitments to preview titles from
Gareth Stevens, Inc. and other third-party publishers. Through the preview
process, librarians are invited to receive copies of Gareth Stevens, Inc. titles
or the third-party titles it distributes. The librarians then have the
opportunity to review actual copies of the selected titles at their convenience.
Gareth Stevens, Inc. telemarketers follow up with these librarians over a
specified time period to ensure that the product has been received and reviewed.
Any titles not selected for purchase are picked up from the librarian's
location, with all postage and handling expenses borne by Gareth Stevens, Inc.
Depending on the school year cycle, there are usually between 50 and 100
part-time and full-time telesales representatives in the Gareth Stevens, Inc.
telemarketing unit.
CompassLearning's inside sales group, comprised of six people, assists its
direct sales force by qualifying sales leads in conjunction with funding
eligibility and also promotes renewal sales of professional development and
technical support services contracts.
World Almanac's Facts On File News Services' strategy for attracting new
customers consists of using targeted prospects derived from a variety of sources
including rented lists, followed by telemarketing calls from representatives who
are recruited and trained by Facts On File News Services. World Almanac
Education Library Services also has recently increased its telemarketing
capacity to promote its products.
Weekly Reader's internal telemarketing group consists of seven individuals,
targeting new subscribers. Weekly Reader also conducts telemarketing campaigns,
to assist in the generation of renewal sales.
DIRECT SALES FORCES. AGS, CompassLearning and Weekly Reader's Lifetime Learning
Systems, Inc. each primarily use a direct sales force to sell and market their
products.
To market its testing and supplemental instructional materials, AGS pursues a
strategy of developing strong relationships with its current and prospective
customers primarily by using its sales organization.
These representatives work closely with schools to determine which of AGS's
products best serve the needs of a specific school's student body. Unlike
traditional telemarketing, AGS's telephone (inside) sales representatives
develop relationships with customers and occasionally make field visits. All of
AGS's sales representatives go through a training process with defined
objectives that they must satisfy during the initial six months of their
employment and each year thereafter. In addition, AGS enlists professionals on a
per diem basis to provide instruction to educators concerning test
administration, scoring and other professional training such as disciplinary
methods and substance abuse and violence prevention techniques.
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CompassLearning maintains a direct sales force of 52 sales representatives. The
sales representatives are each assigned to a sales region within the United
States. Each member of the direct sales force has access to CompassLearning's
database of detailed information concerning the school districts, current
customers, school funding and other data for its sales territories. On the basis
of this information, the sales representatives seek to establish relationships
with, and brand awareness for, CompassLearning's products among existing and
potential customers in their respective districts by making personal sales
visits to the schools or school administrators.
Weekly Reader's Lifetime Learning Systems, Inc. has a small dedicated field
based marketing and sales representatives who make presentations directly to
potential corporate, trade association and not-for-profit organization clients.
These representatives are covering the largest DMA (Designated Market Areas) in
the United States. Presentations generally consist of proposals for education
materials and programs to be shipped free to teachers and schools under the
client's sponsorship.
RETAIL MARKETING/WHOLESALERS. Approximately 76% of World Almanac Books' revenue
is generated from product sold through retail bookstores or through wholesalers
into mass-market locations such as supermarkets and newsstands. World Almanac
Books' products are also sold to book clubs and other resellers as well as into
libraries through World Almanac Education Library Services. In addition, Gareth
Stevens, Inc. distributes approximately 36% of its products through its network
of wholesalers to libraries.
INTERNET WEB SITES. Weekly Reader, AGS, and World Almanac all have free Internet
web sites, which allow customers to order their products. The Weekly Reader web
site: features pages specifically addressing students, teachers, and parents;
and offers materials in the form of puzzles, experiments and games that
correlate with the content of Weekly Reader periodicals.
The AGS web site, provides extensive company information, customer service
information, order placement information and a complete description of its
products. The web site also includes product forums which give detailed
information about those specific products. AGS had approximately $6.8 million in
web site sales, including orders initiated with an Internet effort code and
actual online orders, in 2003.
World Almanac has multiple websites that offer a variety of content/services.
Both the World Almanac Education Library Services and Gareth Stevens websites
offer Internet ordering as well as provide a complete description of their
products. The World Almanac for Kids website offers materials in the form of
games, quizzes and reference facts that correlate with the content of The World
Almanac for Kids book. In addition to free Internet websites, World Almanac
sells subscription based Internet products through its Facts On File News
Services unit.
