UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
_______________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
| For the quarter ended March 31, 2005 | |
| Commission File No. 333-96119 | |
| WRC MEDIA INC. (Exact name of Registrant as specified in its charter) |
|
| DELAWARE (State or other jurisdiction of incorporation or organization) |
|
| 2731 (Primary Standard Industrial Classification Number) |
|
| 13-4066536 (I.R.S. Employer Identification Number) |
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| WEEKLY READER CORPORATION 200 First Stamford Place Stamford, CT 06912 (Exact name of Registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 2721 (Primary Standard Industrial Classification Number) 13-3603780 (I.R.S. Employer Identification Number) |
COMPASSLEARNING, INC. 9920 Pacific Heights Blvd., #500 San Diego, CA 92121 (Exact name of Registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 7372 (Primary Standard Industrial Classification Number) 13-4066535 (I.R.S. Employer Identification Number) |
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: None
| TITLE OF CLASS | NAME OF EACH EXCHANGE ON WHICH REGISTERED |
| 12¾% 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 |
| Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act. |
| Yes No |
PART 1 FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
(Unaudited)
| ASSETS | December 31, 2004 |
March 31, 2005 |
||||||||
| CURRENT ASSETS: | ||||||||||
| Cash and cash equivalents | $ | 11,265 | $ | 7,046 | ||||||
Accounts
receivable (net of allowances for doubtful accounts and sales returns of
$2,811 and $2,796, respectively) |
30,560 | 21,676 | ||||||||
| Inventories | 16,554 | 15,875 | ||||||||
| Prepaid expenses | 2,939 | 2,532 | ||||||||
| Other current assets (including restricted assets of $734 and $637, respectively) | 2,399 | 1,602 | ||||||||
| Total current assets | 63,717 | 48,731 | ||||||||
| PROPERTY AND EQUIPMENT, net | 4,882 | 4,939 | ||||||||
| CAPITALIZED SOFTWARE, net | 10,004 | 10,393 | ||||||||
| GOODWILL | 205,245 | 205,245 | ||||||||
| DEFERRED FINANCING COSTS, net | 8,508 | 7,997 | ||||||||
| OTHER INTANGIBLE ASSETS, net | 65,582 | 63,281 | ||||||||
| OTHER ASSETS | 31,618 | 34,201 | ||||||||
| Total assets | $ | 389,556 | $ | 374,787 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
(Unaudited)
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | December 31,
2004 |
March 31,
2005 |
||||||||
| CURRENT LIABILITIES: | ||||||||||
| Accounts payable | $ | 17,049 | $ | 14,546 | ||||||
| Accrued payroll, commissions and benefits | 8,029 | 8,666 | ||||||||
| Current portion of deferred revenue | 35,468 | 24,612 | ||||||||
| Other accrued liabilities | 16,689 | 21,336 | ||||||||
| Total current liabilities | 77,235 | 69,160 | ||||||||
| DEFERRED REVENUE, net of current portion | 1,442 | 1,314 | ||||||||
| DEFERRED TAX LIABILITIES | 8,293 | 8,707 | ||||||||
| 15% SENIOR PREFERRED STOCK, | ||||||||||
| including accrued dividends and accretion of warrant value | ||||||||||
| (3,000,000 shares outstanding) | ||||||||||
| (Liquidation preference of $166,654) | 153,654 | 159,920 | ||||||||
| LONG-TERM DEBT | 293,238 | 293,378 | ||||||||
| Total liabilities | 533,862 | 532,479 | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||||
| WARRANTS ON COMMON STOCK OF SUBSIDIARIES | 11,751 | 11,751 | ||||||||
| COMMON STOCK SUBJECT TO REDEMPTION | 950 | 950 | ||||||||
| STOCKHOLDERS’ DEFICIT: | ||||||||||
Common
stock ($.01 par value, 20,000,000 shares authorized; 7,008,406 outstanding
in 2004 and 2005) |
70 | 70 | ||||||||
18%
convertible preferred stock ($.01 par value, 750,000 shares authorized,
653,476 outstanding in 2004 and 682,883 outstanding
in 2005) |
26,139 | 27,315 | ||||||||
| Additional paid-in capital | 131,753 | 131,753 | ||||||||
| Accumulated other comprehensive loss | (1,772 | ) | (1,772 | ) | ||||||
| Accumulated deficit | (313,197 | ) | (327,759 | ) | ||||||
| Total stockholders’ deficit | (157,007 | ) | (170,393 | ) | ||||||
| Total liabilities and stockholders’ deficit | $ | 389,556 | $ | 374,787 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
(Amounts in thousands)
2004 |
2005 |
|||||||||
| REVENUE, net | $ | 42,760 | $ | 46,817 | ||||||
| COST OF GOODS SOLD | 12,920 | 12,662 | ||||||||
| Gross profit | 29,840 | 34,155 | ||||||||
| COSTS AND EXPENSES: | ||||||||||
| Sales and marketing | 11,555 | 12,522 | ||||||||
| Research and development | 747 | 719 | ||||||||
| Distribution, circulation and fulfillment | 3,552 | 3,509 | ||||||||
| Editorial | 2,873 | 3,177 | ||||||||
| General and administrative | 7,121 | 7,721 | ||||||||
| Restructuring costs and other non-recurring expenses | 65 | 257 | ||||||||
| Depreciation | 431 | 430 | ||||||||
| Amortization of intangible assets | 4,219 | 4,130 | ||||||||
| Total operating costs and expenses | 30,563 | 32,465 | ||||||||
| Income (loss) from operations | (723 | ) | 1,690 | |||||||
INTEREST
EXPENSE, INCLUDING AMORTIZATION OF DEFERRED FINANCING COSTS |
(14,502 | ) | (14,345 | ) | ||||||
| OTHER INCOME (EXPENSE), net | (250 | ) | (215 | ) | ||||||
| Loss before income tax provision | (15,475 | ) | (12,870 | ) | ||||||
| INCOME TAX PROVISION | 802 | 516 | ||||||||
| Net loss | $ | (16,277 | ) | $ | (13,386 | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