The CompassLearning web site serves as a customer resource for information about
its software solutions.
SHIPMENT. Our periodicals are typically shipped second-class mail directly from
the location at which they were printed. Teen Newsweek, however, is delivered by
truck and/or air directly to United States Postal Service bulk mail centers to
speed delivery. Our other print materials are typically delivered by
fourth-class mail or, in some cases, by the United Parcel Service or other
courier services. Since 1986, we have distributed Facts On File World News
Digest through third parties, which provide electronic on-line delivery of
databases to libraries and have paid these distributors a royalty for each
subscription. Because we have now developed our own Internet delivery format, we
expect our use of these distributors to decline.
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COMPETITION
WEEKLY READER. Our primary competitors in the Pre K-12 classroom periodicals
market are Scholastic Inc. and Time, Inc. These publishers together with Weekly
Reader publish virtually the entire market of periodicals targeted for Pre K-12
classrooms. Scholastic Inc. publishes nine editions in the elementary school
market and eight editions in the middle and secondary school market. Time, Inc.
publishes three editions in the elementary school market and no editions in the
middle and secondary school market. Competition in the school periodicals market
is based primarily on content, price, reputation, and customer service.
In the elementary school periodicals market, we believe we have a competitive
advantage over both our competitors with respect to grade appropriate content
that has close ties to school curriculum.
In the secondary school periodicals market, our competitive strengths include
content that has strong educational value and ties to school curriculum.
In skills books we compete with many large and small publishers, primarily on
the basis of: subject matter expertise and price.
In sponsored supplemental educational materials, Lifetime Learning Systems
competes primarily with Scholastic Inc., as well as with other regional
competitors. Competition in this market is based on editorial quality,
distribution capability and cost.
Lifetime Learning Systems' core competencies, which we believe give us a
significant competitive advantage over our smaller competitors, include: the
Weekly Reader brand recognition with our corporate sponsors; multiple media
product development offerings; and broad distribution capabilities through both
its own and Weekly Reader's distribution channels.
AGS. In the assessment area, our principal competitors are The Psychological
Corporation, The Riverside Publishing Company and CTB/McGraw-Hill.
These companies focus mainly on norm referenced achievement tests, which are
administered in large groups, while individually administered assessment tests,
our target market, represent a secondary product line. We believe we are well
positioned to compete successfully in both the individually administered
assessment test market and the supplemental print instructional materials market
based on our reputation, content and ability to reach the customer base.
In the individually administered assessment test market, where quality and
reputation are the primary decision criteria, we have been providing
market-leading materials for over 45 years.
We believe we are internationally recognized for publishing technically sound
diagnostic assessments that are primarily used to identify strengths and
weaknesses at the individual level. Because we believe none of our competitors
has matched our depth in content, authorship and test instruction in
speech/language assessments, we maintain a competitive advantage in the
individually administered assessment test market.
19
COMPASSLEARNING. Within the electronic courseware market, we compete primarily
with other providers of integrated curriculum software and, to a lesser extent,
with independent software vendors and traditional print education publishers.
Our primary competitors are: Plato Learning/Lightspan; NCS Learn; and Riverdeep.
Competition in the supplemental electronic instructional materials market is
based primarily upon product effectiveness, design flexibility and relationships
with customers. We believe we are competitive on all these factors. Our new
Odyssey product recently won excellence awards from Technology and Learning
magazine and is ahead of most of our competitors in its architecture,
flexibility and curriculum depth/breadth.
WORLD ALMANAC. World Almanac Education Library Services is a niche player in the
school and public library distribution business. Competitors range from full
service distributors, such as Follet Library Resources and Baker & Taylor
Corporation, to smaller ones such as Gumdrop Books, Inc. and Davidson
Publishing, Inc. World Almanac Education Library Services competes with larger
distributors by providing: more product information; better customer service;
and a pre-screened selection of the season's titles.
Gareth Stevens, Inc. competes in the K-12 nonfiction and fiction-publishing
segment of this market which is highly fragmented with many competitors ranging
from small publishers that specialize in the library market to larger publishers
that also sell into the trade market. Some of Gareth Stevens, Inc.'s larger
competitors (and their library imprints or subsidiaries) include: Reed Elsevier
(Heinemann Library, Raintree Steck Vaughn); Scholastic (Children's Press,
Franklin Watts); The Gale Group (Lucent, Greenhaven, KidsHaven, Blackbirch);
Capstone Publishing; Haights Cross (Chelsea House); Rosen Publishing Group
(Rosen, Rosen Central, PowerKids Press); Lerner Publishing.
Competition in the electronic reference materials category is somewhat more
concentrated. Some of the larger competitors in this category include: The Gale
Group, Inc.; EBSCO Industries, Inc.; ProQuest, Inc.
Products sold to school and public libraries tend to be less price sensitive
than in a consumer market. The World Almanac(R) and Book Of Facts competes
primarily with the three other almanacs currently available: The
Time/Information Please Almanac; The New York Times Almanac; and Encyclopedia
Britannica Almanac.
We believe that our almanac has a market share greater than 70%. Competition in
all of these segments is primarily based on reputation and brand names of
products, the length of time products have been on the market and the uniqueness
of a product. We believe we have a competitive advantage with all these factors.
Our competitors, however, have larger publishing organizations, and therefore
are able to generate greater potential economies of scale than we can. Our
larger competitors, which offer broader product lines, also provide more
comprehensive shopping opportunities to library customers than we do with our
narrower product focus.
20
PRODUCTION, FULFILLMENT AND CUSTOMER SERVICE
All of our print products are printed and bound by third parties with whom we
have contracts. We believe that outside printing and binding services at
competitive prices are available, and we currently use a different printer for
each product line. Most of our pre-press production, typesetting, layout and
design functions are conducted in-house, with the exception of American Guidance
where most pre-press and product assembly is conducted by third-party vendors.
Our non-print products, such as Lifetime Learning Systems, Inc.'s videos and
CompassLearning's CD-ROMs, are produced internally and, if necessary, replicated
by third parties. Some of World Almanac's divisions rely on internal production
capabilities while others utilize third-party manufacturers.
The principal raw materials utilized in our products are paper and ink. Paper is
purchased by Weekly Reader and several of World Almanac's divisions from both
suppliers and printers directly based on pricing and, to a lesser extent,
availability, while American Guidance purchases finished goods including paper
components from the printers of its publications. Ink utilized by our
publications is provided by the respective printers of our publications and
included in the cost of print production. Both paper and ink are commodity
products which are affected by demand, capacity and economic conditions. We
believe that adequate sources of supply are, and will continue to be, available
to fulfill our requirements.
Order processing, customer service, cash application, collection functions and
fulfillment are typically performed at separate locations for each of our
operating subsidiaries, including at: Delran, New Jersey for Weekly Reader;
Circle Pines and Shoreview, Minnesota for AGS; Phoenix, Arizona, Springfield,
Illinois and San Diego, California for CompassLearning; and Delran, New Jersey,
Milwaukee, Wisconsin, New York, New York and Cleveland, Ohio for World Almanac.
Fulfillment for some of World Almanac's products are conducted by third parties.
INTELLECTUAL PROPERTY
WEEKLY READER. Each printed periodical or skills book is copyrighted by Weekly
Reader, including any materials written by freelance or third-party contract
writers. Photographs or artwork used in our products are typically used pursuant
to one-time licenses which grant us the right to use the photograph or artwork
in the particular product and within the United States only. Some material from
third parties is reprinted with permission for one-time use. Ownership of the
intellectual property rights in the materials produced by Lifetime Learning
Systems, Inc. are negotiated on a case-by-case basis with each sponsor.
AGS. Our tests, the accompanying score sheets and test record forms, and
supplemental instructional materials are protected by copyrights. Some material
from third parties is reprinted with permission. In addition, some products use
registered trademarks.
COMPASSLEARNING. CompassLearning's computer software products are copyrighted by
CompassLearning, but incorporate software under license from other entities,
where needed. In addition, we periodically obtain permission to use excerpts of
third-party materials on an ongoing basis in some of our products or obtain a
license from these parties to act as a distributor of their products.
21
WORLD ALMANAC. World Almanac owns copyrights for each edition of The World
Almanac(R) and Book Of Facts, The World Almanac For Kids, all Facts On File News
Services products other than Editorials On File which consists of editorials
reprinted with permission, all Gareth Stevens, Inc. books which are written
in-house or commissioned, the Funk & Wagnalls Encyclopedia database and the
World Almanac Education Library Services catalogs. World Almanac is typically a
licensee of the content of the remainder of its products, other than products it
solely distributes, in which it has no intellectual property rights.