WRC MEDIA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(Unaudited)
(Amounts in thousands)
2004 |
2005 |
|||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
| Net loss | $ | (16,277 | ) | $ | (13,386 | ) | ||||||||||
| Adjustments to reconcile net loss to net cash used by operating activities: | ||||||||||||||||
| Deferred income tax provision | 725 | 414 | ||||||||||||||
| Depreciation and amortization | 5,163 | 5,472 | ||||||||||||||
| Accrual of mandatorily redeemable preferred stock dividends and | ||||||||||||||||
| accretion of preferred stock | 5,199 | 6,266 | ||||||||||||||
| Loss on disposition of property and equipment | — | 28 | ||||||||||||||
| Amortization of debt discount | 120 | 140 | ||||||||||||||
| Amortization of deferred financing costs | 2,266 | 511 | ||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Accounts receivable | 8,818 | 8,884 | ||||||||||||||
| Inventories | 1,439 | 679 | ||||||||||||||
| Prepaid expenses and other current assets | 527 | 1,204 | ||||||||||||||
| Other noncurrent assets | (3,180 | ) | (4,412 | ) | ||||||||||||
| Accounts payable | (3,002 | ) | (2,503 | ) | ||||||||||||
| Deferred revenue | (12,859 | ) | (10,984 | ) | ||||||||||||
| Accrued liabilities | 1,595 | 5,284 | ||||||||||||||
| Net cash used by operating activities | (9,466 | ) | (2,403 | ) | ||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
| Purchase of property and equipment | (144 | ) | (515 | ) | ||||||||||||
| Capitalized software | (634 | ) | (1,301 | ) | ||||||||||||
| Net cash used in investing activities | (778 | ) | (1,816 | ) | ||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
| Proceeds from revolving line of credit | 18,000 | — | ||||||||||||||
| Repayments of revolving line of credit | (23,000 | ) | — | |||||||||||||
| Repayment of senior bank debt | (118,678 | ) | — | |||||||||||||
| Deferred financing fees | (6,138 | ) | — | |||||||||||||
| Proceeds from issuance of long-term debt | 145,000 | — | ||||||||||||||
| Net cash provided by financing activities | 15,184 | — | ||||||||||||||
| Increase (decrease) in cash and cash equivalents | 4,940 | (4,219 | ) | |||||||||||||
| CASH AND CASH EQUIVALENTS, beginning of period | 1,432 | 11,265 | ||||||||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 6,372 | $ | 7,046 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
WRC MEDIA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share amounts)
1. DESCRIPTION OF BUSINESS
The accompanying condensed consolidated financial statements include the accounts of WRC Media Inc. (“WRC Media”) and its subsidiaries – Weekly Reader Corporation (“Weekly Reader”), CompassLearning, Inc. (“CompassLearning”) and ChildU, Inc. (“ChildU”). WRC Media was incorporated on May 14, 1999. The term “Company” refers to WRC Media and its subsidiaries.
The Company is in the business of developing, publishing and marketing print and electronic supplemental education materials. Certain of the Company’s products have been sold in the education marketplace for as long as 100 years. The Company’s customers are primarily within the United States.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of the Company as of March 31, 2005 and for the three-month periods ended March 31, 2004 and 2005 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of only normal recurring adjustments necessary to present fairly the financial position, the results of operations and cash flows for the periods presented, have been made.
These condensed consolidated financial statements should be read in conjunction with the Company’s annual financial statements and related notes thereto as reported in the Company’s Annual Report on Form 10-K dated March 31, 2005. The operating results for the three-month periods ended March 31, 2004 and 2005 are not necessarily indicative of the results that may be expected for a full year.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the Emerging Issues Task Force of the FASB reached a consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“Issue 03-1”). Issue 03-1 provides guidance for determining when an investment is other-than-temporarily impaired specifically, whether an investor has the ability and intent to hold an investment until recovery. In addition, Issue 03-1 contains disclosure requirements about impairments that have not been recognized as other than temporary for investments. Issue 03-1 also requires the investor to disclose investments with unrealized losses that have not been recognized as other-than-temporary impairments. The disclosures are effective in annual financial statements for fiscal years ending after December 15, 2003, for investments accounted for under statements 115 and 124. For all other investments within the scope of this Issue, the disclosures are effective in annual financial statements for fiscal years ending after June 15, 2004. The additional disclosures for cost method investments are effective for fiscal years ending after June 15, 2004. In September 2004, the FASB delayed the effective date of the measurement and recognition guidance of Issue 03-1 until the FASB issues FASB Staff Position 03-1a. The adoption of this consensus is not expected to have any impact on the Company’s consolidated results of operations or financial position.