ENVIRONMENTAL MATTERS
We are subject to environmental laws and regulations relating to the protection
of the environment, including those that regulate the generation and disposal of
hazardous materials and worker health and safety. We believe that we currently
conduct our operations in substantial compliance with applicable environmental
laws and regulations. Based on our experience to date, the nature of our
operations and an environmental indemnity from PRIMEDIA delivered with the 1999
recapitalization transactions by which WRC Media acquired its interest in Weekly
Reader and World Almanac, we believe that the future cost of compliance with
existing environmental laws and regulations and any liability for environmental
claims will not have a material adverse effect on our financial condition or
results of operations.
EMPLOYEES
At December 31, 2003, we had a total of approximately 904 employees. None of our
employees are represented by any union or other labor organization. We have had
no recent strikes or work stoppages and believe our relations with our employees
are good.
PART I.
ITEM 2. PROPERTIES
The Company maintains its headquarters in the metropolitan New York area, where
it leases approximately 35,000 square feet of space for executive offices and
certain of its operating divisions. The Company is investigating consolidation
and subleasing possibilities for more economic and efficient operation. In 2003,
the Company entered into an agreement to sublease approximately 11,000 square
feet of excess space in its headquarters location. The Company also leases an
aggregate of approximately 420,000 square feet of office, warehouse and mixed
use space in Connecticut, California, Arizona, Minnesota, Florida, New Jersey,
Ohio, Illinois and Wisconsin.
The Company considers its properties adequate for its current needs. No
difficulties are anticipated in negotiating lease renewals as leases expire or
in finding other satisfactory space, if current premises become unavailable.
PART I.
ITEM 3. LEGAL PROCEEDINGS
Various claims and lawsuits arising out of the normal course of business are
pending against the Company. The results of these proceedings are not expected
to have a material adverse effect on the Company's consolidated financial
position or results of operations.
22
As previously disclosed in our Form 8-K filed with the SEC on December 15, 2003,
the SEC is conducting a preliminary inquiry concerning the Company and has
requested that the Company voluntarily provide the SEC with various documents
and information, and that certain officers and employees of the Company
voluntarily give testimony or be interviewed. The Company is cooperating fully
with the SEC inquiry, and has continued to provide all documents, information
and testimony requested by the SEC, and has arranged all interviews requested by
the SEC with Company employees. The Company cannot predict the final outcome of
this inquiry at this time.
PART I.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year covered by this report, no matter was
submitted to the vote of security holders, through the solicitation of proxy or
otherwise.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S SENIOR SUBORDINATED NOTES
The Company's 12.75% Senior Subordinated Notes are traded on the
Over-the-Counter Market under the symbol WRCMED.
PART II.
ITEM 6. SELECTED HISTORICAL FINANCIAL INFORMATION WRC MEDIA AND ITS SUBSIDIARIES
The Selected Historical Financial Information for the periods set forth in this
Item 6 has been revised to reflect the restatement. For a discussion of the
restatement of our financials for 2001 through 2003, see "Item 8. Consolidated
Financial Statements--WRC Media Inc. and Subsidiaries--Note 24. Restatement."
The following table presents selected historical consolidated financial
information for WRC Media and its subsidiaries as of and from the date of
inception (May 14, 1999) to December 31, 1999 and selected historical
consolidated financial information for WRC Media and its subsidiaries as of and
for the years ended December 31, 2000, 2001, 2002 and 2003. The selected
historical consolidated financial information presented in the table below is
derived from the historical consolidated financial statements of WRC Media and
its subsidiaries as of and for the period May 14, 1999 (inception) through
December 31, 1999 and as of and for the year ended December 31, 2000 and 2001,
which are not included elsewhere in this annual report and the historical
consolidated financial statements of WRC Media and its subsidiaries as of
December 31, 2002 and 2003 and for the years ended December 31, 2001, 2002 and
2003, which are included elsewhere in this report. The selected historical
consolidated financial information does not purport to indicate results of
operations as of any future date or for any future period. This information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Results of Operations-WRC Media
and Subsidiaries," and the financial statements of WRC Media and its
subsidiaries and the notes to them, included elsewhere in this report.
23
ITEM 6 SELECTED FINANCIAL DATA -- WRC MEDIA, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
Period from
May 14, 1999 - Year Ended December 31,
December 31, --------------------------------------------------------
1999 2000 2001 2002 2003
- ------------------------------------------------------------------------------------------------------------------------------------
(As Restated (As Restated (As (As (As
and Unaudited) and Unaudited) Restated) Restated) Restated)
STATEMENT OF OPERATIONS DATA:
REVENUE, NET $ 50,570 $ 217,743 $ 226,897 $ 207,873 $ 202,703
GROSS PROFIT 34,468 151,366 162,151 147,920 146,258
SALES AND MARKETING 14,030 49,002 55,107 48,588 47,201
RESEARCH AND DEVELOPMENT 3,861 4,708 5,989 1,728 1,424
GENERAL AND ADMINISTRATIVE EXPENSES (a) 8,904 51,371 54,138 50,793 50,370
OTHER OPERATING COSTS:
RESTRUCTURING COSTS AND OTHER NON-RECURRING EXPENSE (b) - - 8,594 1,018
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS
AND DEPRECIATION (c) 5,334 71,005 62,445 19,718 19,826
WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT (d) 9,000 2,250 - - -
INCOME (LOSS) FROM OPERATIONS (6,661) (26,970) (15,528) 18,499 26,419
INTEREST EXPENSE 7,902 35,450 33,455 30,061 29,349
NET LOSS (18,422) (62,789) (51,224) (22,085) (7,434)
BALANCE SHEET DATA:
(END OF YEAR)
WORKING DEFICIT (9,990) (26,525) (19,552) (34,550) (34,495)
TOTAL ASSETS 573,138 503,443 467,130 438,636 420,207
LONG TERM OBLIGATIONS (Long term debt, including current
portion and Redeemable preferred stock) 341,324 351,944 373,171 384,712 402,103
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 108,352 32,352 (17,834) (60,126) (85,731)
OTHER DATA:
CAPITAL EXPENDITURES, including pre-publication costs 700 9,198 11,194 11,146 10,408
- ----------
a) General and administrative expenses comprise distribution, circulation and
fulfillment, editorial and general and administrative expenses.
b) For the years ended December 31, 2002 and 2003, $8,594 and $1,018 of
restructuring costs and other non-recurring expenses were recorded in
connection with the Company's 2002 Plan of Restructuring, respectively. The
major cost reduction initiatives included in the 2002 Plan of Restructuring
consisted of: closure of facilities and a reduction in work force. One
hundred and seven positions were eliminated throughout WRC Media. The
workforce reduction involved each of the four operating units of the Company.
For the year ended December 31, 2003, an additional $826 of restructuring
costs was recognized, consisting of $605 in lease costs adjustment due to
updating assumptions used in determining the fair value of remaining lease
obligations associated with facilities vacated in 2002 and additional
severance in the amount of $221 related to an executive severed in 2002. As
well, $192 of due diligence and other costs related to an acquisition that
was not completed and is not expected to be completed in the foreseeable
future are included in this expense.
c) Includes depreciation of fixed assets, amortization of prepublication costs,
goodwill, and other intangibles.
d) WRC Media and its subsidiaries ("WRC") wrote off purchased in-process
research and development on July 14, 1999 after its purchase of
CompassLearning. WRC also wrote off $2,250 of in-process R&D related to a
next generation reading system deemed not to be technologically feasible in
fiscal 2000.
24
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
WEEKLY READER
The Selected Historical Financial Information for the periods set forth in this
Item 6 has been revised to reflect the restatement. For a discussion of the
restatement of our financials for 2001 through 2003, see "Item 8. Consolidated
Financial Statements--Weekly Reader Corporation and Subsidiaries--Note 20.
Restatement."
The following table presents selected historical consolidated financial
information for Weekly Reader and its subsidiaries as of and for each of the
five years in the period ended December 31, 2003. The selected historical
consolidated financial information presented below is derived from the
historical consolidated financial statements of Weekly Reader as of December 31,
1999, 2000 and 2001 and for the years ended December 31, 1999 and 2000, which
are not included in this annual report, as well as the historical consolidated
financial statements of Weekly Reader as of December 31, 2002 and 2003 and for
the years ended December 31, 2001, 2002 and 2003 which are included elsewhere in
this annual report. The selected historical consolidated financial statements do
not indicate results of operations as of any future date or for any future
period. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Weekly Reader and Subsidiaries" and the
financial statements and related notes to them included elsewhere in this
report.