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs – An Amendment of ARB No. 43, Chapter 4”. SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS 151 requires that those items be recognized as current period charges. In addition, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of production facilities. The provisions of SFAS 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Companies must apply the standard prospectively. The adoption of SFAS No. 151 is not expected to have a material impact on the Company’s consolidated results of operations or financial position.
7
In December 2004, the FASB issued FAS No. 123R, “Share-Based Payment” (“SFAS 123R”), a revision of SFAS 123. The revised statement clarifies the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Specifically, the statement eliminates the use of intrinsic value method of accounting provided for in APB 25, Accounting for Stock Issued to Employees, and requires entities to recognize the cost of equity instruments granted to employee using the grant-date fair value of the award. The provisions of SFAS 123R are effective for the Company beginning January 1, 2006. The adoption of SFAS 123R is not expected to have a material impact on the Company’s consolidated results of operations or financial position.
In December 2004, the FASB issued SFAS No. 153 “Exchange of Non-monetary Assets, an Amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions.” SFAS No. 153 addresses the measurement of exchanges of non-monetary assets and requires that such exchanges be measured at fair value, with limited exceptions. SFAS No. 153 Amends APB Opinion No. 29 by eliminating the exception that required non-monetary exchanges of similar productive assets to be recorded on a carryover basis. The provisions of SFAS No. 153 are effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on the Company’s consolidated results of operations or financial position.
In March 2005, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations-an interpretation of FASB Statement No. 143. This interpretation clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. In addition, the entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. This interpretation is effective no later than the end of fiscal years ending after December 31, 2005. The adoption of FASB Interpretation No. 47 is not expected to have a material impact on the Company’s consolidated results of operations or financial position.
4. SEGMENT INFORMATION
The Company has four reporting segments: Weekly Reader; its subsidiaries World Almanac Education Group, Inc. (“World Almanac”) and American Guidance Service, Inc. (“AGS”), and CompassLearning, Inc. and ChildU Inc. (“Compass/ChildU”). This classification reflects the nature of the Company’s organizational structure by which the chief operating decision-maker reviews and assesses the operating performance of the reporting segment and allocates corporate resources.
| • | Weekly Reader is a publisher of classroom periodicals, grade-specific workbooks and a custom publisher of instructional materials paid for by various sponsors. | |
| • | World Almanac publishes print reference and informational materials sold into the trade channel; publishes nonfiction and fiction books under three imprints for K-12 students; publishes print and electronic reference materials sold into the library channel; and distributes third-party books targeted for K-12 students through its catalogs. | |
| • | AGS is a publisher of testing and assessment products and supplemental instructional materials. AGS products are sold into the school channel. Testing and assessment products are primarily for K-12 students and supplemental instructional materials are primarily for low-performing students in middle and secondary schools. | |
| • | Compass/ChildU produce a research-based technology learning solution, including web-based e-learning solutions that bring into being educational assessment, curriculum, reporting and management tools for grades Pre-K through 12, all of which are aligned to local, state and national standards. |
8
Information regarding the operations of the Company’s reporting segments is set forth below. WRC Media Inc. related expenses and assets that are not allocable to the other operating segments are included as corporate items. WRC Media evaluates segment performance based on several factors, of which the primary financial measure is operating income (loss).
| Weekly Reader |
World Almanac |
AGS | Compass / ChildU |
Corporate | Eliminations | Total | ||||||||||||||||
| Three months ended March 31, 2005 | ||||||||||||||||||||||
| Net Revenue | $ | 9,975 | $ | 10,324 | $ | 16,495 | $ | 10,023 | $ | — | $ | — | $ | 46,817 | ||||||||
| Segment income / (loss) | 847 | 689 | 3,468 | (2,353 | ) | (961 | ) | — | 1,690 | |||||||||||||
| Depreciation and amortization | 120 | 589 | 1,759 | 2,065 | 939 | — | 5,472 | |||||||||||||||
| Restructuring and other non-recurring items | — | — | — | 235 | 22 | — | 257 | |||||||||||||||
| Assets | 47,602 | 101,504 | 213,804 | 40,661 | 224,168 | (252,952 | ) | 374,787 | ||||||||||||||
| Goodwill and indefinite lived | ||||||||||||||||||||||
| intangibles (including allocated amounts) | 52,775 | 33,210 | 124,133 | 17,554 | — | — | 227,672 | |||||||||||||||
| Capital expenditures | 73 | 152 | 186 | 1,347 | 58 | — | 1,816 | |||||||||||||||
| Three months ended March 31, 2004 | ||||||||||||||||||||||