ITEM 6 SELECTED FINANCIAL DATA -- WEEKLY READER CORPORATION AND SUBSIDIARIES
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
- ----------------------------------------------------------------------------------------------------------------------------------
(As Restated (As Restated (As Restated) (As Restated)(As Restated)
Statement of Operations Data: and Unaudited) and Unaudited)
REVENUE NET (b) $ 148,287 $ 154,873 $ 158,480 $ 155,055 $ 152,110
GROSS PROFIT (c) 108,076 113,642 117,583 116,408 114,371
SALES AND MARKETING 24,316 27,183 29,478 28,179 28,241
GENERAL AND ADMINISTRATIVE EXPENSES (d,e,f) 45,374 42,214 45,026 43,513 44,002
OTHER OPERATING COSTS:
RESTRUCTURING COSTS AND OTHER NON-RECURRING EXPENSES (g) - - - 4,280 (516)
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS
AND DEPRECIATION (h) 14,500 8,812 10,749 9,221 10,794
INCOME FROM OPERATIONS 23,886 35,433 32,330 31,215 31,850
INTERCOMPANY INTEREST EXPENSE 10,133 - - - -
INTEREST EXPENSE, NET 4,690 34,293 32,267 28,877 28,091
NET INCOME (LOSS) 4,034 779 (852) (898) 2,451
BALANCE SHEET DATA:
(END OF YEAR)
WORKING CAPITAL (DEFICIT) 218 (2,376) (5,575) (8,762) (3,043)
TOTAL ASSETS 237,186 227,377 229,150 226,084 222,756
LONG TERM OBLIGATIONS (Long term debt and
Redeemable preferred stock) 352,962 362,676 382,984 393,592 410,038
TOTAL STOCKHOLDERS' DEFICIT (190,530) (202,392) (215,872) (231,226) (240,958)
OTHER DATA:
CAPITAL EXPENDITURES (including prepublication costs) 5,870 7,613 10,966 10,834 9,576
- ----------------------------------------------------------------------------------------------------------------------------------
(a) The financial statements of Weekly Reader included in this annual report,
including the selected historical consolidated financial information
presented in the table above, include a retroactive adjustment to reflect
the contribution of 100% of the capital stock of American Guidance and
World Almanac by PRIMEDIA to Weekly Reader using the historical carrying
value of the stock, which occurred prior to the recapitalization of Weekly
Reader on November 17, 1999.
(b) For the year ended December 31, 1999, $440 of sales were recorded to
account for non-recurring income related to a discontinued contract.
(c) For the year ended December 31, 1999, $866 of cost of goods sold were
recorded to account for a non-recurring charge to inventory.
(d) General and administrative expenses comprise distribution, circulation and
fulfillment, editorial and general and administrative expenses.
(e) For the year ended December 31, 1999, $600 of general and administrative
expenses were recorded to account for non-recurring litigation.
(f) Includes through November 17, 1999, cost for (1) amounts allocated as
corporate overhead to Weekly Reader by PRIMEDIA and its other operating
companies, such as, executive management costs, salaries and fringe
benefits for legal, financial, information technology expenses, real estate
expenses and third party costs; and (2) direct group overhead costs such as
the salaries, fringe benefits and expenses for PRIMEDIA staff directly
involved in Weekly Reader's operations.
25
(g) For the years ended December 31, 2002 and 2003 $4,280 and ($516) of
restructuring costs and other non-recurring expense were recorded in
connection with the Company's 2002 Plan of Restructuring. The major cost
reduction initiatives included in the 2002 Plan of Restructuring consisted
of: closure of facilities and a reduction in work force. Fifty-one
positions were eliminated throughout Weekly Reader Corporation. The
workforce reduction involved each of the three operating units of Weekly
Reader Corporation. For the year ended December 31, 2003, an adjustment of
$516 was recognized relating to updating assumptions used in determining
the fair value of remaining lease obligations associated with facilities
vacated in 2002.
(h) Includes depreciation of fixed assets, amortization of prepublication
costs, goodwill, and other intangibles.
PART II.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in understanding the financial
condition as of December 31, 2003 of WRC Media Inc. ("WRC Media") and its
subsidiaries, Weekly Reader Corporation and its subsidiaries, and their results
of operations for the years ended December 31, 2001, 2002 and 2003. You should
read the following discussion in conjunction with the Consolidated Financial
Statements of WRC Media and its subsidiaries and Weekly Reader Corporation and
its subsidiaries ("Weekly Reader") and the Notes thereto included in "Item 8.
Consolidated Financial Statements." Unless the context otherwise requires, the
terms "we," "our," and "us" refer to WRC Media and its subsidiaries. This
discussion and analysis contains forward-looking statements. Although we believe
that our plans, intentions and expectations reflected in or suggested by these
forward-looking statements are reasonable, we cannot assure you that these
plans, intentions or expectations will be achieved. These forward-looking
statements are subject to risks, uncertainties and assumptions about us.
In connection with the audit of our 2003 consolidated financial statements and
the reaudit of our 2001 consolidated financial statements, we have restated our
previously audited consolidated balance sheets as of December 31, 2001, 2002 and
2003, and the related statements of operations, stockholders' deficit, and cash
flows for the years ended December 31, 2001, 2002 and 2003 (the "restatement").
The restatement also included adjustments that affected periods prior to 2001.
The impact of the restatement on periods prior to 2001 was reflected as an
adjustment to beginning accumulated deficit as of January 1, 2001.
On March 31, 2004, the Company filed a Form 8-K that included its consolidated
financial statements for December 31, 2002 and 2003, which had been restated to
correct certain accounting errors (the "Initial Restatement"). At that time, the
Company announced that the reaudit of its 2001 financial statements was in
progress and that completion of the reaudit could result in additional
restatements to its financial statements. Subsequent to the Initial Restatement,
the reaudit of the Company's 2001 financial statements was completed and
identified additional errors that impacted the Company's consolidated financial
statements for 2001, 2002 and 2003. Accordingly, the Company has restated its
previously reported 2002 and 2003 financial statements and its 2001 financial
statements for the correction of these additional errors (the "Further
Restatement"). The Company believed that upon furnishing its audited 2003
financial statements to the holders of its 12 3/4% senior subordinated notes and
filing such statements with the SEC in the Company's March 31, 2004 Form 8-K
that it was in compliance with the indentures information requirements. The
report of Deloitte & Touche LLP included in the Form 8-K contained an
explanatory paragraph regarding the Company's ability to continue as going
concern due to the possibility that the trustee or noteholders might assert a
breach under the indenture to furnish audited financial statements for 2001 and
potentially attempt to accelerate the payment of the notes. The filing of this
Annual Report on Form 10-K and the completion of the reaudit of our 2001
financial statements obviates the possibility of any potential breach of the
indenture.
The Initial Restatement primarily relates to (i) correction of errors made in
the application of GAAP and (ii) correction of certain of the Company's
historical accounting policies to conform to accounting principles generally
accepted in the United States ("GAAP"). Described below are the matters for
which the Company has restated its consolidated financial statements for 2001
and 2002 in connection with the Initial Restatement.
26
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 new 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 year ended December 31, 2002 was to increase net loss by
approximately $827. In addition, total assets decreased by approximately
$1,860 and total liabilities decreased by $1,033, including a decrease in
deferred revenue of $691 as of December 31, 2002.
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 goodwill and additional paid-in capital, by
approximately $3,419 as of December 31, 2001. In addition, the Company
allocated primarily all of the 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 intangibles amortization expense by $976 and
$1,672 in 2001 and 2002, respectively. The Company also incorrectly charged
certain severance costs against acquisition reserves, and accordingly has
restated the 2001 and 2002 financial statements to correct for such errors.
The net effect of such adjustments was to increase net loss by $708 and
$1,092 for the year ended December 31, 2001 and 2002, respectively.
Following the determination to restate the Company's financial statements for
2001 and 2002 for the 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 consolidated financial statements.
These matters are described below.
o CompassLearning/Weekly Reader Goodwill Reduction. In connection with the
acquisitions of CompassLearning, and Weekly Reader in 1999, the Company
also recorded certain other reserves for a planned restructuring related to
the acquisitions. The Company recorded reserves of $5,538 related to
estimated liabilities it believed it had assumed at the date of such
acquisitions. The Company also recorded a reserve of $1,705 related to an
estimated liability associated with the rationalization of the shipping
schedule of the Weekly Reader magazine in 2000. The Company concluded that
the purchase reserves associated with these estimated liabilities, and the
elements of the restructuring plan that had not yet been completed should
be reversed in 2001. The excess purchase reserves associated with fiscal
year 2000 activity specifically, the $1,350 of costs incurred to evaluate
CompassLearning's software in order to determine a future growth strategy;
$2,250 of in-process R&D related to a Next-generation reading system deemed
not be technologically feasible;
27
$1,800 of recruiting and consulting costs incurred to transition the
companies acquired to a standalone public company and $150 for other
estimated liabilities assumed were reversed against goodwill and charged to
accumulated deficit as of January 1, 2001 as the Company determined that
the reversal of the excess purchase reserves and corresponding reduction in
goodwill should have been recorded in 2000. The Company also reversed the
$1,705 reserve, and reduced goodwill in a corresponding amount, because the
Company determined that such reserve had been incorrectly recorded in 2000.
The Company has determined that the reversal of the excess purchase
reserves and corresponding reduction of goodwill should have been recorded
in 2000 rather than 2001 and that the reversal of the $1,705 reserve and
corresponding reduction in goodwill should have been recorded in 2000
rather than 2002. Accordingly, the Company has restated its 2001 and 2002
financial statements to correct these errors. The net effect of the
adjustments as of January 1, 2001 increased the accumulated deficit by
$5,961 and increased net loss by $706 in 2001.
o Barter Transaction. In connection with a failed licensing barter
transaction for which it had incorrectly recorded revenue in 2001, the
Company had increased operating costs and expenses for 2001 by the amount
of the revenue recorded, instead of reversing such net revenue amount, as
required by GAAP. The Company has restated its financial statements for
2001 to correct this error, with the net effect being to reduce net revenue
and operating costs and expenses by $1,500 for the year ended December 31,
2001, with no impact on the Company's net loss.
o CompassLearning Minimum Purchase Guarantee. In connection with the
acquisition of CompassLearning, the Company entered into a minimum purchase
guarantee agreement with the seller of CompassLearning. In 2001, the
Company incorrectly recorded as revenue amounts that the seller was
required to purchase under the agreement, which the seller did not
purchase. In its historical financial statements for 2001, the Company also
recorded an intangible asset in an amount equal to the amount of revenue
incorrectly recorded. In 2002 and 2003, amortization of $527 and $235,
respectively, of this intangible was recorded against gross sales as
purchases were actually made. Recording this intangible asset and the
related amortization did not conform to GAAP. The Company has restated its
financial statements to reverse this transaction, with the net effect being
to increase the Company's net loss by $762 for the year ended December 31,
2001 and decrease the Company's net loss in 2002 by $527.
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 our 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. In
addition, the Company should have recorded distributions fees as a
reduction of revenue, rather than as a separate operating cost and expense
item. The Company has restated its financial statements which increased its
net loss by $164 for the fiscal year ended December 31, 2001, decreased its
net loss and increased net assets by $168 for the year ended December 31,
2002.
28
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. As a result,
rent expense increased in 2001 because the average rent to be paid over the
lease terms was greater than the actual rent paid in 2001 and rent expense
decreased in 2002 and 2003 because of the longer lease terms used to
calculate the average rent. In 2001, the Company also incorrectly
capitalized some rent expense prior to its occupancy of a certain leased
premise as a prepaid rent asset and amortized it, rather than recording it
as an expense, as required by GAAP. The Company has restated its financial
statements to correct these errors, with the net effect being to increase
its net loss by $1,005, for the year ended December 31, 2001, to decrease
its net loss by $412 and increase total assets by $352 for the year ended
December 31, 2002.
o Intercompany Sales. Certain sales between two subsidiaries of World Almanac
were recorded in 2001 as revenue for one subsidiary and as a corresponding
operating cost and expense for the other subsidiary, rather than being
eliminated, as required by GAAP. The Company has restated its financial
statements for 2001 to eliminate these intercompany sales. As a result of
this correction, revenue decreased by $795 for the year ended December 31,
2001 with a corresponding decrease in operating costs and expenses, and no
impact on the Company's net loss for the year then ended.
o Common Stock Warrants. During 1999, the Company issued warrants to purchase
its common stock to purchasers of certain debt securities and a lender
under a term loan facility. The Company incorrectly recorded the fair value
of the warrants, as a liability due to a related party. The Company has
restated its 2001 and 2002 financial statements to correctly record the
fair value of the warrants as additional paid-in capital. As a result of
this correction, liabilities decreased by $2,160 and additio